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Chapter 15: Information systems outsourcing

Mikko Pajula and Sari Puumalainen Introduction

Outsourcing is not a new concept and has existed for many years in one form or another. IT environment has changed considerably during 1990s. Instead of fairly stable mainframe environment, IT now has to deal with a user-centered workstation environment supported by server-based storage and processing. (Rockhart & al. 196, 45) Today, the way firms are challenging to changes and demands of IT has changed. Many companies are networking and integrating both internal and external computers so that they can change their structure to more efficient forms of competing flexibly in the global marketplace. This integration places extraordinary pressures on firms trying to keep the old services demanded by the new environment. Therefore, outsourcing has become a viable alternative for these firms to get access to appropriate skills and to speed up the transition reliably and cost-effectively. (Applegate & al. 1996, 247) New development methodologies, integrated package suites, and exploding technologies create a situation in which IT units must interface with as many as 50 to 100 suppliers, compared to previous 5 to 10 major suppliers, to meet their needs (Rockhart & al. 1996, 45). Several changes in the business environment in the end of 1980s and during the 1990s have caused renewed attention towards outsourcing. These changes originating from the demand side are need to focus on core business, need for flexibility, need for reduction of costs and staffing levels, decentralization of IS function, negative perception of internal IS function, new market ideologies and technological changes (de Looff 1997, 3-4). Also the value of strategic alliances has been widely recognized. It is difficult for a company to compete simultaneously in all business areas, which some of them are not core usiness areas for the company. Alliances allow a company to simplify its management agenda safely. Alternatively, alliances also allow a company to leverage a key part of the value chain by bringing in a strong partner that complements its skills. For an alliance to be successful and last for a long term, both firms must believe that they are benefiting (Applegate & al. 1996, 246-247)

15.1. What is information systems outsourcing?

Many different definitions of outsourcing can be found in the literature. There are some common elements in these definitions. First, the notion of two or more parties, where one party outsources to one or more other parties. Second common element is the notion that the other party is an external organization that is not part of the user organization. The third

2 notion is that the other party agrees to perform some activities for the user organization. Outsourcing in its most basic form can be conceived of as the purchase of a good or a service that was previously provided internally. De Looff has created the following definition by connecting all the elements that consist in todays outsourcing field (de Looff 1997, 30): IS outsourcing is the commissioning of part or all the IS activities an organization needs, and/or transferring the associated human and other IS resources, to one or more external IS suppliers. Some view IS outsourcing as a new word for an old practice facilities management. Example of facilities management is a situation when a company outsources IS when it pays another company to operate its computer center. More recently, the concept of outsourcing has been broadened by many to include farming out tasks, services, or functions to a vendor. Information systems outsourcing options have existed since the dawn of data processing. Outsourcing practices have evolved in several ways over the last few decades. Larger companies with more mature IS departments are increasing their outsourcing. They are also outsourcing greater amount of IT/IS functions. (Saunders & al. 1997, 63-64)

15.2. Outsourcing in 1990s

Many innovative types of outsourcing have emerged in the past few years. It is common to transfer IS staff and resources to the IS supplier. IS suppliers often take responsibility for entire projects. Client organisations and IS suppliers engage in strategic relationships that exceed individual projects and systems. Contracts that share risk and rewards are becoming more common. Also joint ventures are formed between organisations and IS suppliers. In these join ventures the parties take a share in each other or establish a jointly owned IS organisation. (de Looff 1997, 5-6) IS suppliers are forced to focus on certain customer groups. Customers demand that their supplier is familiar with their business processes. To meet this demand, small suppliers are focusing increasingly on specific client groups. Large suppliers have changed their internal structure from being organised around functions and technical disciplines to product or market oriented units. Each of these units focuses on a specific group of clients. The focus on customer groups is a positive trend for client organisations, because less time is needed for the IS supplier to get acquainted with the organisations business processes and the result is better suited to the organisations needs. (de Looff 1997, 6-7) There are themes that explain most of the pressures to outsource IT activities. General managers are concerned about internal IT department costs and the service quality. Their objective is to get existing services for reduced price at acceptable quality standards.

