A strategic analysis on how to implement and manage IT Outsourcing of Business Critical Systems

A strategic analysis on how to implement and

manage IT Outsourcing of Business Critical

Systems

Master thesis in Business Information Systems

by

Ana RODRIGUES

a

Graduate School of Informatics, University of Amsterdam

2013/2014

Supervisor: Ronald Kleijn

Contents

1. Introduction and contextualization ... 3

2. Problem Statement and Research Question ... 4

2.1. Scientific & Social Relevance ... 6

2.2. Personal Motivation... 6

3. Research Method... 7

4. Literature study and Theoretical focus ... 7

4.1. IT Outsourcing ... 8

4.2. Business Critical Systems... 9

4.3. ITO implementation and management levels ... 10

4.3.1. Goals and Metrics ... 10

4.3.2. IT Outsourcing contracts: Contractual governance ... 11

4.3.3. Performance Management ... 13

4.3.4. Client - Service providers relationship: Relational governance ... 14

5. Analysis ... 14

5.1. Results analysis ... 15

6. Theoretical Framework ... 20

6.1. Level 1 – Goals and Metrics ... 22

6.2. Level 2- ITO contracts: Contractual governance ... 22

6.3. Level 3 – Performance Measurement ... 22

6.4. Level 4 – Client-Service Provider relationship: Relational Governance ... 23

6.5. Engagement model ... 23

6.6. Revised Framework ... 24

7. Conclusions ... 27

7.1. Limitations & Further Research ... 28

8. Corrections ... 30

9. References ... 31

10. Appendices ... 35

Abstract. Once they have decided to outsource, managers face issues related to the ‘Implement

and manage outsourcing arrangement’ phase, such as goals and metrics definition, contractual governance, performance management and relational governance. This work gives managers guidelines on how to address these issues, both for the demand and supply side, validated with literature, a survey of experienced managers, and multiple expert opinions.

Keywords. IT Outsourcing, Business Critical Systems, service provider, costumer, SLA’s, metrics,

strategic goals, contracts, relationship, business, theoretical framework.

Acknowledgements. I would like to thank my parents for encouraging and supporting me

unconditionally throughout this moment of my life and making this master achievable. I want to express my gratitude to my supervisor Ronald Kleijn and Guus Delen for their continuous support and endless patience which substantially improved the quality of my thesis. Finally, my best and most sincere thanks to all those who provided time to respond the survey, which helped me collect interesting data for analysis; without you the quality of this thesis would not be the same.

1. Introduction and contextualization

The growing demand and delivery pressure that companies suffer every day to survive in a highly competitive environment pushes managers to seek solutions that enable them to "do more with less." Thus, outsourcing continues to grow in all sectors of the economy, mainly in the area of services of information technology (IT) (Ferreira & Laurindo, 2009). However, the number of unsatisfactory experiences with outsourcing arrangements has been significant (Deloitte, 2005). In these situations, it is needed to review the strategies and tactics used in obtaining services processes. The failure rate still lies between 40% to 70% of contracts and at the center of the problem is the conflict of interest inherent in any outsourcing agreement (Deloitte, 2005).

Information technology (IT) Outsourcing has been adopted as a business strategy for more companies throughout the last decades, with the goals of reducing and controlling costs, increasing efficiency and enabling focus on core competencies (Hongxun e.a., 2006). Indeed, outsourcing presents itself as a useful tool to an organization that, having to manage scarce resources, needs to focus on their core business and their key skills.

In the beginning of the outsourcing trend organizations outsourced non-strategic activities. However many companies are today outsourcing complex and business critical resources and activities (McFarlan and Delacy, 2004; Kakabadse and Kakabadse, 2005). From an IT perspective, and similarly to other elements of an IT system, critical systems can generate value from outsourcing; however, their vital significance requires cautious attention, vigilance and specialized skills.

Regardless of the expectations at the start of a process of outsourcing information systems (IS), the end result of such an agreement is hard to predict at the time of signature. To deliver according to the agreed-upon contract it is necessary but not sufficient to achieve compliance. It is also important to ensure a collaborative relationship with the service provider, based on the effective management of contract and constant mutual trust, thus adding value to an outsourcing relationship. A relationship of animosity between clients and service providers can significantly reduce the value of the business (CXO, 2009).

