Companies are increasingly outsourcing information technology for a variety of reasons, such as concern for cost and quality, lagging IT performance, supplier pressure, and other financial factors. The outsourcing solution is acceptable to large and small firms alike because strategic alliances are now more common and the IT environment is changing rapidly. The authors offer their suggestions for determining when to outsource and how to structure and manage the resulting alliance. Most important, they suggest, is to view the outsourcing agreement as a strategic alliance and manage it as such.
1. R.L. Huber, “How Continental Bank Outsourced Its ‘Crown Jewels,’ ” Harvard Business Review, January–February 1993, pp. 121–129.
For a critical discussion of the outsourcing phenomenon, see:
R.A. Bettis, S.P. Bradley, and G. Hamel, “Outsourcing and Industrial Decline,” Academy of Management Executive, February 1992, pp. 7–22.
A library search on “outsourcing information technology” articles for the past year and a half identified over 700 articles, almost all describing IT outsourcing as reported in the various industry trade journals.
2. For a discussion of the impact of outsourcing, see:
L. Loh and N. Venkatraman, “Diffusion of Information Technology Outsourcing: Influence Sources and the Kodak Effect,” Information Systems Research 4 (1992): 334–358.
3. See “Kodak’s Outsourcing Deal Brings Risks — And Not Just for Kodak,” The Business Week Newsletter for Information Executives, August 1989; and
D. Norton, H. Pfendt, G. Biddle, and R. Connor, “A Panel Discussion on Outsourcing,” Stage by Stage, 25 January 1990, pp. 13–16.
4. “General Dynamics and Computer Sciences Corporation: Outsourcing the IS Function” (A), (B), (C), (D) (Boston: Harvard Business School, Publishing Division, 1993).
5. The theory of what transactions are best conducted within the firm and outside the firm has been comprehensively covered. See:
O.E. Williamson, Markets and Hierarchies (New York: Free Press, 1975).
For further contributions on the inefficiencies of hierarchies, see:
H. Leibenstein, Inside the Firm: Inefficiencies of Hierarchy (Cambridge, Massachusetts: Harvard University Press, 1987).
For the notion of a new form of relationship evolving among firms, see:
R. Johnson and P.R. Lawrence, “Beyond Vertical Integration: The Rise of the Value-Adding Partnership,” Harvard Business Review, July–August, 1988, pp. 94–104.
For further discussion of the nature of the evolving firm, see:
J.L. Badaracco, Jr., The Knowledge Link: How Firms Compete Through Strategic Alliances (Boston: Harvard Business School Press, 1991).
For a discussion of the process of managing strategic alliances, see:
M.Y. Yoshino, Managing Strategic Alliance (Boston: Harvard Business School Press, 1994).
Finally, for a discussion of competitive strategy and the role of strategic alliances, see:
M.E. Porter, Competitive Advantage (New York, Free Press, 1985).
6. Porter (1985).
7. See R.L. Nolan, “Managing the DP Crisis,” Harvard Business Review, March–April 1979, pp. 115–126; and
R.L. Nolan, D.C. Croson, and K. Seger, “Note on Stages Theory Today” (Boston: Harvard Business School, Publishing Division, 1993).
8. See S.P. Bradley, J.A. Hausman, and R.L. Nolan, eds., Globalization, Technology & Competition (Boston: Harvard Business School Press, 1993).
9. See L. Loh, “Determinants of Information Technology Outsourcing: A Cross-Selectional Analysis,” Journal of Management Information Systems 9 (1992): 7–24.
10. See K.P. Arnett and M.C. Jones, “Firms That Choose Outsourcing: A Profile,” Information Management 26 (1994): 179–188.
11. For a discussion of the strategic grid, see:
F.W. McFarlan, J.I. Cash, and J.L. McKenney, Corporate Information Systems Management (Homewood, Illinois: Richard D. Irwin, 1992). McFarlan developed the framework in 1982. See:
F.W. McFarlan, J.L. McKenney, and P. Pyburn, “The Information Archipelago — Plotting a Course,” Harvard Business Review, January–February 1983, pp. 145–160.
We have generalized the two dimensions of strategic importance. The operations dimension has been generalized from dependence of the company on the computer for processing transactions to overall dependence of the company on sustained real-time processing of overall business processes. We term this dimension “information intensity.” See:
M.E. Porter and V.E. Millar, “How Information Gives You Competitive Advantage, Harvard Business Review, July–August 1985, pp. 149–160.
The second dimension of the strategic grid that we generalized was the importance of new applications development. Here we generalize applications development to the importance of innovative information resource management. Indeed, in-house applications development is one aspect of this dimension, but modern development initiatives commonly involve a number of outside partners as well.
12. See McFarlan et al. (1992).
13. For additional issues in outsourcing development, see:
“The Managing of Partnering Development in IS Outsourcing,” Proceedings of the Twenty-Sixth Annual Hawaii International Conference on Systems Sciences 4 (1992): 518–527.
14. See M. Hammer and J. Champy, Reengineering the Corporation (New York: Harper Collins, 1993); and
T. Davenport, Process Innovation (Boston: Harvard Business School Press, 1993).
15. For a discussion of issues involved in an outsourcing contract, see: W.B. Richmond and A. Seidmann, “Software Development Outsourcing Contract: Structure and Business Value,” Journal of Management Information Systems 10 (1993): 57–72.