Knowledge Transfer

moved to and exchanged with an external organization (Bahli & Rivard, 2005). Therefore, changes in the knowledge transfer requirements are viewed as the single most important challenge to knowledge management and knowledge management systems in an outsourcing arrangement. A relevant approach to outsourcing relationships from the knowledge management literature includes intellectual capital management, as presented in the beginning of this chapter. Then, we continue presenting how knowledge transfer might influence outsourcing success. Finally, clients’ and vendors’ need for knowledge transfer and knowledge exchange in IT outsourcing relationships is discussed.

Maturity in Outsourcing Relationships

Stages of growth models have been used widely in both organizational research and information technology management research. According to King and Teo (1997), these models describe a wide variety of phenomena – the organizational life cycle, product life cycle, biological growth, stages of growth in information systems, growth model for integration between business planning and information systems planning, electronic commerce evolution, stages of knowledge management technology, and a number of other interesting developments in time perspectives. These models assume that predictable patterns (conceptualized in terms of stages or levels) exist in the growth of organizations and organizational parts, the sales levels of products, and the growth of living organisms. These stages are (1) sequential in nature, (2) occur as a hierarchical progression that is not easily reversed, and (3) evolve a broad range of organizational activities and structures. This chapter starts with an introduction to stages of growth models. In the following sections we present the three-stage model for the evolution of IT outsourcing relationships (Gottschalk & Solli-Sæther, 2006). The three stages are labelled cost stage, resource stage, and partnership stage respectively. Theory-based benchmark variables for measuring maturity in IT outsourcing relationships are presented, followed by the stage hypothesis and a description of how benchmark variables are used to indicate characteristics at each stage of growth. Finally in this chapter, we present results from an exploratory study testing the stage model. The purpose of this chapter is to develop a framework for improved understanding of the current situation in an IT outsourcing relationship in terms of a specific stage, to develop strategies for moving to a higher stage in the future, and to learn from earlier stage experience.

Value Configurations

Understanding how firms differ is a central challenge for both theory and practice of management. For a long time, Porter’s (1985) value chain was the only value configuration known to managers. Stabell and Fjeldstad (1998) identified two alternative value configurations. First, a value shop schedules activities and applies resources in a fashion that is dimensioned and appropriate to the needs of client problems, while a value chain performs a fixed set of activities that enables it to produce a standard product in large numbers. Examples of value shops are professional service firms, as found in medicine, law, architecture and engineering. Next, a value network links clients or customers who are or wish to be interdependent. Examples of value networks are logistic companies, telephone companies, retail banks and insurance companies. In this chapter, we apply the contingent approach to systems outsourcing by making the outsourcing decision dependent on the value configuration of the enterprise. We present the three different value configurations – the value chain, the value shop, and the value network. Next, the three different value configurations are compared according to key characteristics, e.g. use of information systems. Then, we take a look at interfirm relations to be able to identify areas for outsourcing, and value configuration as a determinant and predictor for the extent of outsourcing. Finally, we discuss levels of strategy and we introduce the Y-model for IS/IT strategy work.

Costs, Benefits, and Risks

Managing costs successfully requires more than traditional cost accounting. It requires an understanding of cost-influencing factors based on cost-explaining theories, such as production and transaction economics, hidden costs, and contract termination costs. Managing IT outsourcing successfully implies that costs are not judged in isolation. Rather costs are compared to benefits, before judgments on cost level and development occur. In this chapter, we discuss production and transaction economics, hidden costs and contract termination costs, and we will also take a look at benefits and risk behavior.

Critical Success Factors

We have identified a total of eleven theories that help explain why IT outsourcing is occurring worldwide. These theories were presented in the previous Chapter 2. Based on these theories, we develop eleven critical success factors in IT outsourcing, one for each theory. These factors are presented in the first section of this chapter. We developed the following research question: How do practitioners rank critical success factors based on outsourcing theories? To study this research question, we developed a survey instrument and conducted a survey among business organizations. Results from this survey and discussion of the findings are presented. In the second section of this chapter, we conceptualize the outsourcing of IT services as an electronic business activity, where the vendor electronically provides IT services to the client. The idea is that the purchasing of IT services is a business-to-business (B2B) relationship, which leads to outsourcing implications in terms of services that the vendor has to provide to its customers. Thus, we will in the second section look at critical success factors in electronic business infrastructure as an example of issues that need to be addressed.

Outsourcing Opportunities

In this chapter on outsourcing opportunities, a common conceptual understanding of important issues of the business practice of our interest is established. First, we take a look at how researchers have defined the term outsourcing. An updated outsourcing definition will serve as a common platform for understanding the sourcing universe presented in the following section. Next, we describe in more detail the building blocks of the sourcing universe – insourcing, information technology (IT) and information systems (IS) outsourcing, business process outsourcing, transformational outsourcing, and global outsourcing. At the end of the chapter, we discuss some key aspects of the important outsourcing decision.