IT Outsourcing is gaining significant momentum, raising the stakes to an even higher level. This trend is inevitable as organizations increasingly regard IT as a tool to enable and support business activities, rather than a competitive advantage or threat. A successful IT outsourcing relationship can help the client to achieve major benefits such as cost-savings, better quality of services, increased flexibility, and access to new technology. On the other hand, a poorly managed relationship be harmful in terms of unexpected costs, information security compromised, low staff motivation and loss of control over quality and level of services. In a long-term contract these potential threats are particularly high. The key tool to ensure a successful relationship between both parties is the contract itself, as it is crucial for the management team to be conscious of their ability to secure delivery around the contractual elements. In fact, good reputation and continuation of the relationship are nowadays the focus for service providers, instead of levering high profit margins and short term projects.

According to a Xerox conference about the challenges of outsourcing in Portugal, a commitment to training, empowerment of employees and setting clear strategic lines of action have led companies to channel their focus to core activities, with a view to the business success. Given the current situation of crisis in Europe it is easy to understand the challenges that organizations, large and small, face. It is not sustainable to have resources allocated to functions that are not central to the business success. Organizations will never be able to perform non-core activities cheaper and more efficient than a company with specialized resources. The priorities of the service providers of outsourcing services should focus on simplify and integrate their clients’ business processes in order to optimize the financial and efficiency gains. Xerox also stated that to generate and manage business success there is no scientific formula, but there are several variables, not all with the same weight and size; namely: differentiating the business, gaining client loyalty, recruiting the right people, investing in innovation and gaining competitiveness. If all these items have a place in the corporate business plan and if organizations are able to manage them in a way that is not seen as a cost but able to return add value to business then the company is on track for success.

Throughout this thesis it will be discuss the critical aspects around the preparation of outsourcing contracts highlighting: the main difficulties that arise in the client - service provider relationships, identifying as possible alternatives for managing conflict situations and proposing a framework to deal with these problems.

2. Problem Statement and Research Question

By studying the literature one can find that several researches have been conducted research in the field of IT Outsourcing (ITO). However, the literature regarding ITO reveals that much research and analysis is still lacking on this topic. Jiang & Qureshi (2006) lead a study on outsourcing-related articles with the aim to point out gaps in the current literature; the main gaps identified by the authors are based on these broad topics:

 lack of research on the outsourcing contract itself

 lack of objective metrics for outsourcing results evaluation

 lack of research on the relationship between outsourcing implementation and firms’ value

The present thesis and research will mainly focus on the analysis of the first topic; it will also attend to the second topic by evaluating the current state of the art in metrics and results evaluation and proposing some guidelines. The topic of the relationship between implementation and firm’s value will still be an open area for future research. According to the study “despite the growing emphasis of outsourcing, researchers are unable to empirically and systematically pinpoint its impact on firm’s performance metrics” and “Most available studies of the impact of outsourcing on firms’ performance rely upon perceived results rather than direct measures.” (Jiang & Qureshi, 2006). In fact, one of the issues found was that across a statistically representative sample of firms, there seemed to be no fully reliable quantitative indicators of performance.

Furthermore, the first assumption underlying in this research is that the decision to carry out the IT Outsourcing has been made in advance. The discussion on the decision, including reasons and risks assessment, will not be explored in depth, given that the main focus is on the tools and ways to implement and manage this outsourcing; rather than on the initial decision to outsource.

The aim is to create a framework to help organizations and managers involved in an IT outsourcing implementation and management process addressing the issues referred above. The framework that is proposed is a combination of theoretical guidelines to be used during the outsourcing process. With this framework, it is possible to understand if the strategy is being implemented, the vision is being accomplished and, in case of failure, to assess responsibilities, but most important of all, to deploy tools to service providers and clients for them to understand and identify problems. With such approach the space for assumptions and ramblings is narrowed and a more concrete and real analysis is possible and useful for both organizations and service providers. The aim is to develop and to deploy result-oriented and value driven research and solutions that enable managers to make smart and informed decisions to stay ahead in competition and to drive growth.

