IT Outsourcing: What do we know

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IT OutsourcingWhat do we know?

• Cynthia M. Beath, UT Austin
• Nils Fonstad, CISR/MIT
• (Based on work with
• Pamsy Hui, Nanyang University)

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Agenda

• Our framework
• What we know
• What is less clear
• QA

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The Empirical Evidence for What We Know

• 94 empirical papers published in refereed
  academic journals 1992-2005
• Theoretical and atheoretical papers.
• interpreted atheoretical evidence in terms of
  theoretical constructs, where possible.
• Both qualitative and quantitative papers.
• for qualitative papers, we rely on authors key
  findings

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The Exchange of IT Services
Buyer's Situation - Market (e.g., Production Cost
and Transaction Cost Drivers) - Capabilities
(e.g., Delivery, Deal Management,
Decision/Negotiation) - Institutional Forces
Buyer's Boundary Choice Process (i.e., to
insource or outsource)
Buyer Contract Outcomes
Contract Negotiation Process (i.e., make a deal)
Contract Fulfillment Processes - Contract
Management Processes (e.g., Control,
Coordination) - Service Delivery
Contract
Seller's Boundary Choice Process (i.e., to offer
a service or not)
Seller Contract Outcomes
Seller's Situation - Market (e.g., Production
Cost and Transaction Cost Drivers) -
Capabilities (e.g., Delivery, Deal Management,
Decision/Negotiation) - Institutional Forces
from Hui, Fonstad and Beath (2007)
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Situations Boundary Choices

• Economics of Markets
• Porter, Williamson
• Resource Based View
• Penrose, Barney, Teece et al.
• Institutional Theory
• DiMaggio Powell
• What do we know? Not much
• Buyers Seek to shed non-core activities or if
  costs can be lowered.
• Sellers Enter growing markets if have sufficient
  technical capabilities, intending to grow them.

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Upstream Factors Negotiated Boundaries

• Game Theory
• Nash, 1951
• vonNeuman Morgenstern, 1947
• Negotiation
• Bazerman Neale, 1992
• Pinkley Northcraft, 1994
• What do we know?
• Deals are made that lower Buyer production costs
• Effects of transaction cost drivers unclear
• Deals let Buyers shed non-core technical
  capabilities
• Sellers take deals to develop their distinctive
  capabilities
• Buyer institution influence cuts both ways

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Situation Upstream Processes

• Vigilant Processes
• Williamson, etc.
• Sensemaking/Political
• Weick
• Allison, 1969
• Cohen et al., 1972
• Dutton Ashford, 1993
• What do we know?
• Institutional pressures decrease Buyer vigilance.
• Weak capabilities decrease Buyer Seller
  vigilance

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Upstream Factors Contracts

• Industrial Economics
• Williamson, Grossman Hart '86
• Law
• McNeil, 1985
• What do we know?
• Incentive structure Effects of uncertainty mixed
• Adaptability High uncertainty associated with
  relational contracts

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Contract Fulfillment (1) Contract Management

• Managerial/Social Control
• Ouchi, Eisenhardt, Kirsch
• Uzzi, 1997
• Ring Van de Ven 1994
• Interdependence/Coordination
• Lawrence Lorsch 1967
• Thompson, 1967
• What do we know?
• (B) Outcome Control Associated with specific
  contracts
• (B) Behavioral Control/Coordination More in
  uncertain situations,
• (B) Social Control Associated with strong BS
  capabilities, trust building, and successful use
  of outcome behavioral control.

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Contract Fulfillment (2) Service Delivery

• IT Management
• Too numerous to mention
• IT Infrastructures
• Too numerous to mention
• Software Engineering
• Too numerous to mention
• What do we know? Not Much

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Buyer and Seller Contract Outcomes

• What do we know?
• Buyer Contract Outcomes
• Associated with good service delivery, all
  contract management processes, complete
  contracts, contract adaptability, low
  complexity, all 3 Buyer capabilities, Seller
  tech capabilities, open negotiation processes,
  informed boundary choices (buyer).
• Seller Contract Outcomes
• Associated with good service delivery, TM fee
  structure, low complexity, all 3 Buyer
  capabilities, Seller tech capability,

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Entire Process Situation

• What do we know?
• Buyer Situation
• Effects on market forces May be positive or
  negative. Arms length deals more efficient.
• Effects on capabilities Relational deals can
  build capability some evidence of loss of
  capability.
• Effects on institutional forces In 2000,
  shareholders valued OS announcements, but in 2006
  they are more selective, valuing straightforward
  deals.
• Seller Situation
• Effects on market forces May be positive or
  negative.
• Effects on capabilities can be built while
  outsourcing

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Under-Researched Areas
Buyer's Situation - Market (e.g., Production Cost
Drivers, Transaction Cost Drivers) -
Capabilities (e.g., Technical, Contract
Management, Contract Decision) - Institutional
Forces
Buyer's Boundary Choice Process (i.e., to
insource or outsource)
Buyer Contract Outcomes
Contract Fulfillment Processes - Contract
Management Processes (e.g., Control,
Coordination) - Service Delivery
Contract Negotiation Process
Contract
Seller's Boundary Choice Process (i.e., to
produce a service or not)
Seller Contract Outcomes
Seller's Situation - Market (e.g., Production
Cost Drivers, Transaction Cost Drivers) -
Capabilities (e.g., Technical, Contract
Management, Contract Decision) - Institutional
Forces
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• Thank you very much.
• Any and all comments are welcome!
• cbeath_at_mail.utexas.edu
• nilsfonstad_at_MIT.EDU