Roland Booijen Eur

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<p>IT OUTSOURCING:</p> <p>Success in the operational phase</p> <p>IT OUTSOURCING:</p> <p>Success in the operational phase</p> <p>Master Thesis by Roland Booijen (259497) roland.booijen@inter.nl.net Erasmus University Rotterdam Erasmus School of Economics: Informatics &amp; Economics April 29th, 2004 Co-supervised by Dr. A. Hoogeveen, Erasmus University Rotterdam Co-supervised by Drs. R. Mooijman, Verdonck, Klooster &amp; Associatesth This thesis was assigned with a 9 on the 9 of June 2005 by behave of the graduation committee.</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>PrefaceDuring these last few months I've learnt many things. Not only about conducting scientific research and IT outsourcing, but also how organizations actually work in reality. This thesis is the result of just over six months of research, in which I got supported by my two coaches Diana Hoogeveen (Erasmus University) and Robert Mooijman (Verdonck, Klooster &amp; Associates). I would like to thank you both for your enormous help during this project. Additionally, I would like to thank the organization Verdonck, Klooster &amp; Associates for the internship I received. The way I was treated and helped by all people within VKA was great, I cannot imagine a better place to have written my thesis. Special thanks goes out to Peter Scheffel for co-coaching me both personally and professionally. Guus Delen, for his tremendous outsourcing knowledge and help during this project. Berthold Konijn and Robert Buitendijk for accompanying me during an interview. Ferry Johann for attending the sourcing brainstorm and Bram Spitzer for co-writing the article based on this thesis. Finally, Tim Symons for test-reading the thesis and introducing me at VKA. Who I certainly may not forget to thank are the people I have interviewed during this research. Unfortunately, I cannot name you personally due the anonymous set-up of this thesis, but I couldn't have done this without you. Thanks for your time, information and sourcing insight. On a more personal level, in which support is also essential, I would like to thank all of my friends. They are the ones that make those great evenings, weekends and vacations of relaxation and fun. My parents Paul &amp; Marian and my sister Anja for the support they've given my during my whole life. I would like to thank them for giving me the opportunity to attend University. But the one I owe most gratitude during these last six months and the period before is Jeanette. Thank you for your support!</p> <p>Roland Booijen, April 2005</p> <p>iii</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>Contents1 Introduction 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 Context Topicality of the Subject Definition of the Research Problem Scope of the Research Objectives of Sponsors Deliverables of the Research Methodology of the Research Interim Table of Contents Visualization of the research 1 1 6 7 8 9 10 10 12 14 15 15 15 19 21 22 24 25 27 30 32 34 34 34 35 38 40 43 44 44 44 48 50 51 51 51 54 57</p> <p>(IT) Outsourcing Theories and Definitions 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 Introduction Outsourcing Definitions IT Outsourcing Definitions History of IT Outsourcing What differentiates IT from other Outsourcings? Outsourcing Lifecycle Motives and Disadvantages Selective Sourcing What is being Outsourced Summary</p> <p>3</p> <p>Management Control 3.1 3.2 3.3 3.4 3.5 3.6 Introduction What is Management Control Transaction Cost Theory Application to IT outsourcing and MC Management Control in Practice Summary</p> <p>4</p> <p>Business &amp; IT Alignment 4.1 4.2 4.3 4.4 Introduction What is Business &amp; IT Alignment Strategic Alignment Model Summary</p> <p>5</p> <p>Research Model 5.1 5.2 5.3 5.4 Introduction Perceiving Success Propositions Summary</p> <p>Roland Booijen, April 2005</p> <p>iv</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>6</p> <p>Research Design 6.1 6.2 6.3 6.4 6.5 Introduction Case Study Research Research Subjects Research Process Summary</p> <p>58 58 58 59 61 65 66 66 66 67 74 76 76 77 78</p> <p>7</p> <p>Analysis 7.1 7.2 7.3 7.4 Introduction Analysis of a Case Study Research Propositions Other Observations of the Research</p> <p>8</p> <p>Conclusions 8.1 8.2 8.3 Research Questions Research Outcomes Future Research</p> <p>Appendices: A B C D References Questionnaire Maturity-scan Control Maturity-scan Business &amp; IT Alignment 79 84 86 92</p> <p>Roland Booijen, April 2005</p> <p>v</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>1</p> <p>IntroductionThis chapter serves as an introduction for the thesis "IT outsourcing: Success in the operational phase". This research will provide insight for managers and other involved persons of large and middle large organizations concerning their outsourcing with the accompanying service-provider. The ultimate goal of research is to enable organizations to measure the maturity of several elements of their current outsourcing and provide a solution for those parts