This framework can be as useful for organizations that decide to outsource, as well as to outsourcing service providers. This tool will provide insights and deeper understanding on the organization’s

requirements, therefore, bringing service provider and client together. It can help improve the quality of the final product by raising the issues and future problems early in the process, at early stages of solution design. The clients are more satisfied when the potential problems of implementation and development are addressed in advance. This way they can work together looking for a solution that fits the requirements. This scenario contrasts with the case where the client has low levels of satisfaction due to the lack of transparency and communication. In that case the problems are only undertaken by the organization after its implementation, when contingency and action plans have not been defined, thus catching organizations off guard.

Service providers aim to provide complete and fully adaptable IT infrastructure outsourcing solution according to the needs of each client and specialized in many different environments and systems. All the processes of installation, integration, maintenance, support, monitoring and managing the infrastructure should offer the highest performance. The best way to deploy such complete solutions is to understand the root of the client’s concerns and, early on, work together in pursuit of a common solution. Service providers, with their past experience, should address problems at an early stage to be able to solve them in advance. To achieve that, establishing a detailed and focused analysis of the customer’s requirements and problems is the most appropriate approach. One of the best-selling value-propositions is for service providers to be interested and aware of the client´s problems to present immediate and targeted solutions; this helps the client start seeing them as trustworthy partners given transparent communications and general ability to solve problems. An often mentioned problem is the fact that service providers do not provide proper technical assistance after the systems are implemented. Analyzing the real concerns of clients, service providers can effectively direct their technical assistance. Some clients may need additional support to understand how to operate the system itself; others may want to know how to manage the system data. Service providers should conduct pilot training sessions at an early stage and involve personnel in all organizational layers in order to get the organization accustomed to the system and to raise problems in advance. As Sagoo e.a. (2013) stated in their Accenture article, “Having a realistic perspective that life is not perfect is a good thing—whether you’re a service provider or a client.” In the literature it is argued that the basic hypothesis is that a sourcing relationship can only achieve success when both the client and the service provider achieve their goals and have confidence in the relationship, which lead us to the second assumption of the present thesis: relational management and contract management, between service provider and client, complement each other as determinants of success of a IS outsourcing process. According to Chen & Lin (2001) “communication, coupling quality, and knowledge sharing are three most important variables that directly affect IT outsourcing performance.”

The process of ITO is characterized by different phases/stages. This thesis will be based on the outsourcing framework (Figure 1- Appendices) proposed by McIvor e.a. (2009) and will be mainly focused on the Stage 4 - Implement and manage outsourcing arrangement. This process includes two important sub-stages, the ones that will be main focus of the present thesis: (1) negotiating and signing the outsourcing contract and (2) managing the outsourcing relationship.

The present research pushes towards an improvement in the understanding of IT Outsourcing, particularly in ITO contracts and client - service provider relationship. With increased understanding of these topics, managers can be prepared with better guidelines and tools for ITO project implementation and management and in the long run increase the effectiveness of outsourcing projects. Therefore the research topic will be:

“A strategic analysis on how to implement and manage IT Outsourcing of Business Critical Systems” And this leads to the main research question:

RQ. “How to best implement and manage the IT Outsourcing of business critical systems process?”

Following up on the research question, an assessment of the current situation of the ITO process in practice is conduct, attempting to answer the first sub-question:

SRQ1. “Which are the main problems faced during an ITO of business critical systems process at the

It will then be evaluate the key elements and considerations for managers that are setting up and managing an outsourcing contract structured via the following research question:

SRQ2. “Which are the most crucial aspects to include in ITO of business critical systems contracts?”

Each of the questions above could be the subject for several papers in their own right. Nevertheless, this thesis will develop a platform and deploy a framework from which all these questions can be discussed. The aim is not to find static answers in any amount of detail; instead, ways of thinking are suggested and possible directions towards answers are point out. Useful insights and new understanding may flow in an attempt to raise controversial issues through these questions.

