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Characteristics of I/S Outsourcing Decisions

Encouraged by the projections of phenomenal cost savings, many Fortune 500 firms are jumping on to the "outsourcing bandwagon" (Lacity and Hirschheim 1993b). A survey of U.S. CEOs shows that 42% of communication firms, 40% of computer manufacturers, and 37% of semiconductor companies rely on outsourcing from foreign firms. These same CEOs expect the figures on outsourcing to exceed 50% before the mid-1990s (Bettis et al. 1992). Yet, despite its growth, outsourcing is frequently perceived to be poorly controlled, high in cost, and a drain on quality and service performance (Jacobs 1994).

Cost savings has often been cited as the main driver for the IS outsourcing decision (Due 1992, Loh and Venkatraman 1992a). On the other hand, the short-term focus on financial performance without consideration of the strategic implications has also been criticized (Davis 1992). Another driving force for outsourcing is management's perception that by surrendering control of its IS to an external supplier it can better focus on its core business (Grover and Teng 1993, Huber 1993, Quinn et al. 1990). A third motivating factor relates to the perception of the IS in the organization -- companies consider outsourcing when the internal IS function is perceived to be inefficient, ineffective or technically incompetent (Lacity and Hirschheim 1993a). Based on their case studies, Lacity and Hirschheim (1993a, 1993b) suggest that the outsourcing decision may be a result of rational consideration or it may be a product of organizational politics, conflicts and compromises. They conclude that organizations engage in outsourcing evaluations because outsourcing is inherently about creating a perception concerning the efficiency (and perhaps effectiveness) of the internal IS function.

Some critics (Due 1992, Lacity and Hirschheim 1993b) argue that IS outsourcing can result in loss of control over IS/IT assets, threat of opportunism [from the supplier], the loss of IS expertise and corporate memory, and a decline in the morale and performance of the remaining employees. They also suggest that the anticipated cost savings might also be achieved internally, i.e., without sourcing externally (Benko 1992, Carlyle 1990, Davis 1992, Due 1992, Lacity and Hirschheim 1993a, Sharp 1993). Evidently, most controversy regarding IS outsourcing remains around the issue of balance between strategic implications and financial returns.

Role of Financial Considerations in IS Outsourcing Decisions

Historically, many firms have made sourcing decisions based primarily on anticipated cost savings (Grover and Teng 1993, Huber 1993, Venkatesan 1992), with insufficient regard for strategic or technological issues (Welch and Nayak 1992). Many firms assert that they are justified in outsourcing their 'commodity' activities and retaining their 'core competencies' in-house. Are these organizations really retaining their core competencies by outsourcing their IS/IT functions? Considering the very fact that these firms may also be outsourcing their capacity to learn and coordinate technologies within the business (Prahlad and Hamel 1990) and giving up the opportunity to build "core learning competencies" (Senge 1990), the value of IS outsourcing is questionable. In his criticism of the comparison of the IS function with "catering" services, Lowell (1992) argues that the "essentialness" of the processes, updates and storage that are performed on computer systems and that form an essential element of most products sold by financial companies distinguishes them from "buying statement paper." For instance, the products sold by all financial services companies consist, in most part, of transactions processed and accounts updated and maintained.

Information Technology Outsourcing and Business Strategy

The role of [information] technology in achieving competitive advantage has been described as that of an enabler of several business strategies such as changing industry structure, decreasing buyer or supplier power, raising entry barriers, and creating new products and markets (Porter 1985). The role of IT has also been well-recognized in the exploitation of structural differences among firms (Clemons and Row 1987), in supporting economic reorganization (Clemons and Row 1989) and in providing "a corporation an edge over its competitors" (Cash and Konsynski 1985). Jarvenpaa and Ives (1993) have elaborated on the role of IS in the coordination of global operations of the multinational firm. Citing several reasons for considering technology strategically, Kantrow (1980) states that: "Technological decisions are of fundamental importance to business and therefore, must be made in the fullest context of each company's strategic thinking."

When technology is not considered in developing the business strategy, the results are missed opportunities that could have contributed to the achievement of the organization's goals (Frohman 1985). In contrast to the earlier emphasis on the strategic [and competitive] role of IS in organizations (Blanton 1992, Boynton 1993, Clemons 1990, McFarlan 1984, Porter and Millar 1985, Raghunathan and King 1988, Tavakolian 1989), increasingly, companies are viewing IS as a utility (Hopper 1990) that can be "rented" from an external supplier (Bettis et al. 1992). A critical question that has remained unanswered is if information and IS can be treated as mutually independent entities. In other words, can organizations retain their control over information even when they give up their control over the systems and the IS function? Until a definitive answer to this question is discovered, organizations need to consider if the advantages generally associated with outsourcing decision are being compromised by a potential loss of intellectual capital invested in IS or long-term implications for business strategy.

The Need for a Framework for the Outsourcing Decisions

Although various authors (e.g. Putrus 1992) have offered diverse opinions on the outsourcing issue, theoretical work on outsourcing in general, and IS outsourcing in particular, is sparse. Few managers have a basis for evaluating outsourcing as a management tool (Jacobs 1994), especially for determining if outsourcing decisions need to be guided by the overall business strategy or primarily by financial considerations.

It has been demonstrated in several industries -- information intensive and not so information intensive -- that outsourcing IS/IT may lead to the loss of a capability that could potentially be a key success factor (King, Grover and Hufnagel 1989). Indeed, this has been proposed as a planned strategy of "hollowing" (Jonas 1986) -- a term that was initially used to describe a state of unplanned industrial decline (Bettis et al. 1992). In most cases of outsourcing, the adverse or unforeseen results accompanying outsourcing of IS have been due to the mismatch between the antecedent [i.e., business strategy or financial considerations], the mediating variable [IS outsourcing policy] and the consequent [IS productivity]. Therefore, a framework that analyzes these relationships together has considerable practical appeal for both researchers and managers of IS.

This study attempts to fill the existing void by proposing an integrative conceptual framework for determining: (a) the relative importance of business strategy and financial considerations in determining the IS outsourcing policy, (b) the relative importance of financial considerations and company's outsourcing policies in driving IS productivity. The framework suggested in this study, while consistent with the 'new' models of the IS organizations such as the "emergent IS organization" of Venkatraman and Loh (1994), provides a more general perspective that also has significance beyond the IS context. In other words, this framework can be extended to apply to other organizational outsourcing decisions which may involve processes or functions other than IS.

Generally outsourcing refers to the dependence of the firm's Information Systems (IS) department upon external organizations, but for the purpose of this study we are primarily interested in the dependence of the IS department upon external sources: both inside as well as outside the organization. This generalization is based on the premise that determination of the capabilities of IS i.e., evaluation of its performance is better reflected in its dependence upon any external sources.