3 Another reason is breakdown in IT performance. Failure to meet service standards can force general management to use other ways of achieving reliability. Outsourcing has been used as a cure to meet the standards again. Outsourcing has also been used as a way to fix a broken, ineffective IT department. In some cases intense supplier pressure has forced companies to make an outsourcing decision. Simplified general management agenda can also be a factor behind outsourcing decision. A firm under intense cost or competitive pressures, which does not see IT as a core competence, may find outsourcing a way to delegate time-consuming, awkward problems so it can focus scarce management time and energy on other activities. Also several financial factors can make outsourcing appealing. Outsourcing can turn a largely fixed-cost business into one with variable costs. This is particularly important for firms whose activities vary widely in volume in one year to another or which face significant downsizing. The outsourcer can make the change much less painfully than the firm. It can handle the variation more effectively and potentially provide greater employment stability for the companys IT employees. One significant financial point to outsourcing is that third-party relationship brings an entirely different set of dynamics to a firms view of IT expenditures. (Applegate & al, 1996) Corporate culture, its values and way of thinking can also be a factor in outsourcing decision. Outsourcing can also be a way to eliminate an internal irritant. No matter how competent and adaptive existing IT management and staff are there is usually tension between the end users of the resources and the IT staff. A remote, experienced outsourcer can be an option in these situations. (Applegate & al. 1996, 247-252) There are also five similar outsourcing drivers, which differ a little from what has mentioned above. Drivers are classified in these categories: cost reduction, focus on core competence, liquidity needs, IS capability factors and environmental factors. It is commonly believed that an outside vendor can provide the same level of service at a lower cost than the internal IS department. An important part of many IS outsourcing agreements is an introductory cash payment by the vendor for the tangible and intangible IT assets for the client. The initial payment would be particularly attractive to firms burdened with short-term liabilities and higher debt. Is capability factors may also be motivating factor of outsourcing. Because of rapid technological advances, companys IS department may lack current technical expertise and equipment. Outsourcing can also be used to create an IS infrastructure without substantial capital investments. Environmental factors often play a role in the outsourcing decision. These include factors that are not specific to the firm, but exist in its industry or in the economy at the time of outsourcing. The decision to outsource IS may be driven by imitative behaviour among firms or by mix of external media, vendor pressure and internal communications at the personal level among managers. (Smith & al 1998, 63-65)

15.3. Outsourcing options

4 Outsourcing is often seen as an all or nothing proposition, or that outsourcing constitutes the covering of a significant portion of IS budget. But actually there is a variety of outsourcing options. According to Lacity there are four basic types of outsourcing arrangements (Lacity & al 1995, 4-6; 222-227): general outsourcing, transitional outsourcing, business process outsourcing and business benefit contracting.


General outsourcing

General outsourcing is divided in three alternatives, which are selective outsourcing, valueadded outsourcing cooperative outsourcing (Lacity & al 1995, 4). In selective outsourcing one particular area of IS activity is chosen to be turned over to a third party. In the valueadded outsourcing some area of IS activity is turned to a third party. The third party is thought to be able to provide a level of support or service which adds value to the activity that could not be cost-effectively provided by the internal IS group. In cooperative outsourcing targeted IS activity or activities are jointly performed by a third party provider and the internal IS department.


Transitional outsourcing

Transitional outsourcing typically involves the migration from one technological platform to another. Transitional outsourcing has three phases. These are management of the legacy systems, transition to the new technology or system and stabilisation and management of the new platform. Dependent on companys internal ability and IS strategy, any one or all of these phases could be turned over third party provider. (Lacity & al 1995, 5)


Business process outsourcing

Business process outsourcing is relatively new outsourcing arrangement. It refers to an outsourcing relationship where a third party provider is responsible for performing an entire business function for the client organization. (Lacity & al 1995, 5) Organizations work in an increasingly competitive marketplace. In order to manage these situations, organizations are forced to focus their attention to core activities. Non-core activities remain important to the overall success of organizations, and are best provided by specialist organizations that make those activities central to their business. Managing outsourced business processes is the key to providing competitive products or services, and along with managing core activities, will determine the success of organizations in achieving competitive excellence. The competencies needed for outsourcing management are similar in many respects to project management, but extend beyond it. There is a continued need to review the synergy of outsourced and in-house activities. (May 1998, 136-137)