In the present thesis, the focus is laid primarily on the outsourcing of information systems. However, IT outsourcing (ITO) is not a new concept and has received attention of academics for nearly 20 years (Lacity, Khan & Willcocks, 2009). To start addressing this issue, it is needed to establish clear definitions of the topics involved in the problem statement. First it will be conduct an overview of the relevant theoretical contributions to find pertinent issues in the literature in the field of ITO; thus it will be provide a clear definition of general concepts - IT Outsourcing and Business Critical Systems; and explain more specific levels of outsourcing – Goals and metrics, IT Outsourcing contracts, Performance Management and client - service provider relationship. Afterwards, survey (Appendix A) targeting managers that have or are having experience with ITO projects will be run, from both client and service provider point of view. Based on this literature study and the survey results, deploy a preliminary conceptual framework it will be deployed. With expert opinions collected an attempt to validate the theoretical framework proposed and assess the main problems and crucial aspects faced during the ‘Implementation and management outsourcing arrangement phase’.

2.1. Scientific & Social Relevance

Since the rise in popularity of outsourcing in businesses in the 90s to the major political debate in 2002 in the U.S. about the job loss on the domestic labor market, outsourcing has been a trend and a well spread topic. Nevertheless, as stated before, there are still gaps in the understanding of IT Outsourcing.

Throughout this paper a theoretical framework will be propose with the aim of helping managers during the ‘Implement and manage outsourcing arrangement’ phase: how to incrementally define the right goals and metrics, through the definition ITO contracts and performance monitoring tools to the management of the relationship between service providers and clients. A survey (Appendix A) is used to collect insights on both parties’ understanding of ITO, aiming to improve their relationship by raising and solving misconceptions. Issues with ITO contracts by assessing both parties’ requirements will also be highlight.

Eventually, the results of this study may be used to reduce the gap between actual contracts and what outsourcing projects actually require. By using this approach this research can help develop theoretical tools to manage outsourcing projects and possibly improve the outsourcing contract management quality in practice. This research is aimed both at introducing new academic insights to the ITO literature, as well as providing valuable advice for outsourcing IT systems in practice.

2.2. Personal Motivation

I’m motivated to conduct this research since developing this project will allow me to study and focus on several critical topics related to IT and management, such as IT outsourcing, contract management, requirements assessment (from the business and IT side), performance monitoring and communication improvement.

Understanding how all of these concepts are related and integrated together will allow me to elaborate a theoretical framework that can help executives - service providers and clients - to manage IT systems outsourcing in a more efficient approach.

Also, this represents a personal challenge which will allow me to explore and develop my capabilities as a researcher. What led my decision to this topic was the eagerness to fight false promises, meet requirements and provide reliable assessment tools; in other words, to improve the outsourcing environment mainly in the IT field, the future of our days.

3. Research Method

The aim of this thesis is to deliver guidelines on how to best implement and manage ITO processes, both to service providers and clients; understanding which are the main concerns that are currently face during these processes. By identifying the issues, one can assess which are the crucial aspects to be included in the ITO contracts, the backbone of these agreements. Further research will be one step closer to find suitable solutions, improving the quality and efficiency of these agreements, ultimately driving growth. This chapter is dedicated to discuss the methodology followed through this study to investigate the research questions and sub questions addressed in the Problem Statement chapter.

In the scheme below is represented the Research Method; a theoretical framework (3), supported by the literature (1) and a quantitative study (2), will be proposed; this framework will be then validated through a qualitative study (4).

The questionnaire survey outline and questions were based on the information retrieved from the literature study. The approach to create the framework was based in an extensive literature study and on a questionnaire survey targeting professionals involved in ITO processes. Retrieving the most important steps from the literature the responds are asked to classify the ITO process in four main levels – Goals and metrics identification, ITO contracts outline, performance measurement mechanisms and client-service provider relationship management. The crucial aspects and concepts were gathered and organized by levels of importance during an ITO implementation and management process.

Afterwards, and in order to further validate the framework, expert’ opinion on the provided framework and on the ITO process in general were collect. This expert opinion was gathered through in-depth semi-structured interview regarding the overall framework and its different phases. Through semi-semi-structured interviews one can better understand what the perceptions of the respondents are, which overcomes the more static interviews. The interview was previously outlined to act as a guide but leaving space for improvisation in order to retrieve more interesting and significant content.

