Governance in IT Outsourcing Partnerships

Governance in IT Outsourcing Partnerships [1]

Erik Beulen
Tilburg University, The Netherlands

Copyright 2004, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

Abstract

An IT outsourcing partnership consists of an outsourcing relationship and one or more external IT suppliers and the relationship between them. Alignment of mutually set goals of the IT outsourcing relationship is a prerequisite to achieve governance. In order to achieve governance the management of IT outsourcing partnerships is also essential. Managing an IT outsourcing relationship requires substantial effort from both the outsourcing organisation and the IT supplier. This chapter is based on 11 international IT outsourcing partnerships, five expert interviews and on literature. Three dimensions are described in a descriptive IT outsourcing partnership governance framework: outsourcing organization, the maintenance of the relationship, and the IT supplier. Eleven governance factors are detailed in the framework. These governance factors include guidelines for the implementation of the IT strategy and the information management. Furthermore, this chapter focuses on the IT outsourcing contract. The role of the contract management and account management of the IT suppliers and the implementation of global service delivery processes is also detailed in this chapter.

[1]This chapter is based on a long-term research program into the management of IT outsourcing partnerships conducted by Prof. Dr. Pieter Ribbers, Prof. Jan Roos and the author of this chapter, as part of the Economics branch of the Faculty of Economics of the University of Tilburg in the Netherlands. A large number of outsourcing case studies were analyzed over the last few years as part of this research program. The descriptive framework for the governance of IT outsourcing partnerships developed as part of the author's doctoral thesis (Beu'00) is further refined in this chapter on the basis of an analysis of additional references and case studies.

Introduction

Just as it is necessary to align the business strategy with the IT strategy (Rockart & Morton, 1984; Henderson & Venkatraman, 1992; Brown & Magioll, 1994), it is also necessary to align the IT strategy with the sourcing strategy (Quinn & Hilmer, 1995). Only a sound sourcing strategy will result in proper IT Governance (Dreyfuss, 2002) and solid IT outsourcing partnerships (Lacity & Hirschheim, 1993; Willcocks & Fitzgerald, 1994; Earl, 1996).

Organizations basically have two options for sourcing IT services: they can either provide the IT service themselves through their own internal IT division — insourcing — or use external IT suppliers — outsourcing. These choices are based on a "make or buy" decision whose essence is described by Coase (1937) and Williamson (1975).

The focus will be on the governance of IT outsourcing partnerships, not insourcing, and covers the governance of IT outsourcing partnerships from the perspective of both outsourcing organization and IT supplier. It aims to provide a better understanding of governing IT outsourcing partnerships by proposing a descriptive framework with governance factors.

The definitions of the most important concepts related to the governance of IT outsourcing partnerships and the positioning of IT outsourcing partnerships are detailed in first section. The second section sets out the research framework used. The third section explains the management of IT outsourcing partnership issues. A descriptive framework for the management of the IT outsourcing partnership is described in the fourth section and is further developed in the fifth through seventh sections. Future trends are developed in the eighth section. The final section contains the conclusions.

Definitions

The literature first devoted attention to IT outsourcing partnerships in 1990 (Gantz, 1990; Rochester & Douglas, 1990). An IT outsourcing partnership consists of an outsourcing organization and one or more external IT suppliers and the relationship between them. This definition is based on the work of Lacity and Hirschheim (1993), Willcocks and Chio (1995a) and Currie (1998). The IT services outsourcing market is still growing every year. Trend analysts such as Morgan Chambers, IDC and Gartner predict annual growth figures of approximately 10% (Morgan & Chambers, 2001; Lamy, 2001; Cox, 2002a). This growth is also confirmed by publications such as the OutsourcingProject (2002). In addition, market analyses carried out by Gartner indicate that more and more organizations are outsourcing IT services related to their primary business processes. Furthermore, outsourcing organizations are outsourcing complete business processes (Brown & Scholl, 2002). This increases the impact of the IT outsourcing partnership for outsourcing organizations and is further discussed. All of these factors make it essential that sufficient attention be devoted to the governance of IT outsourcing partnerships. Governance will be defined.

To position the governance of IT outsourcing partnerships, it is essential to properly understand the advantages and disadvantages of outsourcing and to further develop the elements of an IT outsourcing partnership.

Governance

Governance of IT outsourcing partnerships is, amongst others, defined by Lacity and Hirschheim (1993), Willcocks and Fitzgerald (1994), Corbett (1994) and Klepper (1995, 1998). Based on their definitions the governance of IT outsourcing partnership results in realizing the mutually set goals of the IT outsourcing relationship. These goals may be contrary, such as the cost saving goal of the outsourcing organisation versus the return on investment goals of the IT supplier. The alignment of the goals is a precondition for governance (Beulen, 2000). To achieve alignment governance the contract between the outsourcing organisation and the IT supplier is essential. In order to achieve governance the management of IT outsourcing partnerships is also essential. Management of IT outsourcing is defined as the activities that the outsourcing organisation and the IT supplier take to achieve governance. This definition is based on the work of McFarlan and Nolan (1995), Cox (1999), Heckmann (1999) and Kern and Willcocks (2002). Managing an IT outsourcing requires substantial effort from both the outsourcing organisation and the IT supplier. The management attention for the outsourcing organisation will be detailed. The management attention for the IT supplier will also be detailed.

Outsourcing Benefits and Disadvantages

Outsourcing decisions are strongly situation-dependent (Lacity & Hirschheim, 1993; Beulen, Ribbers, & Roos, 1994; de Looff, 1996) and this section consequently summarizes the general advantages and disadvantages of outsourcing. Much was published on this subject during the nineties. This resulted in the perception that outsourcing is only cheaper due to the fact that IT suppliers are able to generate economies of scale and that outsourcing creates a large dependency on the IT supplier. The following summary illustrates this perception.

Outsourcing Benefits:

• Access to expertise and the deployment of new technologies (KPMG Impact, 1995; International Data Corporation, 1998): rapid technological developments require a significant portion of the human resources capacity of internal IT divisions and require high investments in the training of IT professionals. An IT supplier whose core business consists of the delivery of IT services is able to keep the level of knowledge of its IT professionals up to date more effectively and efficiently.
• Increase in the level of flexibility (Lacity & Hirschheim, 1993; Klepper, 1995): due to the fact that an IT supplier has several customers, the IT supplier is better able to absorb the peaks and valleys in the demand for IT services than the internal IT division, which generally only provides services to its parent organization.
• Decrease in costs (Apte, 1990; Willcocks & Fitzgerald, 1994): due to their scale and ability to share production resources, IT suppliers are able to provide more efficient and effective IT services.
• Increase the predictability of costs (Lacity, Willcocks, & Feeny, 1995b; Currie & Willcocks, 1998): outsourcing contracts are generally multi-year contracts. This increases the predictability of costs for the outsourcing organization. This is an important advantage, particularly for investors.
• The generation of cash flows (Earl, 1996; Willcocks & Lester, 1997): through the sale of assets — hardware and immovable property — the outsourcing organization is able to generate a one-time cash flow by outsourcing its IT services.

Outsourcing Disadvantages

• Management of IT supplier(s) (KPMG Impact, 1995; Feeny, 1997a): the management of IT suppliers requires the attention of the management of the outsourcing organization and this carries its own costs. Furthermore, many organizations have difficulty finding qualified managers to assume this role.
• Confidentiality (Willcocks & Fitzgerald, 1994; Klepper & Jones, 1998): outsourcing arrangements cause the outsourcing organization's confidential data to be accessible to the IT supplier's employees. This constitutes a risk that must be considered when the decision to outsource is taken.
• Dependency on the IT supplier(s) (Terdiman, 1993; Lacity & Hirschheim, 1993): by entering into a multi-year contract, outsourcing organizations become dependent on their IT suppliers, particularly when there are changes in IT services required by the outsourcing organization.

Outsourcing Organization

Outsourcing organizations use one of three organization structures [2] (Duncan, 1979; Daft, 1998): the functional organization structure — denoted by Burns and Stalker as mechanistic organizations (1961); the divisional organization structure — the organization structure here follows the organization's business strategy, which leads to the creation of autonomous business units within the enterprise (Chandler, 1962; Lawrence & Lorsch, 1967; Mintzberg, 1979); and the matrix organization structure (David & Laurance, 1977).

