MANAGING IT IN THE DIGITAL AGE

Christoph Mueller-Bloch

Managing IT Vendors: IS Sourcing and Sourcing Management

L’esprit pionnier
COURSE CONTENT—TOPIC AREAS AND SESSIONS

Part Topic

1 Introduction & Digital Transformation

1 Managing IT in the Digital Age 2 Managing the Digital Transformation: IS
2 strategy and the Digital Matrix
3 Managing IT Vendors: IS Sourcing,
Cloud Computing, and Sourcing
4 Governance
3 4 5 6 7 Managing IT projects: Classic and agile
5 IS project management I
8 Managing IT projects: Classic and agile
Managing Managing
IS project management II
of IS 9 through IS 6 Managing through Enterprise IS
7 Managing through Analytics: Utopian
promises vs dystopian surveillance
8 Managing platforms and ecosystems I +
Exam prep
10
9 Managing platforms and ecosystems II
(+buffer)
10 Final exam

25
LEARNING GOALS

After this session, you should be able to…

• … describe and delineate different types of outsourcing
• … critically evaluate energy consumption of cloud-based
sourcing (aka datacenters)
• … make informed recommendations about adequate
governance mechanisms, i.e., contractual and relational
governance

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HOW THIS SESSION WILL HELP YOU SUCCEED IN YOUR CAREER

• “Cloud computing”
= No.1 high income skill (Linkedin,
Most in-demand skills)

• Business relationship
management
=essential skill for digital
transformation (State of the CIO 2019,
McKinsey article)

28
Outsourcing—
Characteristics &
Types
What is (out-)sourcing?
WHAT IS OUTSOURCING

31
IS OUTSOURCING: GENERAL DEFINITION

Outsourcing is the practice of paying a third party (so

called vendors or service providers) to get a company's
(so called client) IS-related work activities done.
These work activities include…
• System and data center operations, and networks: Installation,
operation, and technical maintenance of centralized and
decentralized computers and networks
• Application services: Development, implementation, and
maintenance of software applications
• User support: Support and trainings of users and problem
management
• Business processes: Entire business functions carried out by
vendor, including underlying technology, HR, and actual processing

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WHY DO FIRMS OUTSOURCE?

Reasons to outsource IS functions and business processes?

• Save costs
• Refocus on core business
• Access to new technology and talents
• Flexibility and control over quality
Reasons not to outsource IS functions and business processes?
• High dependence on vendor
• High transaction costs (e.g. for coordination, negotiation,
etc.)
• Loss of control over critical resources
• Hinder the potential to develop innovation with IT

33
 RELEVANCE OF OUTSOURCING: INFORMATION TECHNOLOGY (IT)
SERVICES SPENDING FORECAST WORLDWIDE FROM 2008 TO 2024

1,800

1,585
1,600
1,421
1,400 1,306
Spending in billion U.S. dollars

1,208
1,200
1,071
1,032
993
1,000 906 922 931
897 894
866
804.5 824.4
763.1 784.9
800

600

400

200

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023* 2024*

Note: Worldwide; 2008 to 2024

Further information regarding this statistic can be found on page
40.
Source(s): Gartner; ID 203291

34
Traditional
outsourcing
OUTSOURCING

Focal organization Focal organization Service

provider
IT
IT

The commissioning of a third-party to manage an organization’s IT

assets, activities, services, and/or people, to a defined result

36
RECENT SOURCING DECISIONS—OUTSOURCING APPLICATION SERVICES

In 2012, UBS signed a outsourcing deal with HCL Technologies

for the maintenance of all its “legacy” applications
• Scope: Operation of “legacy” software portfolio
• Purpose: Increasing efficiency in operating “legacy” software

http://www.business-standard.com/article/technology/hcl-technologies-
bags-250-300-mn-outsourcing-deal-from-ubs-112031400130_1.html
• Contract volume: CHF ~300 million
• Employees involved: 1000 at HCL Technologies

37
Nearshoring and
offshoring
OFFSHORING VERSUS NEARSHORING

Differences between offshore and

nearshore markets:

• Due to the longer history of

offshoring, especially in India,
offshore markets and vendors
are much larger
• IT nearshoring often for smaller
projects and if cultural and
geographic distances are
considered to be very important

