The Value of Selective IT Sourcing

  • Mary C. Lacity, Leslie P. Willcocks and David F. Feeny
  • April 15, 1996

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 risk — to focus on core competences.4 As a result, IT has come under scrutiny. Senior executives frequently view the entire IT function as a noncore activity and reason that IT service vendors have the economies of scale and technical expertise to provide services more efficiently than do internal IT departments.5

Second, uncertainty about IT’s value is another reason for the growth of outsourcing. In many companies, senior executives perceive that IT has failed to deliver the promise of competitive advantage propagated in the 1980s.6 Consequently, many senior executives view IT as a necessary cost to be minimized. The CEO of a U.S. conglomerate of petroleum, natural gas, and chemicals expressed his frustration with IT:

All we see is this amount of money that we have to write a check for every year. Where is the benefit? IS says, “Well, we process data faster than we did last year.&