The position of the Chief Information Officer (CIO) and the information managers within the organization structure of the outsourcing organization are related to the organization structure of the outsourcing organization (Dickson, Leitheiser, & Wetherbe, 1984; Niederman, Brancheau, & Wetherbe, 1991), see Table 1, and influences the manner in which the governance of the IT outsourcing partnership is set up (Earl & Feeny, 1997a; Beulen, 2000). It is essential for outsourcing organizations to staff the CIO and information manager positions in order to be able to implement proper governance of the IT outsourcing partnership (Earl, 1996; Lacity, Willcocks, & Feeny, 1996). The roles of the CIO and the information managers are further described.

• Functional Organization Structure: The CIO and the information managers occupy a centralized position within the organization. The information managers functionally report to the business unit managers of the outsourcing organization and, hierarchically, to the CIO. Earl refers to this as the Corporate Service IS function (Earl, Edwards, & Feeny, 1997b).

• Divisional Organization Structure: The CIO occupies a centralized position within the organization, and the information managers have a decentralized position and are part of the business units. The information managers therefore report hierarchically to the business unit managers and functionally to the CIO. Earl refers to this as the Decentralized IS function (Earl, Edwards, & Feeny, 1997b).

• Matrix Organization Structure: The CIO occupies a centralized position within the organization and a number of the information managers occupy a centralized position within the organization. These information managers functionally report to the business unit managers of the outsourcing organization and hierarchically to the CIO. The remaining information managers occupy a decentralized position within the organization. They report hierarchically to the business unit managers and functionally to the CIO. Earl refers to this as the Federal IS function (Earl, Edwards, & Feeny, 1997b).

The IT Supplier

The IT supplier is responsible for the delivery of the IT services on the basis of a contractual agreement. A distinction is made here between the internal IT supplier — the internal IT division — and external IT suppliers. Cases where the internal IT division provides the IT services are not considered outsourcing arrangements: these are referred to as insourcing.

External IT suppliers may be subdivided into specialized companies and full-service suppliers (Pinnington & Woolcock, 1997; Dataquest, 1998). Full service suppliers are further subdivided into first and second tier suppliers. Second tier suppliers provide more limited geographic coverage than first tier suppliers, which are able to provide a consistent worldwide portfolio of IT services (Dataquest, 1998). Specialized companies may be further subdivided into companies that provide specific IT services and companies that operate in vertical markets.

In selecting an IT supplier, the outsourcing organization must choose an IT supplier with a profile that fits the requested IT services (Willcocks & Fitzgerald, 1994; KPMG Impact, 1995; Lacity & Willcocks, 2001). It is important here to select an IT supplier that is comparable to the outsourcing organization in relation to its relative size. If the IT supplier is relatively far larger than the outsourcing organization the attention may not be as appropriate as necessary over the contract period. In the case that the IT supplier is relatively smaller than the outsourcing organization there might be a chance that the outsourcing company cannot benefit from economies of scale. Furthermore, IT suppliers may find difficulties in implementing innovations and flexibility.

There are four variants that may be used by an outsourcing organization to have its external IT suppliers provide the required IT services. A choice must be made in this regard between outsourcing the entire IT service and partial outsourcing. Currie and Willcocks (1998) refer to this as "total outsourcing" and "selective outsourcing" respectively. If an organization opts for selective sourcing, a portion of the IT services will be provided by the internal IT division. The IT literature raises many questions in relation to total outsourcing due to its large dependency on IT suppliers. This includes Lacity, Willcocks and Feeny (1995b) and Huber (1993). In addition, the outsourcing organization must make a choice between outsourcing to a single vendor or to multiple vendors. Currie and Willcocks (1998) refer to this as "single sourcing" and "multiple outsourcing" respectively. "Multiple outsourcing" requires the outsourcing organization to provide greater coordination between IT suppliers and consequently generally leads to higher quality IT services at more competitive prices (Cox, 2002b).

The choice of "single sourcing" or "multiple sourcing" in combination with the choice of "total outsourcing" and "selective outsourcing" yields the following four variations:

1. Selective Single Outsourcing: the outsourcing organization only outsources a single component to a single external IT supplier. The other components are provided by the internal IT division.
2. Selective Multiple Outsourcing: the outsourcing organization outsources a portion of its IT services to multiple external IT suppliers in combination with portions that are insourced to the internal IT division.
3. Total Single Outsourcing: the outsourcing organization has outsourced all of its IT services to a single external IT supplier.
4. Total Multiple Outsourcing: the outsourcing organization has outsourced all of its IT services to multiple external IT suppliers.

The Relationship

The relationship consists of the contractual link between the outsourcing organization and the IT suppliers for the delivery of the IT services.

The contracts in all cases include a framework agreement (Willcocks & Fitzgerald, 1994; KMPG Impact, 1995). The framework agreement includes the Service Level Agreements. The contractual relationship can essentially be set up in one of two ways. By linking the method of grouping the SLAs to the geographical location and the business units of the outsourcing organization it is possible to attain a much higher degree of contract effectiveness. This is due to the fact that this approach makes it possible to align the IT services included in the contract with the local information needs of the business units of the outsourcing organization (Beulen, 2000). The grouping of SLAs by the type of IT service makes it possible to build greater efficiency into the contracts. This is so because this approach makes it possible for the IT supplier to standardize its IT services, which in turn enables the IT supplier to realize economies of scale, including the inherent cost savings (Lacity & Hirschheim, 1993).

There are three types of IT outsourcing: Information Systems Outsourcing, Processing Outsourcing and Business Process Outsourcing (International Data Corporation, 1998) [3] — see Table 2. Information Systems Outsourcing is the most commonly occurring form of outsourcing (Cox, 2002b). This chapter will briefly delve into the subject of Business Process Outsourcing.

• Information Systems Outsourcing: A long-term contract, including facilities management, in which the IT supplier assumes responsibility, or part of the responsibility, for providing the IT services and where there is a possibility that the IT supplier takes over the property, or parts of the property, of the internal IT division, and also takes over its personnel.

• Processing Outsourcing: IT services for specific processing functions that include a high degree of standardization. The IT supplier carries responsibility here for executing a process that includes IT and non-IT related elements. There is no transfer of personnel or transfer of property to the IT supplier.

• Business Process Outsourcing: A specific set of activities and knowledge that is required by an IT supplier for carrying out the activities of a division, process or function of the outsourcing organization. The execution of these activities in support of an IT system or application forms part of the services provided whereby the IT supplier also carries responsibility for non-IT related activities.

  The most important difference here in relation to Information Systems Outsourcing and Processing Outsourcing is that in the case of Business Process Outsourcing the primary emphasis is on the performance of the outsourced process rather than on the performance of the information systems.

The most important difference here in relation to Information Systems Outsourcing and Processing Outsourcing is that in the case of Business Process Outsourcing the primary emphasis is on the performance of the outsourced process, rather than on the performance of the information systems.

[2]In addition, organizations could also adopt a hybrid organization structure in which portions of the organization are structured on the basis of the functional organization structure and portions on the basis of the divisional organization structure. This hybrid organizational structure is not addressed in this chapter.

[3]Gartner uses the terms IT Management Services, Transaction Processing Services and Business Process Management, respectively (Kitzis, 1998).

Research Framework

This analysis is based on the literature, supplemented with 25 interviews with business and IT executives in outsourcing organizations, executives of IT suppliers [4] related to 11 international outsourcing situations, see Table 3, and interviews with five experts with broad outsourcing experience as consultants and/or academics, see Table 4. The scope, geographic coverage and the nature of the IT services covered vary significantly. In view of the limited number of cases that were analyzed, it is not possible to draw specific conclusions about the impact of the characteristics of the case studies on the governance factors. This research only provides a general image of the governance factors related to IT outsourcing partnerships. Case studies and quotes from the interviews conducted have been included in order to provide insight into the issue of the governance of IT outsourcing partnerships. In addition to the literature and professional judgments, these case studies and quotes form a supporting structure for the descriptive framework for the governance of IT outsourcing partnerships.