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OFFSHORING & NEARSHORING: MOTIVATION AND CHALLENGES

Motivation
• Reduced labor costs
• Access to qualified labor
• Higher flexibility

Challenges
• Client extra costs (transaction costs for knowledge transfer,
specification of tasks)
• Cultural, language, time differences
• Legal restrictions on exporting/importing technologies
• Legal restrictions on transmission of data across borders

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Cloudsourcing
CLOUD COMPUTING

• Web technologies enable

using the Internet as the
platform for applications and
data
• Applications that used to be
installed on individual

Valacich and Schneider (2016), Information Systems Today

computers are increasingly
kept in the cloud
• e.g., Gmail, Google Docs,
Google Calendar

Copyright © 2016 Pearson Education, Ltd.

42
 SIZE OF THE CLOUD SOURCING SERVICES MARKET FROM 2009 TO
2024

800

700 678.8

600
563.6
Market in billion U.S. dollars

500 478.3

412.6
400

314.0
300
242.7
219.6
196.7
200 175
154 145.3
130.7
110.27
92.97
100 76.94
58.6

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023* 2024*

Note: Worldwide; 2009 to 2024

Further information regarding this statistic can be found on
page 43.
Source(s): Gartner; ID 273818

43
DISTRIBUTION OF CLOUD COMPUTING MARKET REVENUES
WORLDWIDE FROM 2015 TO 2022, BY VENDOR*

Microsoft Amazon IBM Salesforce Google Oracle Alibaba NTT Electronic Arts Fujitsu Other

2015

2016

2022

Note: Worldwide; 2015 to 2022

Further information regarding this statistic can be found on page
53.
Source(s): ITCandor; ID 540511

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 CLOUD COMPUTING

Cloud as a distribution and payment concept

• Responsibility shift of operation and maintenance activities
• Accessed through the web and priced based on usage
• Standardization logic (customization through configuration)
• Continuous updates/improvements
Architecture layer

Software-as-a-Service

Platform-as-a-Service

Infrastructure-as-a-Service

45
 CLOUDSOURCING MARKET REVENUE WORLDWIDE FROM 2016 TO
2021, BY SEGMENT

Infrastructure as a service Platform as a service Software as a service

500

450
282.7
400

350
Spending in billion U.S. dollars

300 197.6

250

148.5
200

123.9
150
70.1
100.38
100 47.6
61.11 35.9 91.5
50 67.2
25.8
18.05 49
11.57 35.4
0 17.8 24.81
2016 2017 2018 2019 2020 2021

Note: Worldwide; 2016 to 2021

Further information regarding this statistic can be found on page
46.
Source(s): IDC; ID 370305

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THE DARK SIDE OF CLOUD COMPUTING—ENERGY CONSUMPTION

Source: Science
49
IN-CLASS ASSIGNMENT:
Sustainability of Cloud
Computing
MORE RECENT DATA

51
How to make
outsourcing a
success?
THREE DRIVERS OF IS OUTSOURCING SUCCESS

Sophistication of
Sourcing Decision

Sophistication of
Outsourcing Success
Vendor Selection

Quality of Governance
- Contractual Governance
- Relational Governance

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Governance
Mechanisms
OUTSOURCING GOVERNANCE—KEY CHALLENGE

Potential conflict of interest between client and vendor

• Client interests: Low costs, high service quality
• Vendor interests: High revenue/sales, provide standard
services to realize economies of scale

57
OUTSOURCING GOVERNANCE—CONTRACTUAL AND RELATIONAL

Contractual governance
Action Foundation

Formal Control (e.g.,

outcome control,
Contract
behavior control based
on the contract)

Relational governance
Action Foundation
• Trust
Informal control (e.g.,
• Relational norms
client manager
(e.g., knowledge
articulates expectations
exchange)
in informal meetings)
• Commitment

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GENERIC TYPES OF OUTSOURCING CONTRACTS

Time-and-materials Fixed-price contract

contract
Vendor‘s Provide human and/or Deliver a specific outcome
responsibility physical resources in (e.g., software design,
specified quality code)
Remuneration Based on resource Based on delivered
utilization (e.g., billable outcomes (e.g., per
hours worked) milestone reached)
Major portion of Client Vendor
risk borne by