4. Literature study and Theoretical focus

Most companies today have relationships with several partners and collaborators. The number of strategic alliances in most industries has grown over the last decade. Rather than delivering information systems (IS) internally, in the past years, companies have progressively sourced many of their IS activities from external service providers. A recent study (Sagoo, Oates, & Lacityk, 2013) showed that 60% of companies worldwide

Literature study

IT Outsourcing Business Critical Systems

Goals and metrics ITO contracts Performance Management Client-Service Provider relationship

Quantitative study Online questionnaire survey Proposed Framework ITO implementation and management Qualitative Study Expert Opinion (1) (2) (3) (4) Scheme 2 –Research Method

are now adopting outsourcing as a standard practice; and another 19% say that outsourcing is definitely their future.

Many authors have researched into the possible reasons leading companies to outsource part of their IT activities or even whole departments. In most the literature these reasons are categorized in broad groups. Table 1 (Appendices) is a summary of the main categories and motives for ITO that derived from literature, constructed by Hietalahti & Kuoppala (2009). The table makes it evident that much attention and research has been paid to this topic; it has been a trendy topic over the last decades, but nevertheless much more research still needs to be done.

Since every IT outsourcing deal is unique, one can assume that risks are present or absent depending on the context and project of the IT outsourcing deal. Like any business model, ITO also presents challenges, ranging from having a very strong and narrow communication channel across the enterprise, to requiring confidence that a third party will deliver the service fulfilling and improving levels of quality and satisfaction. Often, the clarity of the customer on what to do with outsourcing is also a major challenge (Price, 2004). For that reason, IT Outsourcing negotiation and drafting agreements can be summarized and displayed in the Figure 2 (Appendices), which metaphorically explains various perception gaps that often arise in software development projects through the simple task of building a tree swing. Many ITO service providers and clients face this dilemma often, different points of views are present in the moment of design software solutions, but contracts are useful tools to narrow ideas to a common ground.

Also the critical success factors of outsourcing have been discussed in the literature. The four main factors that derive the most attention from studies and literature authors on the success of outsourcing are:

 Adequate contract (Casale, 2001; Claver e.a., 2004; Gonzales e.a., 2005; Lacity & Willcocks, 2012)

 Fit between client and service provider (Bo e.a., 2011; 2011; Ndubisi, 2011; Lee & Choi, 2011)

 Quality and quantity of communication between service provider and client (Gonzalez e.a., 2005; Guo e.a., 2010)

 Commitment by the management (Shi e.a. 2005; Ndubisi, 2011) 4.1. IT Outsourcing

Since the outbreak of the economic crisis in the past years along with the huge technological

advances the world has witnessed, companies are under extreme pressure to work more efficiently

and to perform better. Outsourcing emerges as a solution for current companies’ problems.

According to Troacă & Bodislav (2012) the concept of outsourcing came from the American

terminology “outside resourcing”, meaning to get resources from the outside. It was defined by

Hafeez e.a. (2002) as “procurement of materials and services inputs by a firm from a source outside.”

In this thesis the concept of outsourcing that will be used is the one defined by Grover e.a. (1994)

which is the acquisition of products or services from external service providers. Outsourcing service

providers has the ability to increase processes performance or to reduce operational costs for the

clients.

Across departments and activities within a company that could be outsourced, IT is considered

to be a main candidate for outsourcing. In areas such as banking, financial services, health care, and

manufacturing, this is particularly true. The employment of outsiders to handle part or all of IT

activities often helps organizations to provide better services and to maintain a competitive

advantage (Grover, Cheon & Teng 1994). The motive behind ITO is that standard IT solutions and

cloud services, which service providers offer, are less prone to fail than customized and complex

solutions, which organizations themselves try to develop to fulfill organizational needs. According

to Gartner IT glossary (2014), IT Outsourcing is “the use of external service providers to effectively

deliver IT-enabled business process, application service and infrastructure solutions for business

outcomes”. Therefore, the definition of information technology (IT) outsourcing used across this

research is: the subcontracting of an external service provider for a part or the entire IT activities of

a company (Altinkemer e.a., 1994). Summarizing, information technology outsourcing (ITO)

concerns the outsourcing of digital services.

Despite research of the last 20 years and the wide availability of literature, ITO projects still

report an inability to meet the expected benefits of the (IT) outsourcing relationship with over 50%

failure rates (Deloitte, 2005; Gartner, 2003). But on the other hand, 89% of the organizations plan to

maintain or even increase their current level of IT Outsourcing, according to a KPMG survey.