Table 3: IT Outsourcing Partnerships Analyzed

Firm	Sector	# of Employees [a]	Region(s)	Total Contract Value in US $	Contract Start Date	Contract Duration (Years)
1 [b]	Discrete Manufacturing	6,200	Europe	30 million	1992 (already renewed)	5
2 [c]	Utilities	1,800	Europe	23 million	1996	5
3 [d]	Discrete Manufacturing	200,000	Asia	21 million	1998	5
4 [e]	Services	200,000	Europe	40 million	1997	5
5 [f]	Process Industry	68,000	Europe/Asia/North America	Yearly revenues 90 million (750 employees)	1999 onwards	Purchase of internal IT division
6	Process Industry	68,000	Asia	0.4 million	1999	3
7 [g]	Telecommunications	100,000	Europe/Middle East/Asia	Confidential (> 20 million)	1997	5
8	Media	8,000	Europe	4 million	1995 (already renewed)	5
9	Discrete Manufacturing	2,000	Asia	1 million	2000	2
10 [h]	Utilities	2,000	Europe	100 million	2000	5
11	Discrete Manufacturing	200,000	Europe/Asia/Americas	Yearly revenues 550 million (initially 1,500 employees)	1990 onwards	Purchase of internal IT division (various contracts)
[a]The data was collected in 2002. [b]This case study was investigated in 2000 and 2002. [c]This case study was investigated in 2000 and 2002. [d]This Firm is part of the Firm described in case study 6, which was investigated in 2000 and 2002. [e]This Firm is part of the Firm described in case study 6. Because of the different type of activities of this business unit this case study is classified under the services sector instead of the discrete manufacturing sector. [f]This case study was investigated in 1994 and 2000. [g]Only the outsourcing contracts were analyzed for this case study and no interviews were conducted. [h]Only the outsourcing contracts were analyzed for this case study and no interviews were conducted.

Table 4: Profiles of Experts Interviewed

No.	Analysts/Opinion Leaders	Business Profile
1.	Director	International research institute of leading consultancy firm
2.	European Expertise Center Manager	International market research institute
3.	Analyst	International market research institute
4.	Research Consultant	International market research institute
5.	Consultant	Leading international consultancy firm

The nature of this type of research is explorative. Case studies can be used for so- called analytical generalization, not statistical generalization (Yin, 1989). The case study method has been used because it enables "reality" to be captured in considerably greater detail than other methods, and it also allows for the analysis of a considerable greater number of variables.

The same research protocol was followed in all interviews conducted for the case studies. Furthermore, all interviews were fully transcribed and submitted to the interviewees for approval. All interviews started with open questions related to the governance of the IT outsourcing partnership. In the second part of the interview, all governance factors of the framework were verified and clarified by the interviewees. For each case study at least two interviews, one with a representative of the outsourcing organization and one with a representative of the IT supplier, were conducted, except for case studies seven and 10. This enabled us to crosscheck the opinions of the interviewees. The interviews with the experts completed the investigation. This enabled us to check for possible influences associated with the fact that all outsourcing organizations in the case studies investigated used the same IT supplier. The experts had access to a large number of complex IT outsourcing partnerships involving other IT suppliers. This helped us to avoid drawing conclusions based only on the best practices of one IT supplier. In addition to the interviews, supporting documentation for the case studies analyzed was collected, including annual reports, organization charts and research reports on IT outsourcing.

[4]The IT supplier in all cases was Atos Origin.

Issues

As indicated in the first section, the outsourcing market is still growing. It is therefore essential for both the outsourcing organization as well as the IT supplier that the governance issue is dealt with. Yet not all organizations that have outsourced their IT services are satisfied (Lacity & Hirschheim, 1995a).

Expert 5: "Over the past 10 years I have advised many organizations on outsourcing and I guided eight organizations in the selection of an IT supplier and the implementation of the outsourcing contract. Let me say this carefully: not all outsourcing partnerships resulted in the realization of the high expectations. The expectations for most contracts were only partially met by IT suppliers."

The reasons why outsourcing does not always result in success are legion. "Successful" here is defined as the realization of prior set objectives by both the outsourcing organization as well as the IT supplier. This definition fits with the definition of Governance as mentioned earlier. This definition of "Successful" is also consistent with the research into outsourcing conducted respectively by the Nolan Norton Institute, Morgan Chambers and Gartner (van der Zee, 1997; Morgan & Chambers, 2001; Ackerman, 2002). On the basis of both the literature as well as actual practice, three important factors that influence the success of an IT outsourcing partnership have been identified — see Table 5: maturity of the outsourcing organization (Klepper & Hartog, 1991; Willcocks & Fitzgerald, 1994; McFarland & Nolan, 1995), the degree of flexibility inherent in the contracts (Lacity & Hirschheim, 1993; Klepper, 1995; Burnett, 1998) and the ability of the IT suppliers to integrate the IT services taken over into their own organization (Terdiman, 1991; Feeny & Willcocks, 1997c; Lacity & Willcocks, 2001). This obviously does not constitute a comprehensive summary of the influencing factors, but it does provide an overview of the governance issue.

• Maturity (Klepper & Hartog, 1991; Willcocks & Fitzgerald, 1994; McFarland & Nolan, 1995): Outsourcing organizations with prior outsourcing experience are better able to implement the governance structure required for IT outsourcing partnerships (Klepper & Hartog, 1991; McFarland & Nolan, 1995). However, most organizations have limited experience with outsourcing (Willcocks & Fitzgerald, 1994), particularly outsourcing relationships that involve the management of multiple IT outsourcing suppliers (Currie & Willcocks, 1998). An important recommendation put forth by Gartner is consequently as follows: "develop the required specific management capabilities" for managing the contract (Dreyfuss, 2002).

Chief Information Officer, Firm 5: "….. had already outsourced their network services before signing the purchasing agreement . This experience contributed to defining the governance structure of the outsourcing relationship and resulted in reaching fairly quick agreement and contract signature ….."

• Flexibility (Lacity & Hirschheim, 1993; Klepper, 1995; Burnett, 1998): The sixth lesson learned from the study of Lacity and Hirschheim is as follows: "If an organization decides to outsource, the contract is the only mechanism to ensure that expectations are realized" (Lacity & Hirschheim, 1993). Most outsourcing contracts are of long duration, however, and are not structured to allow changes in information needs to be easily operationalized (Klepper, 1995). This requires procedures for dealing with changes that lead to situations that are not covered by the contract (Gietzmann, 1996). Burnett (1998) uses the Liaison Model to describe this aspect. This procedure is used as a basis for formulating agreements between both parties that complement the signed IT outsourcing contract. Hart (1995) and Segal (1999) use the concept of ex-post negotiations to describe this aspect.

Business Manager, Firm 1: "…particularly flexibility in terms of volume. We are, of course, a one-product company. It is easy to see that we are tremendously affected by the cyclical character of the economy……This means that you have to be extremely flexible in relation to the marketplace in terms of variations in volume."

• Integration (Terdiman, 1991; Feeny & Willcocks, 1997c; Lacity & Willcocks, 2001): The IT suppliers must integrate the IT services, including the IT professionals taken over, into their own organization. Objectives can only be realized through integration (Feeny & Willcocks, 1997c; Lacity & Willcocks, 2001). Many IT suppliers have difficulty with this integration, however (Terdiman, 1991). Even today this still requires much attention from IT supplier management (Beulen & Ribbers, 2002a). In addition to management attention (Young & Cournoyer, 2000), initial investments constitute an important issue related to integration (Outsourcing Transition Management, 1996) and result in an increase in costs.

Expert 2: "…a few years ago <1997> I was involved in some research conducted by my American colleagues. One of the important issues that came to light was the difficulty experienced by IT suppliers in integrating services into their own organization. Fortunately, today we observe that many IT suppliers are dealing much more effectively with this issue."

The descriptive framework includes some guidelines for setting up the IT outsourcing partnership such that it will become a successful partnership for both the outsourcing organization as well as the IT supplier(s).

Framework

In line with the definition of IT outsourcing partnerships, the descriptive framework for the governance of IT outsourcing partnerships contains three dimensions. The framework includes governance factors for the outsourcing organization, the maintenance of the relationship, and the IT suppliers.

The outsourcing organizations and the IT suppliers may use the governance factors to provide substance to the IT outsourcing partnership. The governance factors do not constitute a comprehensive inventory of the essential measures that should be adopted, but simply constitute specific points of importance that can be implemented by outsourcing organizations and IT suppliers.