5 The achievement of sustainable competitive advantage has long been the goal of companies and organizations. This competitive advantage has only been sought inside the organization. But recently attention has shifted to the supply chain as the unit of analysis rather than the firm. This extended enterprise is seen as the unit of competitive advantage. It has also been suggested that advantage may be gained through developing strong networks of companies. These networks can be developed through horizontal associations, joint venture agreements or through close supply relationships. (Hines & al 1998, 524-525)


Business benefit contracting

Business benefit contracting is also a relatively recent phenomenon. In business benefit contracting a contractual agreement is made. This agreement defines the vendors contribution to the client in terms of specific benefits to the business. It also defines the payment the customer will make based upon the vendors ability to deliver those benefits. The goal is to match actual costs with actual benefits to share the risks. This way some of the risks of traditional outsourcing are eliminated. The stumbling stone in business benefits contracting is usually accurate measuring of the benefits. Benchmarking in this area is particularly problematic. Since vendor revenues and margin potential are directly tied to the benchmarks, getting an acceptable agreement by both parties on the benchmarks can be extremely difficult. (Lacity & al 1995, 5)

15.4. Which IT activities to outsource?

Lacity recommends that IT should be considered as a portfolio when selecting which IT activities to outsource and which to retain in-house. Successful outsourcing begins with an analysis of the business contribution of various IT activities. (Lacity & al. 1996, 18-19) The following three areas should be declared; the volume and the cost of goods or services produced, the amount of the external or in-house customers served and the added value created. In outsourcing situations organizations must define their core and non-core activities and competencies and establish flexible business structures that can most effectively create superior customer value. Non-core activities remain important to the overall success of organizations, and are best provided by specialist organizations that make those activities central to their business. (May 1998, 136) Despite to this fact Lacity's (1996) research indicates that this description is too simple for two reasons. First reason is that generalization about which activities are commodities or strategic are often misguided. Lacity gives a couple of common examples of these situations. For some companies, supposed IT commodities such as payroll, accounting systems, and data centre operations actually serve to differentiate them critically from competitors. And also by contrast, applications often migrate from strategic to commodity within each industry as competition decreases and eases. Therefore Lacity suggests each company to analyze the

6 importance of IT activities in its own business context, rather than accept generalities. Second reason is that many companies do not operate highly visible competitive systems. Therefore senior executives may mistakenly classify all IT activities as commodities. By treating IS as a two-dimensional portfolio, it is easier to identify IT activities which are valuable outsourcing candidates. Companies that consistently succeed in selecting what can be outsourced to their advantage usually distinguish between the contribution that an IT activity makes to business operations and its impact on competitive positioning. Figure 1 illustrates this perspective.

Contribution of IT Activity to Business Operations


Best Source Outsource

Insource Eliminate or Migrate


Useful Commodity

Contribution of IT activity to Business Positioning

Figure 1

Selecting IT activities for outsourcing (Lacity & al. 1996, 19)

In figure 1 contribution of IT activity to business positioning is either commodity or differentiator. Some IT activities differentiate a company from its competitors, while others provides basic necessary functions for the business. Most IT activities are viewed as commodities. Although they do not distinguish a company from its competitors in business offering and performance terms, these activities need to be performed competently. Contribution of IT activity to business operations is either critical or useful. Some IT activities are critical contributors to business operations, whereas others are merely useful because they make only incremental contributions to the bottom line. (Lacity & al. 1996, 18-20) After mapping IT activitys contribution to business, four potential categories of outsourcing candidates emerge as seen in figure 1. These categories are: critical differentiators, critical commodities, useful commodities and useful differentiators. IT activities which are described as critical differentiators should be kept in-house. These activities are critical to companys business operations and help to distinguish the business from its competitors. Critical commodities are critical to the business operations, bur they dont distinguish the business from its competitors. These activities can be outsourced, but with great care. There should be a clear evidence that vendor can meet all the requirements

7 for quality. Useful commodities provide incremental to the business but dont distinguish it from its competitors. Useful commodities are prime candidates for outsourcing. Lacity has found in his study that payroll, benefit, and accounting systems are often best candidates for outsourcing. By outsourcing these useful commodities a companys managers can focus on more critical business activities. Useful differentiators distinguish the business from its competitors in a way that is not critical to success. These useful differentiators should not even exist in a company, but often they do. Useful differentiators need to be eliminated from or migrated within an IT portfolio but never outsourced only to reduce their costs. (Lacity & al. 1996, 19-20) As mentioned earlier all the outsourcing decisions should be carried out with great care. All the aspects and possible risks and advantages should be accounted very accurately.


