The business functions, in turn, drive the design of the IT function.
This continuous loop identifies the changes that constantly occur in an organization’s IT support function.
On the right, the IT function is outsourced. The outsourced provider controls the systems integration (SI) process. It is both changing and complex because of the need to satisfy the business function requirements of the buyer organization as well as the profit motives of the supplier organization. On the far right of the diagram, the business objectives have now become the outcome that is required when the IT function is outsourced.
The buyer defines these processes and sets appropriate standards that need to be achieved by the IT function that has been outsourced to the supplier. The objectives are often variable and ambiguous because of the business conditions that drive the organization.
Along with the changes in IT, new business processes emerge and need to be designed. New platforms, operating systems, networks and applications are driven by changes in the competitive business environment. This influences business operations as information needs become more urgent. As competitive pressures mount, business objectives drive the development of further IT
components. The changes in processes and functions are in turn driven more quickly by the use of more-efficient IT components.
The extremely fast rate of change of IT components creates a reversing effect. IT is the catalyst for process change and outsourcing. Instead of the business functions driving change (see Figure 1.3), the direction of the arrows now shows the reverse.
Outsourcing processes rely on IT for access to organizational information accurately, quickly and cost-effectively. It is recognized that IT facilitates the reduction of transaction costs without increasing transaction risks. This in turn drives further outsourcing activities.
In addition to illustrating the differences in meaning of the concepts in outsourcing, it is equally important to collectively agree 17
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some of the motivating factors of the buyer and supplier organizations in order to discuss the risks that both these parties face.
The fundamental criteria for buyer and supplier motivation are the acceptance of the ITO exercise and the benefits derived.
1.8
Acceptance of information technology
outsourcing (ITO)
A primary objective of a buyer of ITO services is very often to reduce operational risk. The risks that accompany the operations are moved outside the organization when the IT function is moved away. ITO is then a way to reduce operational risks as well as manage IT costs while, at the same time, retaining the benefits of the IT function that is so crucial, within the control of the buyer organization. Much of the argument to outsource the IT function also arises as current management ideology emphasizes the need to optimize the organization’s resources; the notion of being able to completely remove the need to maintain an in-house IT function while being able to enjoy the benefits of the services and use of a world-class IT capability (supplied by an external ‘expert’) is a very tempting proposition.
Many commercially available reports agree and predict that large outsourced IT markets will develop. These global markets are collectively expected to hit approximately US$1 trillion over the next 5 to 6 years (or by the year 2010) as many more organizations choose to implement ITO. The reach and richness of this influence is significant. The acceptance of outsourcing of the IT
function provides some indication of the level of satisfaction that organizations have with the concept, the benefits derived and also importantly, the ability to manage the risks within this environment.
The IT function is more ubiquitous than any other we have seen.
Early in the 1980s many tasks involving the use, maintenance and upgrade of computer systems required knowledge only privy to a few. There was no choice but to employ specialist help to maintain the IT function within the organization. The use of IT, however, has become prevalent over the last two decades. The machines or computers that enable IT to function have become universal, and much easier to use and maintain; yet, the same computers have become more complex. As such, it is suggested that the influence of risks on so many significant parts of the organization has hitherto not been experienced to this level of severity and extent.
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Common Terms and Concepts Used in Outsourcing For the most part, however, the published experience with the outsourcing of the IT function indicates a dismal track record.
Also, it has been suggested that as the nature of IT is not consistent across organizations, industry groups and country settings, the acceptance and use of outsourcing of the IT function has created further confusion. The risks are not easy to measure let alone understand; it is no wonder then that many organizations experience severe anxiety when considering the option to outsource the IT function.
Early adopters and failures
Substantial market size does not necessarily imply that there are satisfied buyers. Nearly seventy per cent of organizations that have outsourced say that they are unhappy with one of more aspects of their suppliers. International research shows that only about half of ITO contracts deliver the previously promised twenty to thirty per cent cost savings. Even back in the early 1990s, a considerable number of organizations expressed dissatisfaction with outsourcing (Currie and Willcocks, 1997). Other studies indicate that fifty-three per cent of organizations attempt to renegotiate the original terms of the contract with their partners, and that twenty-five per cent of those renegotiations end in the termination of the relationship (Caldwell, 1997). Other estimates show that outsourcing clients spend fifteen per cent of their IT budget on litigation (Goodridge, 2001).
The Gartner report (Murphy, 2004) mentioned that, by 2005, there would be a sixty per cent probability that seventy-five per cent of organizations that fail to recognize and mitigate risk throughout the outsourcing life-cycle will fail to meet their outsourcing goals because of misaligned objectives, unrealized expectations, poor service quality and cost overruns. While many of the data justify this fear of outsourcing, a view can be taken from an alternative perspective. The qualitative evidence of ITO
implementation displays symptoms of an industry in turmoil.
The track record that is available has its share of success and failures. Much of the literature on the benefits to the supplier, for example, has not been published or is not available. Could it be that the information remains a source of competitive advantage and hence is being kept ‘secret’? Could it be that this fearful notion of impending failure is, just possibly, exacerbated and made to proliferate by an unintentionally one-sided press, by research papers and by word of mouth? Whatever the case, the elements of risk of information-loss exist. Risks need to be 19
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measured, understood and then mitigated to ensure that the benefits of ITO have the best chance of being reaped.
There are two sides to this scenario. Managers deciding to use ITO
are often very optimistic. These managers have been observed to make decisions to outsource based on a best-case scenario, i.e.
based on their individual expectations or based on the instructions of their superiors (Saunders et al., 1997). This confidence raises expectations. This has been observed to result in unpredictable events, the majority (relative to the optimistic views) of which yield poor results as compared to the case where the risks are anticipated and managed.
Other managers hesitate when faced with the proposition to outsource the IT function. This hesitation is expressed as a fear, and, as a result, also a hesitance to lose control over the daily operations and routine use of the IT function. This innate fear is often a result of an absence of a clear understanding of the possible undesirable outcomes (or risk) that may result from a loss of control over the management of the detailed activities in the IT function. With this, unnecessary steps are taken to regain control from the supplier, frequently having disastrous consequences.
This is often called organizational risk.
1.9
Benefiting from ITO
It is clear that competition for access to growing amounts of information over geographically disparate locations, over shorter periods has been a significant inducement for the need to maintain a more significant and reliable IT capability within the organization. The efficiency and effectiveness of an organization’s IT
function has become a source of competitive differentiation. In the mid-1980s, Michael Porter (1985) propounded and championed the concept of competitive advantage through lower costs and differentiation. He parleyed the concept of the value chain, the pervasive nature of IT in the value chain, and its use as a source of differentiation. As the IT function is inextricably connected to many parts of the value chain, it becomes a vital component that differentiates the organization’s products and services from those of its competitors (Blaxill and Hout, 1991; Teng et al. , 1995).
There is a noticeable increase in acceptance of outsourcing of the information technology (IT) function as a management tool to defray some of the pressures of increasing competition by achieving competitive advantage through lower costs and the ability to deliver improved IT support. The decision to outsource the IT