Table 6 contains a summary of the governance factors. These are further explained. The governance factors are based on the case studies analyzed, the interviews with the experts, professional judgment and a study of the literature.

Table 6: Governance Factors by Dimension

Dimensions	Governance Factors
The outsourcing organization	1.1 Attention to IT within business units
	1.2 A clear IT strategy
	1.3 Information management as the link between business units and IT suppliers
	1.4 A properly functioning Chief Information Officer
The maintenance of the relationship	2.1 Mutual trust between the outsourcing organization and the IT supplier
	2.2 Experience in establishing and maintaining IT outsourcing relationships
	2.3 Efficient and effective IT outsourcing contracts
	2.4 An audit & benchmark process in place
The IT suppliers	3.1 Adequate contract and account management
	3.2 Adequate service delivery processes
	3.3 The availability of human resources to IT suppliers

Governance Factors Related to the Outsourcing Organization

There are four management factors related to the outsourcing organization: attention to IT within business units, a clear IT strategy, Information Management as the link between business functions and IT suppliers and a properly functioning Chief Information Officer (CIO). These factors are further explained in this section and in Appendix A — Measuring the governance factors for IT outsourcing partnership.

Attention to IT within Business Units

The outsourcing objectives are not always equally clear to everyone involved within the outsourcing organization (KPMG Impact, 1995). This doesn't enable achieving governance in IT outsourcing partnerships. It is therefore the task of the CIO, as well as senior management, to communicate these internally. The outsourcing objectives of outsourcing organizations are often focused on cost savings (Morgan & Chambers, 2001; Outsourcingproject, 2002). This is not necessarily in line with the information needs of the business units of the outsourcing organization.

Expert 5: "…there needs to be awareness within the organization , of what the objectives are, and probably not only by the CIO, but also by corporate management."

Building on this, business units should no longer judge IT on the basis of costs, but on the basis of its added value. A shift must take place from the minimization of costs to the maximization of business impact (Kotwica & Field, 1999). Lacity and Willcocks (2001) support this transformation, albeit with a somewhat different nuance. This transformation is related to the changing role of IT. The role of IT is shifting from the support of non-primary processes to IT that forms part of the products or services that are provided by the outsourcing organization, such as in-product software. Another example is provided by Willcocks and Plant (2001): UPS has a track and trace Internet application which allows clients to track their shipments during transport. When business management pays proper attention to IT, the organization is able to anticipate needs in a timely fashion. In view of the ever-decreasing time-to-market, it is not an excessive luxury to involve IT proactively in the development of new products and services. This line of thought fits into the observations made by Gerrity and Rockart, who already in the mid-80s concluded that line managers feel themselves to be increasingly responsible for IT (Gerrity & Rockart, 1986). It also fits in with the suggestion made by Earl that IT can be used "to develop new business" (Earl, 1987).

Business Manager, Firm 5: "We specifically involve our information managers in our product creation process. This helps us to prevent IT from becoming a bottleneck when we are ready to introduce new products."

The management of the outsourcing relationship is the responsibility of the CIO and IM. This concept is further developed. However, it is important for business management to devote proper attention to the outsourcing relationship (Willcocks & Fitzgerald, 1994; Klepper & Jones, 1998). Attention to the outsourcing relationship on the part of business management has a positive influence on the management of outsourcing relationships (Quinn & Hilmer, 1995). Gartner supports this position and adds: [business management] "must actively manage their side of the partnership" (Terdiman, 1991). To retain business management's attention, the type of reporting about the IT services delivered is very important and must be consistent with the type of reporting units that business management is familiar with (Katz & Katz, 1966; Feeny, Willcocks, & Core, 1998).

A Clear IT Strategy

IT strategy is defined as the strategy of the outsourcing organization in relation to its information technology and IT services, and the role these play, or will play, within the outsourcing organization. This is consistent with the definitions put forth by Zani (1970), McLean and Soden (1977) and King (1978). The development and implementation of the IT strategy is the responsibility of the Chief Information Officer (CIO). An IT strategy is essential because organizations are able to implement new technologies within their organization on the basis of this strategy, and will subsequently be able to derive strategic benefits from this (Porter & Millar, 1985; Earl, 1987). From a governance perspective it is important to create alignment between the business and IT. The IT strategy can be a facilitating factor in accomplishing this (Henderson & Venkatraman, 1993). Furthermore, organizations are well advised to incorporate their sourcing strategy into the IT strategy: how does the organization intend to deliver the required IT services in support of business operations (Currie & Willcocks, 1998)? This issue requires continuous attention from the CIO (Grigg & Block, 2002).

The development and implementation of an IT strategy is not easy. Through the development of different scenarios it is possible to reduce uncertainty (Emery & Trist, 1965; van der Heijden, 1996). Scenarios can also be used for the development of an IT strategy (Rosser, 1998; van der Zee & van Wijngaarden, 1999). Among others, Gartner and IDC also work with scenarios.

It is important to emphasize that responsibility for the development of the IT strategy lies with the outsourcing organization itself (KPMG Impact, 1995). The capacity for executing this responsibility is denoted as IT/IS leadership by Feeny and Willcocks (1997c). Gartner also views the transfer of responsibility for developing an IT strategy to someone else as a high risk: "…retain control of, or be able to influence, strategic technology issues and directions" (Terdiman, 1991). It is possible, however, to involve external consultants in the formulation of an IT strategy. The use of external consultants may be considered as a means of supplementing a shortage in required capacity and for hiring specific knowledge that the organization is not able to develop and/or maintain itself.

Business Director, Firm 1: "You do the following , you throw out some ad hoc questions and you ask for some research to be conducted. In some instances a project manager from the consultancy firm may be involved. You use this person to test your ideas. However, the situation must not be such that the external consultant jointly determines your IT strategy."

Information Management as the Link between Business Units and IT Suppliers

The information manager is responsible for the alignment of the demand for IT services by the outsourcing organization's business units with the services provided by the IT suppliers (Quinn, Doorley, & Paquette, 1990). The information manager is furthermore responsible for the IT outsourcing partnership and supports the Chief Information Office (CIO) in the implementation of the IT strategy (Corbett, 1994; McFarland & Nolan, 1995). The effort required on the part of outsourcing organizations to manage the IT outsourcing partnership is substantial. The cost of the effort expended by the information management function is between 2% and 10% of the contract value (Aylott, 2002).

In order to be able to properly carry out these tasks, information managers require knowledge of the business operations, as well as IT (Willcocks & Fitzgerald, 1994; Kitzis, 1998). Many outsourcing organizations have difficulty finding qualified candidates to carry out these functions (Heckmann, 1999).

Expert 3: Three months ago <2000> I was doing…a presentation at a conference…and resourcing the information management office was one of the major discussions that took place. There were a lot of vendors and major user organizations . What most of the user organizations came up with, they were saying it's so hard…. To find people who have experience or expertise with this supplier management model, that are able to manage multiple suppliers in particular."

It is important to ensure there exists a strong information management function that can provide a counterbalance to business unit management. Lacity and Hirschheim (1995a) refer to this as "senior management must empower IS to implement changes."

A Properly Functioning Chief Information Officer

The Chief Information Officer (CIO) is responsible for the development and implementation of the IT strategy and carries final responsibility for the IT outsourcing partnership relationships (Earl & Feeny, 1997a; Kotwica & Fields, 1999; Lacity & Willcocks, 2001).

In order to be able to provide proper direction to their responsibilities, which includes safeguarding the governance of the IT outsourcing partnership, it is important that in addition to their knowledge of information technologies, both the CIO and the information managers also understand the business operations and developments in the markets in which the outsourcing organization is active or intends to become active (Willcocks & Fitzgerald, 1994; de Looff, 1996; Kitzis, 1998). A CIO could also play an important role in the alignment of business operations with IT. Many organizations set up an IT Board for this purpose. Gartner refers to these boards as coordinating committees: the business-IT strategy committee (Dreyfuss, 2002). This is an organization-wide steering committee in which all business units and information management is represented and which is chaired by the CIO. The IT Board is able to explore the political field of influence and decisions concerning the IT services to be provided can be prepared and discussed here. All case studies analyzed included the use of some kind of IT Board.