How to achieve outsourcing success?

16.1. Outsourcing success factors

The aim of this chapter is clear out the recent knowledge about how a outsourcing success can be achieved. Every outsourcing arrangement is a individual case and also means to succeed are different. There are some basic questions that should be asked in every outsourcing arrangement: Is there an economic rationale? Can the organization manage ownership issues around asset and people transfers? Is a suitable vendor available? After a company knows which IT activities are possible candidates to outsource, the next question is naturally When to outsource these activities?. In the outsourcing literature the contract is viewed as the most important single element behind a successful outsourcing process. The contract forms the building ground for successful outsourcing relationship. Therefore the elements of a successful outsourcing contract are clarified in detail. The last section defines how should an outsourcing relationship to be managed. Willcocks and Kern (1998) have listed six factors, which have a primary influence on the effectiveness of IT sourcing arrangements. 1. Is an IT activity differentiator of commodity. 2. IS an IT activity critical or useful. 3. Degree of uncertainty of the business environment and business needs and hence longer term IT needs. 4. Degree of technology maturity associated with the IT activity or service. Maturity is low when technology is new and unstable, or where an existing technology is being

8 used in a radically new application and where the organization has little in-house experience in implementing the technology in the current application. 5. Level of integration. Highly integrated systems have complex and extensive interactions with other technical systems and interface in complex ways with multiple business users. 6. In-house capability relative to that of the market. Willcocks and Kern (1998) found that lowest risk route to using the market was to outsource useful commodities in conditions of low uncertainty. On the technical side it is important to reduce risk by outsourcing discrete systems in situations of high technology maturity where the market is able to provide comparable service at more efficient price. Saunders & al. have studied the success of outsourcing in over thirty companies, which have outsourced their IT functions. According to Saunders there are five determinants of successful outsourcing: core functions, partnerships, multiple vendors tight contracts and winning combinations. The conventional wisdom is that companies should never outsource their core functions. Outsourcing of a strategic function can leave a company potentially vulnerable to market failure. Instead firms should concentrate their resources on a set of core functions and strategically outsource other functions. In an increasing number of cases, companies are opting to form partnerships with their service providers. Typically these are long-term commitments that allow firms to share risks and rewards and to better manage complex interrelationships. (Saunders & al. 1997, 63-65, Prahalad & al. 1990) However, outsourcing providers cannot be strategic partners because they do not share the same profit motive. Account managers at outsourcing providers are rewarded for maximizing profits, primarily by charging customers additional fees for services that extend beyond the contract. This means, when a customers costs increase, so do vendors profits. (Lacity Hirchheim 1993, 74) Regardless to this arrangements exist which deny their perspective. When a vendor for a company develops an application, the outsourcing company may require the vendor to share revenues derived from the selling of application to others. These revenue sharing contracts do exist in the outsourcing field. (Saunders & al. 1997, 65) The use of multiple vendors brings flexibility in the outsourcing contracts. The contracts, where a multiple vendors work together to satisfy customers needs, allow the customer to benefit from the strengths of each vendor. Several researchers have explored the relationship between tight contracts and outsourcing success. Saunders & al. (1997) have mapped twelve companies on the basis of their perception of the service provider, the nature of the contract and outsourcing success. The results of the mapping very clearly indicates that companies with loose contracts viewed their outsourcing arrangements as a failure. To ensure outsourcing success, organizations need to look beyond simple recipes

9 such as tightly written contracts or outsourcing only commodity functions. Outsourcing success is most probably achieved with the right combination of all the determinants mentioned above. ( Saunders & al. 1997, 66-67)



Personal Responsibility Flexible Salary Programs Career Alternatives Education Flexible Working Hours

Profit Responsibility Charging Mechanisms Pricelists for services Financing and Accounting Systems Alternative Operative Forms

Decentralized Decision Making State-of the art Working Methods Product-like Services Outside Sales Marketing



Figure 2

Conceptual Model of Outsourcing (Reponen 1993)

Reponen (1993) has formed a conceptual model of outsourcing. This model can be used as an overall framework for making and implementing outsourcing decisions. It states three areas of objectives: personnel, finance and organization. The model also describes the means for meeting the objectives set. Reponen points out that outsourcing of IT or IS services is a change process that takes several years to stabilise. The management problem is to make this change happen.

