MIT Sloan Management Review

Management of Technology and Innovation

 

The Value of Selective IT Sourcing

By Mary C. Lacity, Leslie P. Willcocks and David F. Feeny

April 15, 1996

WHY DOES THE OUTSOURCING OF IT FREQUENTLY FAIL TO PRODUCE THE EXPECTED COST SAVINGS OR OTHER BENEFITS? PERHAPS BECAUSE managers don’t carefully select which IT activities to outsource. The authors examined sixty-two sourcing decisions at forty organizations through interviews with senior business executives, CIOs, consultants, and vendor account managers. From their data, they developed a set of frameworks to clarify sourcing options and aid managers in deciding which IT functions to contract out and which to retain in-house.

Buy article & permissions

When Eastman Kodak turned over the bulk of its IT operations to three outsourcing partners in 1989, outsourcing was a $4 billion a year business.1 Today, that number has grown to nearly $40 billion a year, according to the estimates of industry watchers Frost & Sullivan. Following Kodak’s example, various companies such as Continental Bank, General Dynamics, Continental Airlines, and National Car Rental opted to dismantle internal IT departments by transferring IT employees, facilities, hardware leases, and software licenses to third-party vendors for seven- to ten-year periods.2 But while such high-profile deals are continually reported — most recently, involving Xerox, Delta, and British Aerospace — a different, more typical pattern has been developing. The growth of IT outsourcing is increasingly based on what we call “selective sourcing,” characterized by short-term contracts of less than five years for specific activities. Selective sourcing meets customers’ needs while minimizing the risks associated with total outsourcing approaches.

Companies outsource IT for many reasons, ranging from its high profile and current popularity to cost pressures from competition and the economic recession.3 However, industry watchers attribute the growth of the IT outsourcing market to two main phenomena. First, interest in IT outsourcing largely results from a shift in business strategy. Many companies have abandoned their diversification strategies — once pursued to mediate... To read the complete article, login or sign-up using the form below.

 
 

In This Issue

 

Best Sellers