Account Manager IT Supplier, Firm 2: "My customer has an IT Board that functions as kind of an awareness club for different business functions, including purchasing, sales and transportation. Due to the fact that all divisions are represented, there exists strong support for preparing decisions about the IT services to be provided."

To ensure that the CIO is able to function properly, it is also essential that the CIO function be positioned at the proper level within the organization. Outsourcing organizations are ill advised to place the CIO on the Board of Directors. Responsibility for providing IT services is an integral responsibility of the entire Board of Directors. The CIO should therefore report to one of the members of the Board of Directors (Earl & Feeny, 2000). A trend is being observed in this regard which shows that an increasing number of CIOs are directly reporting to the Chief Executive Officer instead of to the Chief Financial Officer or to the Chief Operating Officer (Kotwica & Fields, 1998).

Expert 1: "Anyone who'd like to play the role of an entrepreneur, and this should include all members of the Board of Directors, must simply possess understanding and knowledge and maybe then you can simply turn over the service aspects to the CIO. But the understanding of technology, what that can do for the business, I think that this will become an integral part of entrepreneurship."

Governance Factors for the Maintenance of the Relationship

There are four factors that govern the maintenance of the relationship: mutual trust between the outsourcing organization and the IT supplier; experience in establishing and maintaining IT outsourcing relationships; efficient and effective outsourcing contracts; and an audit and benchmark process in place. These governance factors are described in further detail in this section and in Appendix A — Measuring the governance factors for IT outsourcing partnership.

Mutual Trust between the Outsourcing Organization and the IT Supplier

Trust is a particularly important criterion for the selection process used by outsourcing organizations (Apte, 1990; Lacity & Hirschheim, 1993; Willcocks & Fitzgerald, 1994; Earl, 1996).

Account Representative IT Supplier, Firm 8: "We obtained the contract at the time <1995> because they had confidence in the management of our organization. This helps us in maintaining that relationship to this very day. Trust is indispensable to an outsourcing relationship."

Country Manager IT Supplier, Firm 6: "Our customer has chosen us because of our track record and cultural fit, especially here in X , this is really important."

But trust is also necessary for maintaining a relationship. Lacity and Hirschheim (1995a) state that mutual trust can be increased by exchanging strategies with the objective of aligning mutual strategies: complementary or shared goals. This is not easy in actual practice. There does not always exist equality, a true partnership, between the outsourcing organization and the IT supplier. This issue is not specific to the IT services industry. Kraljic (1983) has been pleading for the creation of partnerships since the 80s: "Purchasing must become Supplier Management". In the case of IT services there often exists a client-supplier relationship (Kanter, 1994). A client-supplier relationship is referred to by Gartner as buying technology. When this joint relationship evolves into a partnership, the relationship is referred to as buying services (Cox, 2002b).

Furthermore the culture factor is also important for creating trust (Hofstede, 1980). Grnroos states that the culture of a service provider is focused on creating service-oriented attitudes and proactive behaviors (Grnroos, 1990). This is consistent with the opinions of Aylott, an outsourcing specialist with Orbys (Aylott, 2002): "...a culture that is proactive, collaborative and supportive." It is not essential for the cultures of the outsourcing organization and the IT supplier to be identical. It is more important that they not be in conflict (Eggleton & Otter, 1991) — cultural convergence (Kern & Willcocks, 2000), and this becomes particularly important when a global IT outsourcing partnership is involved (Beulen & Ribbers, 2002b). In addition, it is important that the outsourcing organization and the IT supplier are both clearly aware of the differences in their respective cultures.

Expert 5: "I recently attended a meeting of the Board of Directors of a large multinational. They were in the process of negotiating the outsourcing of their worldwide infrastructure with four IT suppliers. To provide you with an indication of their size, their yearly IT budget is approximately US$200 million. The CFO had a strong preference for one of the IT suppliers because its culture was a good fit with the culture of his own organization. By way of background to this outsourcing initiative, there was a desire on the part of the outsourcing organization for things to change dramatically. During the discussions I suggested that the organization avoid selecting an IT supplier with a similar culture. Otherwise you'll never be able to make a break with established patterns."

Experience Establishing and Maintaining IT Outsourcing Relationships

Experience is an important selection criterion for choosing an IT supplier (Klepper & Hartog, 1991; McFarland & Nolan, 1995). By providing references, IT suppliers are able to provide the outsourcing organization with an overview of their track record. In addition, mature IT suppliers use a standard methodology for setting up and managing IT outsourcing partnerships in order to achieve governance. Examples include HewlettPackard (1999) and Atos Origin (Outsourcing Transition Management, 1996). Research conducted by Gartner indicates that there are no significant differences between these methodologies (Young & Cournoyer, 2000). However, outsourcing organizations should use a standardized process for the implementation of outsourcing (Chaderton & van de Wittenboer, 2002). Aside from the experiences of the IT supplier, it is also important for the outsourcing organization to build up experience in outsourcing. Lacity and Hirschheim (1995a) state that the lack of experience with outsourcing is an important argument for deciding not to outsource: "customers' inexperience with IS outsourcing". It is not essential that the experience with outsourcing involves the outsourcing of IT services. Experience with the outsourcing of other business processes, such as document reproduction, the treasury or logistics services also contributes to the experience with outsourcing (Beulen, 2000).

The method used for reporting about the IT services provided is particularly important in maintaining sound outsourcing relationships (Willcocks & Fitzgerald, 1994; KPMG Impact, 1995; Lacity & Willcocks, 2001). The reports provided by the IT supplier must be consistent with the reporting units used by the outsourcing organization. This makes it possible for the outsourcing organization to provide direction to the delivery of IT services (Terdiman, 1993; Klepper & Jones, 1998). In addition, the frequency of reporting and the review milestones and reporting levels linked to it are also important for maintaining a sound outsourcing relationship. The choices made in this regard depend on the impact of the outsourced IT services on business operations. The greater the impact, the more frequent the reporting and the higher the level within the organization where reporting should take place (Terdiman, 1991; KPMG Impact, 1995).

Purchasing Manager, Firm 5: "We outsourced portions of our IT services to multiple IT suppliers. Reporting is of vital importance to us for keeping things under control. Every month we receive an elaborate overview of all delivered services and the service levels attained for the major portion of the IT services provided. This reporting is based on exception reporting. We receive a weekly update for some business-critical IT services. This particularly concerns itself with the progress of projects…. Supplementary agreements are formulated and other measures are discussed with the IT suppliers on the basis of this reporting."

Efficient and Effective Outsourcing Contracts

Many authors, such as Lacity and Hirschheim (1993), and Kern and Willcocks (2002) emphasize the importance of a contract — "…the centrality of the contract." Aside from a precise description of the IT services to be provided and the agreed upon service levels, it is important for contracts to be flexible (Klepper & Jones, 1998; Kitzis, 1998). Inflexible contracts carry additional costs for the outsourcing organization (Cox, 1999). One way of achieving flexibility is to manage IT as a portfolio and to enter into contract with multiple suppliers: "…avoid being locked into a single supplier" (KPMG Impact, 1995). This also requires additional attention from information management to manage the relationship (Cross, 1995). It furthermore carries additional risks. The responsibilities of the different IT suppliers must be clear (Lacity, Willcocks, & Feeny, 1995b).

Description of contract clauses, Firm 7: "The contracts do not include a guarantee of exclusivity '…neither grants to suppliers an exclusive right of privilege to sell to X any or all service of the type described in this framework agreement which X may require, nor requires the purchase of other materials or services from the supplier by X.' and no guarantee of purchase '…shall neither restrict the right of X to cease purchasing nor require X to continue any level of such purchase.'"

Also individual IT suppliers in outsourcing partnerships can make use of subcontractors. This impacts the governance of IT outsourcing partnerships (Willcocks & Choi, 1995a). Outsourcing organizations have to ensure that their IT suppliers are able to be held responsible for the contracted services, including the services that are provided by their subcontractors (Burnett, 1998). Also involving subcontractors carries additional risks (de Looff, 1996). In order to limit these risks the involved subcontracts have to be agreed with the outsourcing organization.

Account Manager, Firm 11: "In order to provide the services we make use of a limited number of subcontracts. Sometimes is it necessary to make use of subcontracts that are not on the list. But all these subcontractors are prior to providing the services approved by the outsourcing organization. But my company is anyway responsible of providing the services to our customer."