16.2. IT outsourcing contract issues

10 In the outsourcing literature the contract is highlighted as the most important factor in achieving outsourcing success. The contract between the client organization and the IS supplier documents the decisions and negotiations results from the previous phases of outsourcing decision-making. Several researchers have explored the relationship between tight contracts and successful outsourcing arrangements (Saunders & al. 1997, 66; de Looff 1997, 229; Lacity & al. 1995, 91; Lacity Hirschheim 1993, 76; Kettler 1993, 456). A solid and detailed contract is necessary to guarantee adequate performance of the supplier. Using standard contracts and framework contracts increases the efficiency and effectiveness of contracting. (de Looff 1997, 228) Saunders & al. have mapped twelve companies on the basis of the nature of the contract and outsourcing success. The study clearly indicates that there is a clear connection between a tight outsourcing contract and outsourcing success. (Saunders & al. 1997, 6869) 1. Discard the vendors standard contract. 2. Do not sign incomplete contracts. 3. Hire outsourcing experts. 4. Measure everything during the baseline period. 5. Develop service level measures. 6. Develop service level reports. 7. Specify escalation procedures. 8. Include penalties for non-performance. 9. Determine growth. 10. Adjust charges to changes in business volume. 11. Select your account manager. 12. Include a termination clause. 13. Beware of change of character clauses. 14. Take care of your people.

Table 1

Lessons in contract negotiations (Lacity Hirschheim 1993, 244)

Lacity and Hirschheim have created the list of lessons in contract negotiations on the basis of their research in thirteen different companies that had outsourced their IT activities. Next, these contract issues are studied more closely and some complements from other literature are added. The client organization should not accept the suppliers standard contract, not even as a starting point for drafting a new contract. Suppliers contracts are usually biased towards the suppliers interests. A site-specific contract should be made in every outsourcing

11 arrangement. (Lacity Hirschheim 1993, 244; de Looff 1997, 229) Each organization is different and will require a different contract (Saunders & al. 1997, 77). Outsourcing arrangements are often made under a great pressure. The risk of signing incomplete contracts is possible when both parties are anxious for relationship to begin. (Lacity Hirschheim 1993, 245-246) Loosely defined growth rates, poor baseline measurements, and unspecified non-performance clauses often result in outsourcing failure (Saunders & al 1997, 76). In many outsourcing cases clients internal experience about outsourcing is not sufficient to make outsourcing decisions in most appropriate way. Vendors negotiate with different clients and they are fully aware of the technical implications of contracting, while the Customer Company may have little or no experience with outsourcing. To balance the negotiating power, senior executives must have a sound understanding of the specific service requirements associated with outsourced technology. If this is not possible, customers should hire experts to represent their interests. During negotiations, the vendor uses a host of their technical and legal experts to represent their interests. These experts thoroughly understand the way to measure information services and how to protect their interests. Lacity found in his research that experts are a critical success factor in negotiating a fair contract. Lacity recommends companies to hire a technical and a legal expert if needed. A technical expert is particularly helpful when measuring the costs of baseline services. A legal expert who is familiar with outsourcing contracts is also recommended. These legal experts ensure that customers wishes are sufficiently documented in the contract. No matter how experienced the clients IS or legal staff are, IS suppliers typically have more experience with this type of agreement. (Lacity Hirschheim 1993, 246; Lacity & al. 1996, 22; Saunders & al. 1997, 77; de Looff 1997, 229) De Looff emphasizes that the contract should be future-oriented. Reason for this is that the major challenges to the relationship will come about as requirements, volume and technology change. (de Looff 1997, 229) Saunders & al. suggests that a renegotiations option should be included into contract, because something will be forgotten or under specified in the original contract (Saunders & al. 1997, 77). During the baseline period all the services that the vendor is obligated to provide to the customer should be determined. In most of the outsourcing arrangements the outsourcing vendor will charge a fixed fee for delivering these services, but will charge an excess fee for services above and beyond the baseline. Therefore, customers must measure every service during the baseline period to ensure that these services will be included under the fixed fee obligation. (Lacity Hirschheim 1993, 246-247) Service level measures and reports of these measures should be part of every outsourcing arrangement. Service level measures are needed if the customer or vendor wishes to add,

