Beyond Outsourcing: Managing IT Resources as a Value Center

How to best extract value from information technology (IT) resources is a major challenge facing both business and IT managers, particularly as they turn their focus from searching for the competitive benefits of strategic information systems and striving for benefits beyond process reengineering. At the same time, managers are beginning to synthesize lessons from nearly a decade of IT outsourcing. Now astute managers are asking: How can we move beyond leveraging IT for redesigning current business processes to create new business capabilities? What is the best design for organizing our IT activities as a business driver? How can we best exploit the potential benefits of the Inter-net and the World Wide Web for delivering superior value to customers? How should we allocate and manage IT investments? How can we develop a strategic approach to IT sourcing that balances the risks and benefits of insourcing and outsourcing?1 What types of sourcing options should we explore? What truly distinguishes our ability to exploit IT functionality differently from our competitors? How can we continually achieve and sustain the required strategic alignment between business and IT operations? What are the driving principles for organizing IT resources in the twenty-first century?

During the past decade, I have observed and analyzed how companies respond to such questions and challenges. In this article, I synthesize my observations and analyses into a framework for managing IT resources as a value center. I introduce the value center concept, describe its essential features, and highlight its use in reframing the dialogue between business managers and their information systems counterparts on IT’s role in shaping and supporting business strategies. In doing so, I position the value and risks of IT outsourcing as part of the larger challenge of crafting an effective IT strategy.

The Compelling Case for Change

Most managers are painfully aware of the limitations of their legacy technological infrastructure and plan to migrate from their centralized, mainframe technology toward a more decentralized, distributed, multimedia platform. In this arena, they seem preoccupied with the year 2000 conversion problem. Few recognize the potential weaknesses of their legacy administrative architectures. Outmoded IS organizational design and processes, misdirected IS resource allocation criteria, inappropriate IT planning systems, parochial views on outsourcing, and mismatched IT skills with business needs are as critical as obsolete technological platforms.

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References

1. For a recent discussion on the value of selective outsourcing, see:

M. Lacity, L. Wilcocks, and D. Feeny, “The Value of Selective IT Sourcing,” Sloan Management Review, volume 37, Spring 1996, pp. 13–25.

For an overview of the risks of outsourcing, see:

M.J. Earl, “The Risks of Outsourcing IT,” Sloan Management Review, volume 37, Spring 1996, pp. 26–32.

2. See T. Davenport, Process Innovation (Boston: Harvard Business School Press, 1992);

M. Hammer and J. Champy, Reengineering the Corporation (New York: Harper Business, 1993);

N. Venkatraman, “IT-Enabled Business Transformation: From Automation to Business Scope Redefinition,” Sloan Management Review, volume 35, Winter 1994, pp. 73–87; and

D. Tapscott, Digital Economy: Promise and Peril in the Age of Networked Intelligence (New York: McGraw-Hill, 1996).

3. Leading companies include: McDonnell Douglas, Continental Bank, British Petroleum, Philips Electronics, Inland Revenue in the United Kingdom, Xerox, Blue Cross/Blue Shield of Massachusetts, National Car Rental, J.P. Morgan, Salomon Brothers, Campbell Soup, Swiss Bank, and DuPont.

4. Kodak’s move indeed elevated IT outsourcing as an acceptable administrative practice. For a technical discussion on the diffusion of this phenomenon within the United States, see:

L. Loh and N. Venkatraman, “Diffusion of Information Technology Outsourcing: Influence Sources and the Kodak Effect,” Information Systems Research, volume 3, December 1992, pp. 334–358.

For a recent discussion on the state of IT outsourcing, see:

“Outsourcing Megadeals,” Information Week, 6 November 1995, p. 10.

5. CSC Index Foundation, “New Perspectives on IT Outsourcing” (Cambridge, Massachusetts: report #105, December 1995), p. 10.

6. “Sears Hit the Road with Wireless Devices,” Computerworld, 29 May 1995, p. 6.

7. “Law Firm Thrives on Bleeding Edge,” Computerworld, 25 September 1995, p. 73.

8. W.P. Yetter, president and CEO of Astra-Merck, quoted in:

“The End of Delegation? Information Technology and the CEO,” Harvard Business Review, volume 73, September–October 1995, p. 169.

9. “CIGNA Creates Top Technology Post,” Computerworld, 10 July 1995, p. 20.

10. Quoted in:

“The End of Delegation” (1995), p. 162.

11. Some research is underway at Boston University Systems Research Center by Professor Nalin Kulatilaka and his colleagues on applying the options thinking to IT investments. This approach provides valuable insights on the investment management process under conditions of uncertainty.

12. See, especially:

J.B. Quinn, Intelligent Enterprise (New York: Free Press, 1992); and

G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994).

13. M. Scott Morton, The Corporation of the 1990s (New York: Oxford University Press, 1991).

14. Venkatraman (1994).

15. Quoted in:

“The End of Delegation” (1995), p. 169.

16. See, for instance:

Quinn (1992).

17. Personal conversation, June 1992.

18. “J.P. Morgan Allies with Four Firms,” Boston Globe, 14 May 1996, p. 55.

19. News release, 28 March 1994.

20. R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996).

Acknowledgments

I thank the Boston University Systems Research center for the support provided to complete this paper. I have benefited significantly from discussions and interactions with several managers and academic researchers. I particularly thank those whose comments and challenges have sharpened my thinking and refined my ideas: John Henderson, Lawrence Loh, Tom Boehm, Frans Lion, Jay Michaud, Joseph Guegan, Jim Noble, Jack Prouty, Walt Whalen, Robert Brammer, Jim Kinney, John Cross, Jim Short, David Feeny, Charlie Gold, Ron Tarro, Robert Lukas, Randy Grossman, and Christopher Sprague. Lawrence Loh first suggested that I use the label value center as an organizing framework as I was struggling with a way to unite the different components. I thank the SMR referees for their constructive comments on an earlier version.