In addition to completeness, which can be addressed by creating a procedure for situations that are not covered by the contract, the termination of a contract constitutes an important area requiring attention, because it means that the responsibility for the delivery of the IT services must once again be transferred. Responsibilities are transferred not only when an IT outsourcing contract is initially signed, but also when the IT outsourcing contract is assigned to an IT supplier other than the IT supplier currently performing the IT services. This also involves costs that are considered to be coordination costs. A transfer demands much attention from the outsourcing organization, the current IT supplier and the new IT supplier (Outsourcing Transition Management, 1996; Anderson & Christensen, 2002). In particular, the knowledge that the current IT supplier has built up over the years, also referred to as tacit knowledge, will need to be transferred to the new IT supplier. The only interest that the current IT supplier has in carefully transferring this knowledge is the preservation of its reputation (Beulen, 2000). The IT outsourcing contract must therefore include agreements concerning the transfer process at the end of the contract.

Contract Manager, Firm 1: "This contract is almost coming to an end. I am not sure that it will be extended once again. I am already thinking about the resources that are available for the preparation of a transition plan and for the execution of that plan. The current resources that carry responsibility for the delivery of the IT service play an important role in this regard, but a strong project manager and a few consultants are essential for ensuring that this effort proceeds along the proper lines. Obviously I am hoping that it will not come to this and that we will be able to sign an extension of a few more years."

An Audit Benchmark Process in Place

It is important for the outsourcing organization to formulate agreements about the conduct of audits (Allen, 1975; Willcocks & Fitzgerald, 1994; Parikh, 2002): a verification of the IT supplier's processes. In addition, agreements must be made about establishing regular benchmarks (Lacity & Hirschheim, 1995a; Lacity & Willcocks, 1998; Cox, 1999): is the price/quality ratio of the IT services provided in conformance with the marketplace?

IT suppliers that deliver their services in a process-oriented manner, for example through means of ISO certification, the implementation of ITIL or CMM, are generally in a better position to provide the services contracted for. Experts 1, 2 and 5 consider this a critical success factor for the IT supplier. This is further explained in the next section. The outsourcing organization must audit the IT service delivery processes on a regular basis.

Expert 2: "The process-oriented delivery of their services is no longer a differentiating factor for IT suppliers, but a necessity. Even so, it is important for outsourcing organization to keep a finger on the pulse. Furthermore, there are many outsourcing organizations that must regularly audit their suppliers on the basis of their own procedures or certification."

Gartner states: "Enterprises and their External Services Providers must acquire the monitoring and measurement tools required to keep their outsourcing agreements technically and financially on track, and also to demonstrate that they are on track" (Cox, 1999). This ongoing process (Linsenmeyer, 1991) must be the subject of prior agreements between the outsourcing organization and the IT supplier. Morgan Chambers recognizes four phases as part of the benchmarking process: organization and planning, data analysis, action and review (Eliades, 2002). It is important in this regard that the benchmark be carried out by an independent third party (Ackerman, 2002) and that the IT supplier be involved in this process in order to avoid differences in interpretation and to provide supplementary information to the independent third party.

Expert 3: "It is essential for the IT supplier to be involved in the benchmarking process…. The IT supplier may be able to provide additional information…and even more important is likely able to accept the conclusions of the benchmark analysis more quickly due to its involvement. This makes any discussions on this subject far easier for the outsourcing organization."

Governance Factors for it Suppliers

There are three governance factors related to the IT supplier: adequate contract and account management, adequate service delivery processes and the availability of human resources. These factors are explained in further detail here and in Appendix A — Measuring the governance factors for IT outsourcing partnership.

Adequate Contract and Account Management

Contract and account management make up the front office of the IT supplier and are denoted as the "customer outsourcing interface" by MacFarland and Nolan (1995). It is important in this regard to make a clear distinction between contract management and account management, due to the fact that there is a big difference between the primary tasks performed by an account manager and a contract manager (Beulen, 2000).

Contract management is responsible for the operational management of the relationship and therefore the direction of the service delivery processes. Contract management is therefore focused on the effectiveness and efficiency of the agreed upon contractual commitments.

Account management is responsible for maintaining the relationship with the outsourcing organization (Holden, 1990) and is focused on obtaining an extension of existing contracts and on expanding the services provided through means of new contracts. This requires the account manager to understand both new business developments and technological developments.

Expert 4: "An anecdotal example…an outsourcing organization was getting desktop hardware from supplier X. At the time they were also talking with this supplier about the use of Lotus Notes, which was going to be used to perform business processes, which is a very different way of working. Now one contract is a hardware acquisition commodity contract, while the other is very innovative and very collaborative and involves how a product is going to be used as part of the business. They had enormous difficulties in persuading the account manager to cooperate, because this account manager used to work in a commodity environment, and he simply didn't understand what they were talking about. They got him moved before they could get any sense out of supplier X, because he was blocking the line of communication to this supplier."

Expert 1 indicates that particularly smaller outsourcing contracts, with a value of less than U.S.$5 million, combine different functions, because the scope of these contracts does not warrant the involvement of two different contracting officers. For the case studies analyzed here, this is indeed so for case studies 6 and 9, but not for case study 8. The explanation for the latter is likely that the size of this contract was decreased after it was signed.

Adequate Service Delivery Processes

The existence of adequate service delivery processes are considered to be a "core capability" by Feeny (1997b): "delivery of IS services" and using Mintzberg's (1979) terminology, the "operating core". When the service delivery processes are set up it is essential to make a distinction between the IT supplier's business units, which are involved in the delivery of the IT services that have been contractually agreed upon with the IT supplier's customers: the so-called service delivery units, and the IT supplier's business units that are involved in researching the potential of new technological developments and which are responsible for building up knowledge about these new technologies: the so-called competence centers (Cash, McFarlan, & McKenney, 1988; Markus, 1996). The service delivery units must be assessed in terms of their degree of effectiveness and efficiency and are directly controlled by the contract managers responsible for the contracts signed with the outsourcing organization. It is important in this regard that the service delivery units use a standardized methodology for delivering their services. For this purpose, IT suppliers could make use of methodologies such as ITIL (CCTA, 1993) for setting up the management organization, and CMM for software development (Paulk, Curtis, Chrisses, & Weber, 1993). These industry standards help ensure uniformity, which is certainly essential when multiple IT suppliers are involved.

Contract manager, Firm 3: "A portion of the software is developed in India. We use a software development process, which is CMM Level 5 certified. This certification was the deciding factor for company X to select us as their supplier. This certification only carries advantages with it for performing our activities. Because of the certification our processes have been set up such that the quality of our services is high and that we are able to work efficiently."

The competence centers are directed by the IT supplier's general management and fall within Mintzberg's (1979) so-called "technostructure". New technologies are researched on the basis of proposals and projects. Feeny refers to this as "making the technology work" (Feeny & Willcocks, 1997c). It is evident that it is more difficult to measure the output of a competence center than the results produced by a service delivery unit. An important factor here is the development of an innovative capability. The competence centers develop the IT services of the future.

Account Manager, Firm 11: "I maintain intensive contacts with the managers of the competence centers. I very much want to discuss the innovative things that are being developed there, with my customers. However, it is the service delivery units that deliver the actual services when a contract is signed."

The Availability of Human Resources to IT Suppliers

From the mid-90s to the year 2000, the shortage of IT professionals was seen as a factor that would limit the growth of the IT services industry (Kitzis, 1998). Due to economic developments there has been a decrease in this shortage in the labor market (Hirschheim & Lacity, 2000). In spite of this, IT suppliers must continue to pay attention to the availability of IT professionals for delivering their IT services. A staff disposition plan involves the grouping of all IT professionals into expertise groupings, on the basis of their current expertise. Based on the projected IT services to be delivered in the future, a plan is prepared for updating the current expertise groupings. There are three factors that play a role in this plan: staff turnover, training and recruitment. By preparing a staff disposition plan, it becomes possible to ensure that the required IT services can continue to be delivered in the future (Outsourcing Transition Management, 1996; Young & Cournoyer, 2000).