12 combine, improve, or delete measures. For every service that the vendor is expected to provide, a service level measure should unequivocally express the level of required service. In addition to service level reports, the client and vendor must agree upon problem escalation procedures. Every measure should have its own agreed escalation procedure. Services may be divided into critical versus non-critical categories to prevent micromanagement. For non-critical measures, such as analyst training hours, perhaps the vendor may miss this measure once or twice a year. For critical services, such as on-line availability, the customer may require immediate reporting, problem resolution within a specified period of time, and perhaps even cash penalty. (Lacity Hirschheim 1993, 252) Growth rates should also be determined in the contract. There are outsourcing contracts that include a growth rate where the customer gets a certain amount of growth free. The reasoning is that the cost of a unit of processing decreases every year, so the customer deserves to share the benefits of price/performance improvements. Lacity and Hirschheim point out that the problem is that vendor understands growth rates much better than the senior executives with which they negotiate. (Lacity Hirschheim 1993, 251-253) Companies should also adjust charges to business changes. These changes could be for example severe fluctuations caused by acquisitions, mergers or selling of business units. An outsourcing contract should also include a termination clause. This clause protects both parties, since the desire to terminate by one party will severely affect the other party. There can be many reasons for termination. Either party may need to terminate because of bankruptcy or selling of the company and there is always a change that customer may wish to terminate because of failure to provide services. Most contracts require either party to notify the other in case of possible changes in business or services supplied within a specified time period. Another weakness of several outsourcing contracts have been the change of character clause. This provision states that the customer will be charged for any changes in functionality. According to Lacitys (1996) research this clause has triggered several disputes between vendor and client. Therefore, customers should carefully specify what changes will trigger an excess charge and what changes will be included in the baseline fee.

16.3. How to manage an IS outsourcing alliance

The management of the outsourcing relationship is the coordination of the parent companys internal IS departments and the external vendor, to form a synergy where the whole is greater than the individual parts. The management of the outsourcing vendor of the outsourcing agreement should be treated as a strategic alliance and managed as such. A strategic alliance partner is an organization to complement an area of weakness to give stability in the turbulent world of IS.

13 This part of the paper will first look at the difficulties of management of the alliances and then discuss some of the classical tools used in management of the outsourcer.


Why are these relationships difficult to manage?

Outsourcing contracts are usually set for a long period of time which does not necessarily match the dynamic and fast pace world of information systems (IS). Like marriage, however, these outsourcing arrangements are much easier to enter then to sustain or dissolve. (McFarlan, 1995) In an outsourcing contract, the timing of benefits is different for the client and the outsourcer. The benefits for the customer are clear in first year because: 1)they may receive a one time capital payment 2) feel they have transferred their IS problems to an other organization and 3) the payments in the first year may resemble the anticipated benefits in the contract. In contrast, the situation for the outsourcer id reversed. During the first year they make heavy capital payments in expectancy of flow of payment in the future. At the time when the outsourcer is moving into a positive cash flown then its client may feel the need for new services, may not like the monthly charges, and/or may want to move to a new IS architecture. (McFarlan, 1995) The outsourcer has to be very careful when using software licences of their client, because the outsourcing vendor may be responsible of the software licences for their client. This ruling will force outsourcing vendors to closely examine the software licences of their clients and write disclaimers in the outsourcing contracts. (Minoli, 1995)


Tools for management of an outsourcing alliance

There are a number of tools which management can use to manage the outsourcing vendor. These tools should be used with care and all actions well planned. The tools are as follows: Allow the outsourcer to use the client as a reference for future outsourcing contracts. This will be a great aid for the vendor in selling, but without the references, making sales is difficult. (Lowell, 1992) Van Honeycutt, president of Computer Sciences Corporation (CSC), was asked in a 1994 interview, "What are an outsourcers keys to success?" He responded by saying "First and foremost is maintaining your reputation. Outsourcing is a very small town. CEOs are the most important references, and a failed relationship has an overwhelming negative impact." (McFarlan, 1995) Ranking of priorities for what work should be done and when. Document the priorities, including critical dates, and walk through them with the vendor to set both groups expectations.