Hence the growth of IT outsourcing gives the impression of being undeniable. In fact, as

acknowledged by Clark (1992), IT Outsourcing is one of the six most important strategic

management concerns that organizations face in the management of corporate systems.

Grover e.a. (1994) led an exploratory study of 188 firms and reported that even though IT

Outsourcing is not a new phenomenon, over the years its nature has evolved and differentiated.

Contrary to traditional IT operations, results confirm that a variety of IT functions are being

outsourced. The highest outsourced activity remains operations; however applications,

telecommunications and end-user support are being executed with greater relevance by external

service providers (Grover, Cheon & Teng 1994). Over the years, service providers had increased

their solutions specification either by function, industry or application, due to the fact that different

industries pursue different levels of outsourcing. Gonzalez e.a. (2010) proposed the following

determinants of IT outsourcing success:

“A clear idea of the objectives sought through outsourcing; provider’s understanding of clients’

objectives; provider’s attention to clients’ specific problems; choosing the right provider; frequent

client-provider contacts; a good-value-for-money relationship; top management’s support and

involvement; and proper contract structuring.” (Gonzalez e.a., 2010)

The present research will focus on some of these determinant factors of IT outsourcing,

specifically the relationship between client - service provider and the contract analysis.

4.2. Business Critical Systems

In literature, IT outsourcing services has been investigated tremendously. However, not all of the

outsourced IT facilities are considered to be equally important. Traditionally, only facilities that

were considered commodities were being outsourced, whereas more specific facilities were not

considered candidates for outsourcing (Price, 2004; Slack, Chambers & Johnston, 2010). The last

decade, the literature on application service providers (ASPs; e.g. Curry & Seltsikas, 2001) and

outsourcing itself (e.g. Willcocks & Lacity, 1999) has drawn attention to outsourcing business

critical IT systems.

Despite the fact that there is no clear definition on what a business critical system or process

is, several authors provide some insights in what might be considered to be critical business

operations. One dictionary gives the following definition of critical: “having a decisive or crucial

importance in the success, failure, or existence of something” (oxforddictionaries.com.). Another

relevant semantic aspect is one of the definitions of critical, which states that critically can mean

“urgently needed” (Dictionary.com). This implies that a critical system is not only of extreme

importance but also needed straight away.

Several authors have given indications about what possible critical systems could entail.

Slack e.a. (2010), suggest that the first thing one should look at, when outsourcing a process, is

whether that process is strategically important (in regards to the operational strategy). The decision

of what is strategically important varies with a company’s perspective. Slack e.a. (2010), states that

within operational strategy, deciding what is critical varies per project (and resource) and is often a

pragmatic decision based and depending on the operational strategy of a company (Slack e.a., 2010,

p. 77). Although these authors state that it is hard to generalize criticality, it also suggests that

critical importance is related to strategically important decisions.

Companies’ activities may be labeled as core competences or not core competences and can

possibly be executed by external providers more efficiently and/or effectively.

Prahalad & Krishnan (1999) suggest that business critical applications lead to severe

problems when they fail. They might even stop the organization to operate entirely. Price (2004)

also suggests something similar; according to the author business critical processes are those that

have both a strategic and operational risk. This also implies that something is business or mission

critical if a failure of that process or application will lead to a major business failure in terms of

strategy or operation.

A definition of business critical systems should therefore state that a business critical system

is a system that is both strategically or operationally of (extreme) importance, (urgently) needed,

and when it (partially) fails severe problems arise, including (but not limited to) significant

financial losses, operation shutdowns, competitive disadvantages, damage to both reputation and

credibility, regulatory (compliancy) issues and safety related issues, which affect the business

(Price, 2004; Slack e.a., 2010; Prahalad & Krishnan, 1999; Duff as cited in: Soliman & Youssef,

2003). The previous definition will be used in the thesis.

The thesis will not focus merely on core activities, but in critical systems. As discussed

earlier, any system that causes significant damage to the organization in case of rupture is

considered a critical system. The third assumption of this thesis is that any system can be

considered critical; for example, a simple financial system of an industrial cars company, it is not a

core system (it is not through this system that the organization will gain a competitive advantage in

the cars market), however, if it fails one cannot perform sales which could mean huge financial

losses.