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WHAT IS THE RIGHT CONTRACT TYPE

Software Development Risks (-)

• Requirements volatility**(-)
•Availability of trained personnel*** (-) Findings
> Projects with high risk are
Client Knowledge usually associated with
• Client‘s IS experience** (+) t&m contracts
Market Conditions Choice of > Higher clients’ IS
•Number of projects completed by the experience is associated
fixed-price
vendor for the client*** (+) with fixed-price contracts
contract
> More projects by the
same vendor for the
same client promote
fixed-price contracts

Gopal et al. (2003)

*** Supported at p = 0.001
** Supported at p = 0.01

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WHAT IS THE RIGHT CONTRACT DESIGN?

> ISO Success is more likely,

— when contracts are more
detailed,
ISO Success
— when the contract size (total
value of contract in monetary
terms) is higher, Contractual Governance

— when the contract type (e.g. Contract Detail (++)

Contract Size (++)
fixed-price vs. t&m projects) Contract Type (MM)
fits the particular project and Control Mechanisms (MM)

— when control mechanisms fit

the particular project.

Legend:
(++) more than 80% of evidence positive and significant
(+) 60% to 80% of evidence positive and significant
(- -) more than 80% of evidence negative and signiticant
(-) 60% to 80% of evidence negative and signiticant
(MM) More than 80% of evidence suggests variable matters
(MR) mixed results Source: Lacity et al. (2010)

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HOW DO I DESIGN DETAILED CONTRACTS? 3 CONTRACT ELEMENTS

Foundation Governance
Change Characteristics
Characteristics Characteristics
What tasks are part of the How will tasks evolve in What are the
outsourcing deal? Who is the future? communication processes,
responsible for doing measurements, penalties,
what? dispute resolution and exit
options?
Service level objectives Future demand Communication plan
Process ownership plan management plan Measurement charter
Service level contents Anticipated change plan Conflict arbitration charter
Feedback plan Enforcement plan
Innovation plan

Goo et al. 2009

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OUTSOURCING GOVERNANCE—CONTRACTUAL AND RELATIONAL

Contractual governance
Action Foundation

Formal Control (e.g.,

outcome control,
Contract
behavior control based
on the contract

Relational governance
Action Foundation
• Trust
Informal control (e.g.,
• Relational norms
client manager
(e.g., knowledge
articulates expectations
exchange)
in informal meetings)
• Committment

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RELATIONAL GOVERNANCE

> ISO Success is more likely

when client and vendor,
— engage in close, informal ISO Success
knowledge sharing
— trust each other
— have a high relationship Relational Governance
Effective Knowledge Sharing
quality (++)
Trust (++)
— have low cultural distance
Relationship Quality (++)
Cultural Distance (- -)

Legend:
(++) more than 80% of evidence positive and significant
(+) 60% to 80% of evidence positive and significant
(- -) more than 80% of evidence negative and signiticant
(-) 60% to 80% of evidence negative and signiticant
(MM) More than 80% of evidence suggests variable matters
(MR) mixed results Source: Lacity et al. (2010)

64
EFFECTIVE COMBINATION OF CONTRACTUAL AND RELATIONAL
GOVERNANCE

Relational Relational Relational

Governance Governance Governance

replace/ replace/ compensate / compensate /

harm harm foster foster

Contractual Contractual Contractual

Governance Governance Governance

Substitution Substitution Complementarity

Source: Huber et al. (2013)

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IN-CLASS ASSIGNMENT:
Contractual and Relational
Governance
Summary & conclusion
SUMMARY

• Outsourcing vs. insourcing relates to the boundaries of the firm

whereas nearshoring vs. offshoring relates to geographic
boundaries
• “Classic outsourcing” and cloud-sourcing are different delivery
models of IS outsourcing
• Outsourcing relationships are governed through contractual and
relational governance
• Adequate contractual governance entails decisions regarding
contract detail, contract size, contract type, and different types of
contract clauses
• Adequate relational governance is associated with soft factors
such as trusted relationships and positive relational norms
• Contractual and relational governance are not independent but
interact with each other in systemic ways

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