The Role of the CIO

The CIO can be defined as the highest-ranking IT executive who typically exhibits managerial roles requiring effective communication with top management, a broad corporate perspective in managing information resources, influence on organizational strategy, and responsibility for the planning of IT. This definition is in line with research; which applied the following criteria when selecting CIOs for empirical observation: i) highest-ranking information technology executive; ii) reports no more than two levels from the CEO, that is, either reports to the CEO or reports to one of the CEOs direct reports, iii) areas of responsibility include information systems, computer operations, telecommunications and networks, office automation, end-user computing, help desks, computer software and applications; and iv) responsibility for strategic IS/IT planning. The CIO plays a vital role in every interoperability project in digital government. There may be a CIO in each involved public agency as well as a CIO for the whole of government. For example in Hong Kong, there is an office of the government chief officer, which developed the interoperability framework for all agencies and other public organizations to follow (2007). In this chapter we start by defining the position of the CIO. CIOs are playing a key role sourcing IT resources and enabling IT governance. These topics are covered in the next sections. Then, we continue discussing CIO leadership roles. As organizations expand their use of the Internet, the CIO emerges as an important executive for developing digital government, competitive strategy and Internet strategy. We are also looking into the CIO selecting e-business model.

Outsourcing Governance

The overall objective of this chapter is to concentrate on the important issues of strategy, structure, and management of IT outsourcing arrangements. First, we take a look at the broader issue of governance. Learning that IT outsourcing governance includes not only information and IT assets, but also such aspects as human, financial, physical, intellectual property, and relationship assets, we present in the next section the interaction approach as a model that focuses both on short-term episodes and general long-term relationships in dyadic buyer-supplier ventures. Then we discuss how appropriate governance structures – including management control systems and the development of trust – may work to reduce risk and decrease failure. We continue by presenting the important partnering process, where management can take actions when building and sustaining outsourcing relationships. Important stakeholder groups are presented as they may have distinct expectations and goals in outsourcing and for outsourcing relationships. Hard and soft sides of outsourcing management are presented, as both sides are keys to success. Finally, using theoretical perspectives described earlier and experience earned from several business case studies, we present a governance model for successful management of IT outsourcing relationships.

Outsourcing Performance

For the vendor an IT outsourcing relationship is successful if it generates profit for the company and if it strengthens the company’s value proposition in terms of complementary competencies such as IT personnel development, methodology development and dissemination, and customer relationship management (Levina & Ross, 2003). For the client an IT outsourcing relationship is successful if it generates profit for the company and if it contributes to achievement of outsourcing objectives as exemplified by Lee and Kim (1999). Managing successful IT outsourcing relationships means to us that source firm and sourcing firm both achieve their objectives in a joint effort. Achieving objectives is a matter of outsourcing outcome. In this chapter we start by presenting the vendor’s value proposition because outsourcing outcomes are dependent on the vendor’s ability to create value for both parties in the relationship. Satisfaction based on successful exploration and exploitation of the vendor value proposition plays an important role in building other important assets for the client company. The following two sections in this chapter discuss outsourcing opportunities and threats in a client perspective. Next, we present a method for developing quantitative performance measurements. Although decisions to outsource should be a part of the overall business strategy, control and objective measurement of service quality is important for any company as this may influence the overall relationship. At the end of this chapter, we take a look at how to measure the success of IT outsourcing relationships.

Dynamics of Outsourcing Relationships

Given the potential headaches of managing IT, it is tempting to hand the job over to someone else. Indeed, outsourcing once appeared to be a simple solution to management frustrations, and senior management teams at many companies negotiated contracts with large service providers to run their entire IT functions (Gottschalk & Solli-Sæther, 2006). At a minimum, these providers were often able to provide IT capabilities for a lower cost and with fewer hassles than the companies had been able to themselves. But many of these outsourcing arrangements resulted in dissatisfaction, particularly as a company’s business needs changed. Service providers, with their standard offerings and detailed contracts, provided IT capabilities that were not flexible enough to meet changing requirements, and they often seemed slow to respond to problems. Furthermore, a relationship with a supplier often required substantial investments of money and time, which entrenched that supplier in the company’s strategic planning and business processes. The company then became particularly vulnerable if the supplier failed to meet its contractual obligations (Ross & Weill, 2002). In our dynamic perspective of knowledge resources, outsourcing relationships are not just about transactions between a vendor and a supplier. The resource-based theory argues that the firm’s ability to mobilize and utilize both internal and externally available resources determines its ability to succeed in the market place. If the firm is short of important resources such as IT resources, an outsourcing arrangement might help overcome the problem as the vendor makes IT resources available to the firm for a price.