Once the concept is defined, another question arises: how can managers combine the

concept of business critical and strategic outsourcing to achieve maximum effectiveness? A really

interesting example is Nike. Nike, Inc., is today a massive company and the leading supplier of

athletic footwear in the world. Interesting enough Nike outsources 100% of its shoes production and

only the key technical constituents of one of their line of sneakers (“Nike Air”) are manufactured by

them. One could assume that sneakers production is their business critical. Sport shoes are seen as

stylish and modern accessories, which require fashion and technological flexibility at the production

and marketing levels. While focusing on preproduction phase (research and development) and

postproduction activities (marketing, distribution and sales), Nike generates maximum value,

“linked together by perhaps the best marketing information system in the industry” according to

Hillmer & Quinn (1995). Through the last decade Nike grew at 20% growing rate and grossed a

31% ROE for its shareholders.

4.3. ITO implementation and management levels

4.3.1. Goals and Metrics

In business nowadays, there is still a lot of misunderstanding about the meaning of the words goals and metrics. According to Walden (1994), the unit in which something is measured is known for metric (measurement); goals are the targets set in terms of units (target/objective).

According to Locke and Latham (2002) the probability that performance increase after a goal has been set is above 90%. There is proof that indicates that there is an important constituent of individual’s motivation through goal setting policies. Psychologists and experts have found that when workers are committed to challenging but attainable goals, their performance increases.

As Judge (2000) stated: The most effective way an organization can promote job satisfaction of its

employees is to enhance the mental challenge in their jobs, and the most consequential way most individuals can improve their own satisfaction is to seek out mentally challenging work (Judge, 2000, p. 107).

Goal setting theory suggests that ensuring that a group has a common goal and is clearly aware of what is expected from them are effective tools for progress. If individuals accepts the goal, does not have conflicting goals and has the aptitude to accomplish it, there is a positive direct relationship between goal difficulty and task performance (Locke & Latham, 2002)

Nevertheless, goals are not static; companies may change goals as the circumstances change. It is important to understand if the environment is changing in order to align goals and metrics to it, to follow market trends. Companies must develop a self-critical and reflective thinking about adopting various goals and metrics, as it may help to ask if each significantly improves the efficiency of their business learning system. According to a General Electric’s online article (2014), performance metrics should be developed to meet a company’s particular long-term goals and choose credible metrics is crucial to ensure buy-in at all levels of the organization. It is known that the right combinations of metrics can show where the company is succeeding but also highlight specific areas of weakness.

One of the most important rules in the world of business is: “if you can’t measure it, it doesn’t exist”. This rule is particularly true when defining goals and targets, because if managers are not able to define measurements then the progress can’t be achieve because they don’t know their current position. Therefore all goals defined by an organization have to be specific, measurable, achievable/attainable, result oriented/realistic/relevant and time bound – or as also known as SMART goals.

4.3.2. IT Outsourcing contracts: Contractual governance

During the recent years we have witness a shift and increasing of complexity on the concerns regarding outsourcing. Instead of focusing in the decision to outsource or not, the concern has been in how to outsource and on how to manage the client-service provider relationship. In order to address and mitigate these issues the attention should relay on the contracts used to support ITO processes. According to a survey by Gartner (2008) 55% of outsourcing companies emphasis excessively on the operational level of outsourcing, rather than spending resources on setting up and managing contracts.

Outsourcing contracts can be complex and may involve a lot of work, but building a good and robust contract shall cover service level agreements, measurements and timeframes, penalties and rewards, regular reviews, and exit strategies. The right craft of this type of IT outsourcing contracts is critical because they deliver business value and drive IT outcomes to the companies.

Developing solid contracts can dramatically reduce ITO risks (Aubert e.a., 2005): well structure contracts cover most of the situations companies want to secure, and simultaneously setting versatile agreements allows response to changes taking place during the contract, which can be a valuable resource in reducing risks of ITO. Fraga (2010) argued that the outsourcing success or failure is conditioned and can be determined by how the process is run before and after the contract is signed. Therefore, ITO contracts are crucial to manage risks, are effective mechanisms for relational outsourcing management or, in case of underperformance, for early recession (Osey Ngwenyama-Bryson, 2006). However, define and sign the contract is not enough to pursue stable outsourcing situations; once started one must be continuously managing the signed contract. It must be remembered that often the difference between failure and success of an outsourcing project may simply reside in the choice of the supplier and on the terms of the contract (Meyer ., 1994; Lee e.a. , 2000) .