Contract Manager, Firm 2: "Due to the migration from a mainframe environment to a client server environment, I required IT professionals with a completely different skill set. The mainframe experts were phased out on the basis of a staff disposition plan. They are now working for customers who are still using mainframe technology. I obtained access to a team that had worked for another one of our customers to provide the new services. I complemented this team with three recruited trainees and an experienced service manager from the responsible service delivery unit. Unfortunately the contract was not extended. However, these IT professionals were able to find employment with my customer."

Trends

Trends are not explicitly addressed in the interviews. On the basis of an analysis of the literature, three trends related to IT outsourcing partnerships became evident: Business Process Outsourcing (BPO) (Kern & Willcocks, 2002; Outsourcingproject, 2002; Brown & Scholl, 2002), Multiple Sourcing (Currie & Willcocks, 1998; Parikh, 2002) and Insourcing (Lacity & Hirschheim, 1995a; Cox, 2002a). These trends have already been defined in the first section.

In analyzing these trends, a link was made between these trends and the governance factors for IT outsourcing partnerships. This is shown in Table 7 and is further developed here, primarily on the basis of professional judgment. In addition, it is also possible that these trends may result in the identification of new governance factors. This aspect has not been dealt with in the executed research. Consequently, it is not possible to draw any conclusions about this here.

Table 7: Link Between Governance Factors of the IT Outsourcing Partnership Framework and Trends

Governance Factors	Trends
	BPO	Multiple Sourcing	Insourcing
The Outsourcing Organization
1.1 Attention to IT within business units	X
1.2 A clear IT strategy	X		X
1.3 Information management as the link between business units and IT suppliers		X
1.4 A properly functioning Chief Information Officer		X
The Maintenance of the Relationship
2.1 Mutual trust between the outsourcing organization and the IT supplier	X
2.2 Experience in establishing and maintaining IT outsourcing relationships	X
2.3 Efficient and effective IT outsourcing contracts		X	X
2.4 An audit & benchmark process in place		X
1.1 IT Suppliers
3.1 Adequate Contract and Account Management		X	X
3.2 Adequate service delivery processes
3.3 The availability of human resources to the IT suppliers	X		X

Business Process Outsourcing

In addition to outsourcing the IT services for their supporting processes, an increasing number of organizations are also deciding to outsource complete business processes. IDC: Another remarkable trend emerging from the analysis of the top 100 deals is the onwards march of BPO contracts (Kern & Willcocks, 2002). Gartner: BPO is the fastest growing segment (Brown & Scholl, 2002). BPO requires a greater level of attention from business management (governance factor 1.1) because it involves a higher level of impact. Business managers must ensure that the business processes that are still carried out by their own organization remain consistent with the business processes outsourced. Furthermore, the sourcing strategy, which is part of the IT strategy (governance factor 1.2), must be defined. Once again, due to the high level of impact of BPO, outsourcing organizations must go through careful deliberations before making a decision to outsource their business processes. This sourcing issue must be anchored within the IT strategy.

Trust is an important factor for the outsourcing of the IT services for supporting processes (governance factor 2.1). Due to the higher level of impact associated with BPO, trust becomes an even more important factor. Suppliers are able to gain trust through proven successes. This is particularly important, because the market is not yet really mature and there are still very few mature providers (Brown & Scholl, 2002). This is also linked to governance factor 2.2: experience in establishing and maintaining IT outsourcing relationships. As indicated earlier, experience on the part of IT suppliers is important for the success of an IT outsourcing partnership (Lacity, Willcocks, & Feeny, 1995a). Finally, BPO requires different skills from IT professionals. IT professionals must have greater knowledge of the business processes and they must possess business knowledge: "Recruitment using traditional technical criteria was seen as particularly inappropriate…" (Feeny, 1997a).

Multiple Sourcing

Many organizations outsource their IT services to more than one IT supplier (Parikh, 2002). This is referred to as multiple sourcing (Currie & Willcocks, 1998). Lacity and Hirschheim (1998) indicate that it is better for outsourcing organizations to outsource their IT services to multiple suppliers. Multiple sourcing affects the role of information management (governance factor 1.3) and the Chief Information Officer (CIO) (governance factor 1.4). The management of multiple IT suppliers requires greater effort from information management and the CIO. The option of using multiple sourcing also carries consequences with it for the individual IT suppliers (governance factor 3.1). IT suppliers will have to fight for their position in the case of competition. This requires higher level account and contract managers. They have to be able to work together, not only with the outsourcing organization, but also with the other IT suppliers. This requires a proper demarcation of responsibilities among IT suppliers (governance factor 2.3). The most important advantage of multiple sourcing for the outsourcing organization is that it promotes competition among IT suppliers. This should lead to a reduction in costs and an increase in the quality of the services provided (Currie & Willcocks, 1998; Lacity & Willcocks, 1998; Parikh, 2002). However, it must be possible for the outsourcing organization to measure this. This makes benchmarking more than essential (governance factor 2.4). Outsourcing organizations must realize, however, that they must not allow themselves to fall into the "divide and conquer" trap: "Enterprises that have embraced the multisourced environment must seriously evaluate the service value lost to ineffective sourcing decisions and management" (Stone, 2002).

Insourcing

Insourcing means that not all of the IT services are performed by one or more IT suppliers and that a portion of the IT services are provided by the internal IT division. Lacity and Hirschheim suggest: "Selective sourcing is right sourcing" (Lacity & Hirschheim, 1995a). This implies that some aspects will continue to be looked after by the internal IT division itself. The internal IT division also requires attention: "Re-shaping the internal team will become a priority in 2002–2003" (Cox, 2002a). Furthermore, the choice to insource will need to be anchored into the organization's IT strategy (governance factor 1.2). In addition, as in the case of multiple sourcing, insourcing has an impact on contracts, since the internal IT division also constitutes an IT supplier with which the external IT suppliers are required to cooperate (governance factor 2.3). Monopolies are no longer the norm. This requires significant effort on the part of the account and contract management team (governance factor 3.1) within the internal IT division. Due to recent labor market developments insourcing has a limited impact on the resourcing of the internal IT division (governance factor 3.3). Until recently, the scarce labor market for IT professionals was a serious threat to the resourcing of internal IT divisions (Hirschheim & Lacity, 2000). Due to recent developments, however, internal IT organizations are now also able to attract IT professionals with the proper qualifications.

Conclusion

Organizations must deliberate carefully before taking a decision to outsource. Outsourcing should certainly not be considered to be superior to insourcing during these deliberations. These careful deliberations should be based on an IT strategy that incorporates the sourcing strategy. If the organization decides to outsource, it must also make the required decisions about the scope and nature of the outsourcing relationship: single/multiple and total/selective. In addition, the type of IT services to be outsourced must be defined: Information Systems Outsourcing, Processing Outsourcing or Business Process Outsourcing. These different types of outsourcing possess an increasing degree of complexity and demand increasing management attention from both the outsourcing organization as well as the IT suppliers.

It is clear that not all IT outsourcing partnerships are a success. There are three key factors that cause IT outsourcing partnerships to be unsuccessful: lack of maturity of the outsourcing organization, contracts that are inflexible and insufficient degree of integration of the IT division taken over into the organization of the IT supplier.

These factors were explored as part of the descriptive framework to achieve governance in IT outsourcing partnerships. Aside from the role of the outsourcing organization and the IT supplier, the maintenance of the relationship also takes on an important role in this framework. In addition to the already mentioned need for a clear IT and sourcing strategy, it is important for outsourcing organizations that their business units are committed to IT. Furthermore, the management of the IT function must be properly anchored within the organization: the information management function and the Chief Information Officer (CIO). The IT supplier must ensure that an interface with the outsourcing organization is created for managing the relationship: the account management and contract management functions. Contract management is responsible for directing the IT supplier's service delivery processes in this regard. The IT supplier must also ensure that sufficient and sufficiently qualified personnel are available. Trust is a key concept for the relationship between the outsourcing organization and IT suppliers, and experience with outsourcing relationships helps in maintaining the outsourcing relationship. Effective and efficient contracts are essential for managing the relationship and audit and benchmarking processes must be set up. Only then does it become possible to guarantee the continuous and consistent governance of the IT outsourcing partnership.

