Information Systems Outsourcing: Enduring Themes, Emergent Patterns and Future Directions PDF
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Information Systems Outsourcing Springer-Verlag Berlin Heidelberg GmbH Rudy Hirschheim Armin Heinzl . Jens Dibbern Editors Information Systems Outsourcing Enduring Themes, Emergent Patterns and Future Directions With 43 Figures and 60 Tables i Springer Professor Dr. Rudy Hirschheim University of Houston Bauer College of Business 77204-6282 Houston,TX, USA Professor Dr. Armin Heinzl Dipl.-Kfm. Jens Dibbern UniversiHit Bayreuth UniversiHitsstraBe 30 95440 Bayreuth, Germany ISBN 978-3-662-04756-9 ISBN 978-3-662-04754-5 (eBook) DOl 10.1007/978-3-662-04754-5 Library of Congress Cataloging-in-Publication Data applied for Die Deutsche Bibliothek - CIP-Einheitsaufnahme Information Systems Outsourcing: Enduring Themes, Emergent Patterns and Future Directions; with 60 Tables / Rudy Hirschheim ... ed. - Berlin; Heidelberg; New York; Barcelona; Hong Kong; London; Milan; Paris; Tokyo: Springer, 2002 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. http://www.springer.de © Springer-Verlag Berlin Heidelberg 2002 Originally published by Springer-Verlag Berlin Heidelberg New York in 2002. Softcover reprint of the hardcover 1 st edition 2002 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: Erich Kirchner, Heidelberg Preface The research on IS outsourcing has evolved rapidly over the past decade. Outsourcing has emerged as a key topic for both IS practitioners and academics. Whilst academics may have lagged behind their practitioner brethren in recognizing its importance in the beginning, they have begun to catch up. By our quick count, there are over 90 academic papers that have been published on IS outsourcing since 1992, along with numerous doctoral dissertations. Moreover, there has been virtually no major IS conference without a substantial outsourcing track. Thus, we felt the time was right to arrange a compilation of contemporary outsourcing research as a common platform for mutual interaction and scientific discourse. This book brings together key researchers who had published or were currently working on academic publications or dissertations in IS outsourcing. In this realm it is dedicated towards both researchers and practitioners. It is the result of thoughtfully selected contributions from leading researchers who came together for the Second International Conference on Outsourcing of Information Services (ICOIS'2001) held in Bayreuth, Germany during June 22-23rd, 2001. Their papers form the basis of this edited volume entitled Information Systems Outsourcing in the New Economy: Enduring Themes, Emergent Patterns and Future Direction. We hope you enjoy the resulting product. Rudy Hirschheim Armin Heinzl Jens Dibbern Houston, Texas Bayreuth, Germany Bayreuth, Germany Contents Preface v Part I: Overview Information Systems Outsourcing in the New Economy - An Introduction 3 Hirschheim, Rudy; Dibbern, fens On the Theoretical Foundations of Current Outsourcing Research 24 Klein, Heinz K. Part II: Determinants of the IS Outsourcing Decision 45 Costs, Transaction-Specific Investments and Vendor Dominance of the Marketplace: The Economics of IS Outsourcing 47 Ang, Soon; Straub, Detmar Outsourcing of Information Systems in Small and Medium Sized Enterprises: A Test of a Multi-Theoretical Causal Model 77 Dibbern, fens; Heinzl, Armin IT Sourcing - A Dynamic Phenomenon: Forming an Institutional Theory Perspective 100 fayatilaka, Bandula A Taxonomy of Employment Insourcing and Outsourcing Strategies in Information Systems 131 Ang, Soon; Slaughter, Sandra A. VIII Contents Part III: Arranging and Managing IS Outsourcing Relationships 153 Managing IT Outsourcing Risk: Lessons Learned 155 Aubert, Benoit A.; Patry, Michel; Rivard, Suzanne Applying Traditional Risk-Return Analysis to Strategic IT Outsourcing Decisions 177 lurison,laak Further Thoughts on Information Structure, Knowledge Management and Outsourcing 187 Elitzur, Ramy; Wensley, Anthony K.P. Current and Future Directions of IS Outsourcing 195 Lee, lae-Nam; Huynh, Minh Q.; Kwok, Ron Chi-wai; Pi, Shih-Ming Relational Exchange Theory and IS Outsourcing: Developing a Scale to Measure Relationship Factors 221 Goles, Tim; Chin, Wynne W. Part IV: Experiences and Outcome of IS Outsourcing 251 The Normative Value of Transaction Cost Economics: What Managers Have Learned About TCE Principles in the IT Context 253 Poppo, Laura; Lacity, Mary C. Spiraling Effect of IS Outsourcing Contract Interpretations 277 Marcolin, Barbara L. Success of Outsourcing and Strategic Alignment as Predictors of IS Effectiveness 311 Siiiiksjiirvi, Markku Outsourcing: A View from Those Doing the Work 329 Saunders, Carol Four Stories of Information Systems Insourcing 348 Hirschheim, Rudy; Lacity, Mary C. Contents IX Part V: Integration, Transaction and Recruitment Platforms 393 IS Integration in the Internet Age: Exploring Alternate Infrastructure Sourcing Strategies 395 Duncan, Nancy B. Transaction Platforms as Flexible Interorganizational Systems: The Case of M-Cornrnerce Payment Services in the Financial Logistical Management ofthe Dutch Payment Industry 415 Wassenaar, D. Arjen; Swagerman, Dirk M. Cybermediaries Supporting the Management of Independent Workers: A Case Study of Extended Outsourcing Relationships 432 Knolmayer, Gerhard F. Part VI: Application Service Providing (ASP) 449 Application Service Provision: The IS Infrastruct).lfe Context 451 Smith, Michael Alan A Market Segmentation Strategy for Developing an ASP Business 474 Currie, Wendy L.; Seltsikas, Philip Impact of Vendor Capabilities on ASP Performance 497 Swinarski, Matthew E.; Kishore, Rajiv; Rao, H. Raghav Service Provision and the Net: Risky Application Sourcing? 