that perform insufficiently. The objective of this study is to examine the factors that influence an outsourcing in theory (which will form this thesis) and to implement this knowledge into practice (which will form an outsourcingscan). This research has been performed under the authority of the Erasmus University and Verdonck, Klooster &amp; Associates (VKA). VKA is an independent consultancy agency specialized in Information and Communications Technology (ICT). Their mission is to make the public and private sector more successful by innovating their ICT, business processes and organization. Firstly, the context and topicality of the subject will be closely examined, in order to give a general impression of the IT outsourcing subject. This will be followed by the research definition, the research objectives, the research deliverables as well as the research scope. Finally, we will discuss the methodology of research.</p> <p>1.1</p> <p>ContextOutsourcing During the last two decades, a lot of research has been done on the subject of outsourcing, especially concerning Information Technology (IT) outsourcing. Detailed definitions entailed to outsourcing will be discussed in the second chapter of the thesis, but the meaning of outsourcing will first be explained in a nutshell. Outsourcing is the concept of contracting out one or more activities to other companies, which used to be performed by the company itself. However, it was not a new world-shattering invention twenty years ago. For centuries, people have dealt with outsourcing, though just not called by that name. The make or buy decision, the choice between carrying out an activity within the organization itself and buying that same activity externally, has always existed. IT Outsourcing Information Technology has become very important in today's business environment. There is hardly any organization that could continue its business processes without the help of IT. Nowadays, IT has become just as indispensable as electricity or telephony. But you might wonder: why all that sudden attention from the business community in IT outsourcing during the last years? Why are more and more companies increasing their outsourcing activities? According to Willcocks and Lacity (2000) IT outsourcing is not just a fad. It has already survived the typical five-year period of a fad.</p> <p>Roland Booijen, April 2005</p> <p>1</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>There are many reasons for outsourcing, such as: the popularity (bandwagon effect), cost pressures from competition and a lack of trust in the internal IT department. However, industry watchers attribute the initial growth of the IT outsourcing market to two main phenomena (Lacity, Wilcocks and Feeny, 1996). The first one is the focus on core competence. For years, companies have used diversification in order to mediate their business risks. Now they massively leave this strategy to refocus on their few core competences. Because many companies view their IT functions as non core competence, they outsource these IT activities to service-providers whose core competence is IT. The second phenomenon is the uncertainty of ITs value. Sometimes, the benefits from IT are hard to see or located at other departments. For example: the costs of the implementation of a CRM (Customer Relationship Management) application are put on the account of the IT department, but the benefits of this application become visible at the Sales department which increases its turnover. Aside from these two causes, Van der Zee (1997) also states two other prominent developments to clarify IT outsourcing's growing importance. As time passes by, IT is becoming more complex, more diverse and also more critical. In addition, traditional IT-organizations are less capable of controlling this complexity and diversity by themselves. Outsourcing Evolution The growth of the last few years can be attributed to an evolution that took place in the outsourcing market. This change can be summarized by three interrelated developments (Kane &amp; Ravi, 2003). The technological advances, the economical recession, continual globalization of business and the increasing complexity of the business work, collaborate as a catalyst for the adoption of outsourcing. There has been a shift in the drivers behind the demand for outsourcing. In the past, organizations often applied outsourcing to achieve tactical goals like cost reduction and business efficiency (by concentrating on core business). Nowadays, there is a stronger focus on the strategic side of outsourcing. It can also be used to transform organizations, acquire new capabilities and bring fundamental strategic and structural change (Linder, 2004) The former developments have led to a third one. The expansion and transformation of the outsourcing market have made it possible and interesting for other companies to enter the outsourcing services industry. Companies originating from software, hardware and IT services entered the outsourcing market. This diversification made outsourcing more attractive. Janet