However, time does not stand still. Business Process Outsourcing is expected to become increasingly dominant and increasing numbers of multiple outsourcing relationships will come into being. In addition, outsourcing organizations will also selectively repatriate certain components of their IT services. This will have an impact and will lead to an increase of complexity in governing IT outsourcing partnerships.

Acknowledgments

I would first like to express my thanks to all persons interviewed and who generously provided their cooperation to this research project. Their valuable insights form the basis of this research project. I am also grateful to Atos Origin for providing me with the opportunity to write this chapter.

The critical comments of Lielle van Laren have been of immeasurable help in improving the content of this chapter. Christine Holdert's critical eye led to significant improvement of the structure and readability of this text.

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Endnotes

1 This chapter is based on a long-term research program into the management of IT outsourcing partnerships conducted by Prof. Dr. Pieter Ribbers, Prof. Jan Roos and the author of this chapter, as part of the Economics branch of the Faculty of Economics of the University of Tilburg in the Netherlands. A large number of outsourcing case studies were analyzed over the last few years as part of this research program. The descriptive framework for the governance of IT outsourcing partnerships developed as part of the author's doctoral thesis (Beu'00) is further refined in this chapter on the basis of an analysis of additional references and case studies.

2 In addition, organizations could also adopt a hybrid organization structure in which portions of the organization are structured on the basis of the functional organization structure and portions on the basis of the divisional organization structure. This hybrid organizational structure is not addressed in this chapter.

3 Gartner uses the terms IT Management Services, Transaction Processing Services and Business Process Management, respectively (Kitzis, 1998).

4 The IT supplier in all cases was Atos Origin.

5 The data was collected in 2002.

6 This case study was investigated in 2000 and 2002.

7 This case study was investigated in 2000 and 2002.

8 This Firm is part of the Firm described in case study 6, which was investigated in 2000 and 2002.

9 This Firm is part of the Firm described in case study 6. Because of the different type of activities of this business unit this case study is classified under the services sector instead of the discrete manufacturing sector.

10 This case study was investigated in 1994 and 2000.

11 Only the outsourcing contracts were analyzed for this case study and no interviews were conducted.

12 Only the outsourcing contracts were analyzed for this case study and no interviews were conducted.

Appendix A Measuring the Governance Factors for IT Outsourcing Partnership [Beu 00]

Table 8: Governance Indicators by Governance Factor for the Outsourcing Organization

Governance Factors for the Outsourcing Organization	Governance Indicators
1.1 Attention to IT within business units	1.1.1.	Responsibility for IT has been assigned to the management team of the business function
	1.1.2.	IT service delivery is evaluated in terms of its added value and its cost
	1.1.3.	The business functions proactively involve the IT supplier's IT specialists in the development of new products or services
	1.1.4.	Business function play particular attention to the strategic management of the IT outsourcing relationship
1.2 A clear IT strategy	1.2.1	The outsourcing organization's IT strategy is linked to and interacts with outsourcing organization's overall strategy
	1.2.2	The outsourcing organization's supplier strategy is an explicit part of the IT strategy and focused on continuity
	1.2.3	The IT strategy anticipates new developments in the market in which the outsourcing organization operates or is going to operate and which offers opportunities for developing new technologies
	1.2.4	The role of external IT suppliers and consultancy firms in the development and implementation of the IT strategy is limited to a facilitating or supporting role. The outsourcing company is accountable for developing and implementing the IT strategy
	1.2.5	Alignment of the IT strategy with the parent company's IT strategy
	1.2.6	An adequate IT board
1.3 Information management as the link between business units and IT suppliers	1.3.1	The information management comprises the following tasks: development & implementation of IT strategy, contract management, points of contact of the IT supplier and points of contact for the business functions
	1.3.2	Information management possesses both business knowledge and IT knowledge
	1.3.3	Information management has a facilitating role in implementing the IT strategy on behalf of the business functions
1.4 A properly functioning Chief Information Officer	1.4.1	Within the board of management of the outsourcing organization there is attention for IT
	1.4.2	The role of the CIO comprises the following tasks: alignment of business and IT, development & implementation of the IT strategy, managing of IT outsourcing relationships and governance of IT
	1.4.3	The CIO is accountable for the IT outsourcing relationship
	1.4.4	The CIO possesses both business knowledge and IT knowledge

Table 9: Governance Indicators by Governance Factor for the Maintenance of the Relationship

Governance Factors for the Maintenance of the Relationship	Governance Indicators
2.1 Mutual trust between the outsourcing organization and the IT supplier	2.1.1	Overall strategies are enhanced between the outsourcing organization and the IT suppliers and the objectives of the outsourcing company and the IT suppliers are aligned
	2.1.2	The cultures of the outsourcing organization and the IT suppliers do not clash
	2.1.3	Mutual trust between the staff members of the outsourcing organization and the external IT suppliers
2.2 Experience in establishing and maintaining IT outsourcing relationships	2.2.1	The IT suppliers have an experienced-based methodology for defining IT outsourcing relationships and the outsourcing organization has an experienced-based process description for defining IT outsourcing relationships
	2.2.2	The outsourcing organization's strategy focuses on establishing alliances with suppliers and the strategy of the IT suppliers is focusing on establishing long-term relationships with outsourcing organizations
	2.2.3	The outsourcing organization and the external IT suppliers do not only judge the performance of the outsourcing relationship on the basis of short-term results
	2.2.4	After the IT outsourcing contract has been signed, a planned and successful transition was carried out
2.3 Efficient and effective IT outsourcing contracts	2.3.1	The IT outsourcing contracts between the outsourcing organization and the IT suppliers are flexible
	2.3.2	The descriptions in the outsourcing contracts as well as any other mutual obligations are in line with the spirit of the relationship between the outsourcing organization and the IT suppliers: completeness is not an issue
	2.3.3	The IT outsourcing contracts clearly specify the reporting frequency and the content of the reporting
	2.3.4	The outsourcing contracts explicitly specify the consequences of not or not fully meeting the terms of the contract and the maximum amount of damages to be paid for not or not fully meeting the terms of the contract
	2.3.5	IT outsourcing contract have a satisfactory profit margin
2.4 An audit & benchmark process in place	2.4.1	The accountable officers of the outsourcing organization and the IT suppliers periodically evaluate the cooperation and content of the IT outsourcing contract at predefined points in time and, if necessary, at any other point in time
	2.4.2	The IT outsourcing contracts clearly specify which process is to be followed should there be deviation from the agreements reached
	2.4.3	The audit process should be based on a general accepted standard

Table 10: Governance factor by Governance Factor for the IT Suppliers

Governance Factors for the IT Suppliers	Governance Indicators
3.1 Adequate Contract and Account Management	3.1.1	Contract and account management tasks include: management of IT resources, overseeing the IT service provision, maintaining and increasing turnover, business development, optimization of the cooperation with other IT suppliers and ensuring internal priority for the IT outsourcing contract
	3.1.2	The responsibility of the contract and the account management for the outsourcing relationship is separated from the responsibility for the IT service provision and the IT business function
	3.1.3	The IT supplier's organization pays specific attention to IT outsourcing relationships and the IT outsourcing contracts are managed by a separate organizational unit: this unit is also responsible for the ongoing delivery of the IT services
	3.1.4	Contract and account management of the external IT supplier and the management of the IT business function posses business knowledge in addition to IT expertise
3.2 Adequate service delivery processes	3.2.1	The cost component required to deliver the IT services are well understood
	3.2.2	The available manpower capacity of an IT business function is used optimally
	3.2.3	The IT business functions include sufficient overhead costs to manage the IT business function
	3.2.4	IT employees spend an adequate number of training hours each year as part of an improvement-focused and concrete training plan to train themselves in new technologies and interpersonal and business skills
	3.2.5	Process govern service delivery
	3.2.6	Working with a limited group of dedicated resources to execute the IT service provision tasks
	3.2.7	The external IT supplier has alliances with specialized business organizations
3.3 The availability of human resources to the IT suppliers	3.3.1	IT employees are given the opportunity to gain experience with new technologies
	3.3.2	The IT supplier is able to attract a sufficient number of qualified new employees from the labor market
	3.3.3	The IT supplier has a high training budget and individual employees have a say in how their training budget is spend within the framework of an overall concrete and development-focused training plan
	3.3.4	The IT supplier has a low turnover percentage among the employees assigned to a specific IT outsourcing contract