513 Kern, Thomas; Willcocks, Leslie P. List of Contributors 535 Sponsors 539 Part I: Overview Information Systems Outsourcing in the New Economy - An Introduction Rudy Hirschheim Bauer College of Business, University of Houston, Houston, Texas 77204-6282 Jens Dibbern Dept. of Information Systems (BWL VII), University of Bayreuth, D-95440 Bayreuth, Germany 1 Introduction When Eastman Kodak announced that it was outsourcing its information systems (IS)1 function in 1989 to IBM, DEC and Businessland it created quite a stir in the information technology (IT) industry. Never before had such a well-known organization, where IS was considered to be a strategic asset, turned it over to third party providers (Applegate and Montealegre, 1991). Since then both large and small companies have found it acceptable, indeed fashionable, to transfer their IS assets, leases and staff to outsourcing vendors (Arnett and Jones, 1994). Kodak appears to have legitimized outsourcing, leading to what some have called "the Kodak effect" (Caldwell, 1994). Senior executives at well known companies in u.s. the have followed Kodak's example and signed long term contracts worth hundreds of millions of dollars with outsourcing "partners". A number of high profile multi-billion dollar "mega-deals" have been signed which has raised awareness even more. A recent Dataquest report (2000) notes that since 1989 there have been over 100 ofthese mega-deals (Young, 2000). Studies performed by Dataquest (Caldwell, 1995) note that the IS outsourcing market grew from $9 billion in 1990 to $28 billion in 1994 representing a growth rate in excess of 25% per annum. Other figures produced by Dataquest suggest even greater growth. According to their research, in 1995 companies spent $22 billion in the network management and desktop services outsourcing market and would grow to $37 billion by 1998. The Yankee Group estimated global revenues for IS outsourcing were $50 billion in 1994 and increasing at a rapid rate. The Information systems (IS) and information technology (IT) are used synonymously in this paper. 4 R. Hirschheim, 1. Dibbern Outsourcing Institute's survey of 1200 companies indicates that 50% of all companies with IS budgets of $5 million or more are either outsourcing or evaluating the option. They also report that one-twelfth of IS dollars spent in 1995 flowed through an outsourcing contract (http://www.outsourcing.com). Another view of the IS outsourcing market comes from an International Data Corporation report, which using a narrow definition of IS outsourcing, noted that actual global IS outsourcing spending to be $40 billion in 1996 growing to reach $71 billion in 2003 representing a growth rate of 12.2% per annum (IDC, 1999). A recent Dataquest report reported the IS outsourcing industry revenue to be $194 billion in 1999 and growing to $531 billion by 2002 (Young, 2000). So by any stretch of the imagination, the IS outsourcing market is significant. Although companies outsource IS for many reasons (Willcocks and Fitzgerald, 1994), industry watchers generally attribute the growth of the IS outsourcing market to two primary phenomena (Lacity and Willcocks, 2001), First, interest in IS outsourcing is largely a consequence of a shift in business strategy. Many companies have recently abandoned their diversification strategies - once pursued to mediate risk - to focus on core competencies, Senior executives have come to believe that the most important sustainable competitive advantage is strategic focus by concentrating on what an organization does better than anyone else while outsourcing the rest. As a result of this focus strategy, IS came under scrutiny, Senior executives frequently view the entire IS function as a non-core activity, and believe that IT vendors possess economies of scale and technical expertise to provide IS services more efficiently than internal IS departments. Second, the growth in outsourcing is a function of the unclear value delivered by IS. In many companies, senior executives view IS as an overhead - an essential cost but one to be minimized nevertheless, These two phenomena - refocus to core competencies and the perception of IS as a cost burden - prompt many senior executives to sign outsourcing "mega-deals" for the provision of all IS services. But while such mega-deals afford these companies with much press, some have voiced concern about the long-term viability of these deals, Indeed, some prominent IS professionals have cautioned against the wholesale transferal of the management and control of a "strategic asset" such as IS. In a number of cases, these concerns proved valid, with "outsourcing partnerships" experiencing grave problems, A few companies have paid out significant sums of money to extricate themselves from outsourcing contracts and then rebuilt their internal IS capability (Hirschheim and Lacity, 2000), On the other hand, some IS managers who have refused to deal with outsourcing vendors or ignored them, have either been fired or had their jobs marginalized when their IS shops have failed to demonstrate value for money (Lacity and Hirschheim, 1993b), So clearly outsourcing must be taken seriously, What appears to be happening is that an important change is taking place in the sourcing of IS activity. Fundamentally, companies need to consider how best to
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