Walker, director of resource strategy at American Express, is not too surprised to see cost savings play a secondary role at companies that are outsourcing or considering to do so. For us, it is certainly a factorit would be absurd not to bebut to focus on that sends the wrong message to employees and even customers and shareholders, she points out. (The Outsourcing Institute, 2002)</p> <p>Roland Booijen, April 2005</p> <p>2</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>Business Process Outsourcing A new trend in outsourcing is business process outsourcing (BPO). Although this is not entirely new, companies have already outsourced secondary processes for years. Since the eighties, they have outsourced non-vital secondary processes such as the company catering and cleaning activities. The recent trend in BPO is the outsourcing of primary activities. This outsourcing differs from IT outsourcing on the following points. With IT outsourcing, all IT activities related to one or multiple processes are being outsourced. As the name already gives away, BPO outsources the whole process, which can include IT. The reason why many managers choose to not outsource the whole process, is that they fear of losing control. According to Linder (2004), "Why do so many executives feel their stomachs knot at the thought of turning over a vital business function to an outsider? Because they fear of losing control. But a solid, collaborative business process outsourcing relationship can actually give you more controland boost performance in the bargain." Offshore Outsourcing When a company chooses to outsource processes or activities to a service-provider located in a different country, it's called offshore outsourcing or offshoring. Because some countries have lower wages, they can offer products or services at lower costs. This concept has been well known in other industries for centuries, but is relatively new in the IT services area. The globalization and improvement of telecommunications have made it possible to outsource IT services (Carretek, 2004). The transmission costs have fallen, bandwidth has exploded and universal networking standards have emerged, all ironing out the obstacles that existed in transmitting the massive amounts of information between the company and the offshore serviceprovider. India, the Philippines and eastern Europe (IDC, 2004) are frontrunners in offshore IT activities, as can be seen in Figure 1.1. Ireland plays an important role in the telecommunication market. Therefore many large companies, like Dell and Microsoft, outsourced their call centers to Ireland.</p> <p>Roland Booijen, April 2005</p> <p>3</p> <p>Master Thesis Informatics &amp; Economics IT Outsourcing</p> <p>Figure 1.1: Market share of offshore service providers (IDC, 2004) The education in these countries is relatively high-qualified, their inhabitants have a good knowledge of the English language and there is a match of culture between the service-providers and the outsourcing companies. All these factors are important for a service-provider, in order to understand the business of the outsourcer in an offshore outsourcing. It is not surprising that the frontrunners of the market fulfill all these criteria. Not only has offshoring an effect on cost, it can also contain strategic motives. "If approached strategically, outsourcing can enable organizations to remain competitive, not only by reducing costs, but by freeing up staff to focus on more strategic, innovative projects, or by remaining at the top of their industry by outsourcing new developments that otherwise could not have been handled by the internal staff," notes Gordon Brooks, president and CEO of E5 Systems, an application outsourcing company with software manufacturing centers in India, China and the United States (Hansen, 2004) Offshore outsourcing is a very hot topic within the current economy. Even within the modern political environment, it was one of John Kerry's issues during the United States elections of 2004. This is not very surprising, because offshoring is growing fast and has a huge impact on the employment in the country that chooses to outsource. According to the IT research and analysis firm Gartner, by the year 2004, over 40% of IT-related businesses will either be investigating the possibility of offshore outsourcing or have already shipped some IT-related work overseas (SearchCIO, 2004). Outsourcing in the Netherlands The outsourcing market is a booming business. Single deals going over billions of dollars are no exception anymore, like for instance (though already terminated) J.P Morgan Chases 5 billion dollar contract with IBM. Everyday, more and more companies are outsourcing an increasing number of their activities. The United States (US) are the outsourcing market leader, they spent an estimated 2,827 billion dollar on outsourcing in 2003, compared to 1,047 billion dollar in Europe. Although Europe started outsourcing later, it is now catching up and growing much faster, with...</p>

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