Organizational performance can improve in three areas through the introduction of new skills and working practices, by reducing staff numbers, and by modifying individual incentives, employment terms and attitudes in the workplace. As management is more able to predict future costs than to predict future revenues, reducing costs by decreasing the size of the workforce is often done. Hence, the expected economic benefits of a smaller workforce include reduced expenses, increased returns on investment, higher profits and improved stock prices. Changes like these are often very emotive, generating internal fears as well as employee resistance.
Overall, it is acknowledged that whether the need for change in the organization is a consequence of a re-engineering of business processes and/or a focus on core competencies, or an attempt to restructure in order to become more globally competitive, and whether restructuring or outsourcing strategies are utilized, the resultant effect is downsizing. Redundancies and layoffs are commonplace in outsourcing situations despite the transfer of personnel to service providers, the redeployment of staff within the organization, outplacements and voluntary early retirements.
In the long term, the service provider relies more on natural attri-tion and redeployment as a means of aligning manpower to the contract. Even the transfer arrangements may have an impact on employment within the organization: on wages, on working conditions and on the duration of the contract with the new employer.
Employees hence may perceive the prospect of outsourcing as 37
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tantamount to a sell-off, often along with capital equipment.
Although many employees understand economic reality, i.e.
that outsourcing efforts are undertaken for the improvement of organizational efficiency and to increase value to shareholders, questions are increasingly being asked concerning the emphasis on shareholder well-being to the detriment of stakeholders in the organization, namely employees. Effectively, employee loy-alty to the organization diminishes in such circumstances.
Poaching, for example, is the misuse of information by another organization that has a close working relationship. Poaching occurs as, unlike the case with a physical asset, information is not subject to wear and tear and cannot be returned in the same way when it has finished being used. This enables organizations to appropriate information without obvious indications as to its use.
This constitutes a subset of environmental or organizational risk. Organizational risk results from changes to internal organizational structures that occur as a result of changing roles. This risk will be reduced as organizations become more flexible, depending less on formal and rigid organizational structures.
The next chapter continues with a definition and description of risks that occur in the ITO environment. Risks, together with outsourcing activity and the unique nature of the IT function form the basis of first measuring, then understanding and subsequently mitigating, risks through planned activities in this high-profile environment.
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2
Outsourcing the IT function
Risk-taking is an integral and intrinsic part of success or living a full life.
Malcolm S. Forbes (1919–1990), US publisher The outsourcing of the IT function often means that the organization’s information requirements become a joint responsibility of a third party and the original organization. What is the risk then, if either the supplier or the buyer does not provide its end of the agreement? If we postpone the response to this question, and take a more optimistic perspective instead, i.e. consider the scenario wherein both sides deliver to expectations, the true value of information that can be derived from the IT function will be seen to be optimized.
The use of information is very subjective and quite dependent on the user’s ability to leverage further advantage. Information that is left idle is not worth anything. If information is well used, the tiniest amount of information that is leveraged can return very significant benefits. It is argued that the value of information is derived from its accuracy (reliability), its relevance and its timeliness. Phrases like ‘information is power’, ‘insider information’
and ‘business intelligence’ represent attempts to describe the critical nature of information in many different scenarios to gain ascendancy and advantage. When the supplier can provide improved services from the IT function, the benefits to the buyer organization are certainly better than they were before.
Given the unique nature of each buyer/supplier encounter defined in the previous chapter, each ITO project is distinctive.
In addition, the risks that become manifest are only applicable to the project at selected points in time. In the previous chapter, common concepts were referred to in the outsourcing environment. In this chapter, a baseline understanding of commonly used outsourcing frameworks is vital if the risks are to be measured from this common baseline. Each of these unique concepts contains inherent risks that influence the project. These risks 39
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need to be managed. The key concepts for illustration include the following:
● Core competency.
● Economies of scale and scope.
● Commoditization of the IT components (within the function).
● The dual role of IT within the organization.
The nature of IT not only refers to the equipment and related components but the nature and value of information. As a result, IT processes can be delegated but this also carries a level of risk that varies between organizations. It is difficult enough to identify the risk types let alone to quantify risk exposure in this environment. In an outsourced environment further questions need to be asked and answered. What, for example, are the capabilities/competencies of the parties involved with the delivery of the product that could introduce key operational risks? What are the delivery outcomes that determine a successful ITO agenda? How does the product contribute to a successful outcome for the buyer and/or the seller?
Many of the services offered to support the ubiquitous IT function are now commoditized. There is little differentiation in common processes, technology and capabilities. Over time, many common IT functions such as the maintenance and supply of routine software applications become commodity items that can be purchased as if they were mass produced. The organization’s ability to maintain an IT function internally (within its own range of functions) has been used to provide a source of advantage; few organizations adopted the use of IT in their portfolio of capabilities only a decade ago. This is now no longer the case.
For example, an organization may have a critical data warehouse function that provides information on its customers throughout the world. As storage was expensive in the late 1980s, its competitors could not afford to maintain large databases. And it was uncommon for an organization to be able to maintain a large data warehouse at that time. However, the situation has changed.
Data storage has increased in quality and at the same time has undergone a very significant price reduction. Data storage services are now being charged on a cost-per-megabyte-per-month basis, similar to the way in which we all pay for utilities such as electricity and water. The commoditization of the data warehousing function has made data storage a commodity (as opposed merely to a feature that differentiates an organization that has data storage facilities).
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As the existence of an IT function, at a generic level, loses its differentiated advantage relative to its competitors, IT service providers are more likely to increase their reliance on external suppliers and redirect their own capabilities to other high value-added areas. This argument supports outsourcing of the IT
function. At the same time, however, it increases the level of competition among suppliers, who now need to seek ways to differentiate a generic service. Supplier organizations now need to maintain relevant skills, experience and capabilities to be able to deliver world-class IT services. The suppliers have the ability to deliver IT at a much lower cost and of significantly better quality than can other organizations without IT as their core competence.
2.1
The ‘core competency’ argument
Many organizations use outsourcing in the belief that ITO is a tool that provides the solution for lowering costs, improving service levels, accessing specialized resources and ensuring the success of new business ventures. The justification for the value provided by outsourcing the IT function is also made on the basis of the core competency argument. It has even been proposed by practitioners and researchers in this area that ITO should be an integral part of the organization’s overall plan in order to focus on its core competence (Quinn and Hilmer, 1994; Venkatraman, 1997; DiRomualdo and Gurbaxani, 1998). Specifically, the organization needs to determine the scope of its activities with specific reference to its objectives, as opposed to outsourcing when there is a pressing need to apply cost disciplines.
The organization’s corporate resources (personnel, computing equipment and other components) will be available to channel energies into the organization’s core business or core competency.
The key components of core competence as defined by Prahalad and Hamel (1990) include:
● accessing a wide variety of markets;