MIT Sloan Management Review

Management of Technology and Innovation

How to Manage an IT Outsourcing Alliance

By F. Warren McFarlan and Richard L. Nolan

January 15, 1995

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.

Buy article & permissions

Long-term sustained management of a strategic alliance is turning out to be the dominant challenge of effective IT outsourcing. From a relatively unusual entrepreneurial activity, IT outsourcing has recently exploded across the global corporate landscape.1 Xerox, Delta Airlines, AMP Insurance (Australia), British Aerospace, and the Inland Revenue Service are the latest of these mega-alliances. Several years ago, Shell Oil out-sourced its Brazilian IT activities. Like marriage, however, these arrangements are much easier to enter than to sustain or dissolve. The special economic technology issues surrounding outsourcing agreements necessarily make them more complex and fluid than an ordinary contract. Both parties need to make special efforts for outsourcing to be successful. In addition to clear successes, we have identified troublesome relationships and several that had to be terminated.

Our purpose in this article is to provide a concrete framework to help senior managers think about IT out-sourcing and focus on how to manage the alliance to ensure its success.

Why Outsourcing Alliances Are Difficult

Outsourcing contracts are structured for very long periods of time in a world of fast-moving technical and business change. Ten years is the normal length of a contract in an environment in which computer chip performance is shifting by 20 percent to 30 percent per year. (This standard contract length has emerged to deal with switching cost issues and to make... To read the complete article, login or sign-up using the form below.

From The Magazine

Fall 2009

Special Report: Sustainability

8 Reasons That Sustainability Will Change Management

Michael S. Hopkins

Transparency, accidental innovation, trust, collaboration — as sustainability affects how the world works, so will it affect how business works in the world.

Intelligence: Management

Debunking Management Myths

Martha E. Mangelsdorf

In this interview, Henry Mintzberg questions some of the conventional wisdom about managerial work.