14 If the vendor has multiple clients with similar concerns then a user group should be setup. The user group will allow clients to help plan and set priories for enhancements and maintenance issues for the vendor. (Soininen, 1995) The vendor and the client have to agree on the structure of communications internally and externally. Who at the client will communicate with the vendor and who from the vendor will communicate with the client? "This geographic and cultural separation, relative infrequency of contract (particularly between client and vendor managers), and multiplicity of agendas within the client company can thoroughly distort unstructured communications." (Lowell, 1992) Also, all significant communications should be documented and shared internally and externally. (Foxman, 1994) The client company users, managers and IS personnel may conflict with the vendor. An agreed structure for conflict resolution should be in place to solve the conflict, including how and where to escalate them. (Lowell, 1992) Service standards for the vendor should be defined and agreed upon in concrete terms. For example, response time and scheduled completion times for batch processing. Performance against those standards should be reported to the vendor as well as the client. (Lowell, 1992) At regular intervals the vendors performance is to be reviewed and evaluated against the agreed upon service standards. At these reviews the expectations and priorities should be revisited for the coming period and all documentation produced to be shared with internal groups and the vendor. (Lowell, 1992) Develop a direction for the vendor to follow in order for the client meet its business objectives. This should be well defined, documented and communicated to the vendor as to allow mutual co-ordination. (Lowell, 1992) Planning for unexpected events, whether they are delayed batch system updates or shutdowns due to fire or earthquake. These kinds of crisis plans should be documented and reviewed as the contract gets updated. (Lowell, 1992)


Managing of an outsourcing alliance

The ongoing management of the alliance is one of the most important aspects of outsourcings success. (McFarlan, 1995) The CIO has to be actively planning and assuring IS resources are at the right level and appropriately distributed. There are six critical areas to concentrate on to maintain a successful alliance. The alliance must continuously adapt to change, because the nature of the technology and external competition is in a state of evolution. As noted in the outsourcing contract with

15 IBM and Eastman Kodak, in the past four years there has been twelve amendments to the original contract. (McFarlan, 1995) The planning for network architecture must be on a long-term approach of interconnectivity. Networks, standard hardware and/or software conventions, and database accessibility all need customer planning. (Soininen, 1995) The client must have a clear understanding of emerging technologies and how they may be used. The managers must attend vendors seminars and visit firms currently using these technologies. This allows the client firm to understand what is going on in the market and to see if there are any problems or opportunities can be sighted. (Soininen, 1995) Continuous learning should be part of the internal IS departments philosophy because this will aid users to be comfortable in a climate of continuous IS change. (Soininen, 1995) The customer-outsourcer interface is crucial and should not be underestimated. The interaction between the two parties must occur at multiple levels. The lower levels deal with the mechanics and more operational issues while, the IS senior level people identify major issues of policy and the relationship structuring. (Soininen, 1995)



Outsourcing decision is always a far-reaching decision, and possible consequences of the arrangement should be studied with a great care. An outsourcing relationship must be managed and controlled actively by the client organization, to ensure that the relationship is operating according to the interests of the client. Therefore it is advised to keep enough IS personnel to manage and control these outsourcing relationships and the development of IS market. The knowledge and skills of the internal IS personnel can be kept up to date by performing part of IS activities internally. (Merikanto, 1999) If an outsourcing decision is made, it should align with organizations IT strategy. Outsourcing is not a cure, which can immediately solve the problems of internal IT operations. Therefore all the possible alternatives, both internal and external, should be evaluated as closely as possible. (Merikanto, 1999) In some cases a total IT utilities outsourcing would probably be a good idea. If the client can somehow measure the future needs and the direction of the business, then an outsourcing contract, which considers these needs could be drawn. This arrangement would be fairly close to the business benefit contracting mentioned in the theory part. If the companies are outsourcing their IT utilities functions to different service providers, a lot of resources is needed to manage and link the separate pieces together. What actually happens in these cases is a change from managing internal IT resources to managing external

16 supplier relationships. Therefore companies should consider a total IT utilities service package if there is a suitable supplier with appropriate services available in the market. Before making an outsourcing decision, companies have to remember that outsourcing is beneficial only if suppliers have knowledge that give them an opportunity to operate more efficiently than the client companys internal department. At the same time the supplier has to be motivated to enforce the improvements and obtain some of the possible benefits. (Merikanto,1999)

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