Contractual governance and relational governance are two determinants categories the success of IT outsourcing (Scheme 1), according to Lacity e.a. (2009). The contract management category includes the details of the contract, contract type, duration and size. Moreover, the category of relationship management encompasses trust, norms, communication, information sharing, cooperation and mutual dependence. Organizations must be aware of this when outsourcing IT services; keep track and monitor these factors in order to achieve greater alliances and reach out for success.

If celebrating contracts alone does not guarantee the success of outsourcing, is however, pertinent to conclude solid contracts, enabling the fulfillment of expectations. A very common outsourcing myth exposed by Lacity and Hirschheim (1993) is that IT Outsourcing is in the nature of partnership and strategic alliances. On the contrary, Outsourcing service providers do not share the same motives for profit as their clients. The only manner to ensure that expectations of the costumer are met is to define a tight contract. According to Lacity and Hirschheim (1993) research, outsourcing customers agreed that the contract is the key issue to a successful outsourcing relationship. Contracts are crucial and necessary, however, not enough to a successful outsourcing partnership. Contracts are a trade-off between the level of risk both parties are supporting and the level of completeness of the contract they accept to aim for; as Graph 1 (Appendices) captures. In fact, firms outsource IT operations and activities in order to obtain benefits, and contract characteristics constitute a crucial element which should contribute to getting these benefits.

According to the Business Dictionary, transaction cost is “the cost associated with exchange of

goods or services and incurred in overcoming market imperfections. Transaction costs cover a wide range: communication charges, legal fees, informational cost of finding the price, quality, and durability. Transaction costs are a critical factor in deciding whether to make a product or buy it.”

(businessdictionary.com) – as Graph 1 exhibits it. The figure exposes the process of minimization of transaction costs leading to the design of the optimal contract (see Graph 1). The degree of contractual completeness reflects the desire to minimize contractual exchange costs. From the figure is quite intuitive that in order to increase firm’s protection against threats they should reduce the contract incompleteness until the point where the marginal cost of risk exposure is equal to the marginal benefit of reducing risk exposure. According to McCarthy & Anagnostou (2004) “There are several compelling reasons to outsource, but the underlying rationale is consistent with the principle of transaction cost in economics, i.e. to achieve economic improvement in the performance of business functions”.

There are several types of IT Outsourcing contracts and most of them involve passing responsibilities from an in-house IT department to the outsourcing service provider through a contract. Nevertheless, outsourcing contracts comprise complex legal and business concerns and carries risks both for clients and service provider. Where situations of conflicting interest arise, clients cannot expect the service provider to act in the best interest of the client (Lee, 1996). Thus, a written outsourcing contract is the most important instrument to delimit expectations, fights and liabilities of both parties as it guides the behaviors of both sides involved. Therefore it is crucial to have some knowledge of the legal and business issues involved in ITO as well as some awareness of how to address these issues in the contract concerned. Lee (1996) elicited a collection of agreements an outsourcing contract should often include: “service level, transfer of assets staffing, pricing and payment, warranty and liability, dispute resolution mechanism, termination, intellectual property matters, and information security”.

Pre-contract negotiation and post-contract management are crucial in order to achieve the desired levels of agreement and success of an ITO. Pre-contract negotiation takes place before the negotiation and the company that desire to outsource must clearly define what part of the IT activities wishes to outsource. Also the issues addressed above by Lee (1996) need to be considered in this phase, before the actual negotiation starts. With such approach considerable time and costs saving will be achieved, as the client will be taking a much more proactive attitude during negotiations. Post-contract management takes place after the contract has been settle. The client should allocate internal managers that have knowledge on the services outsourced to carry out the contract management. Lee (1996) stated that these managers “will have to deal with routine measurement of the service provider’s service level against contractual requirements, handle change requests and payments, and assume the overall responsibility of ensuring the services provided by the service provider are of an acceptable quality”.

For the design and preparation of outsourcing contracts some guidelines are found in the literature. A list of these guidelines will be presented being the criterion of choosing the relative importance of each in the final contract. So important criteria to take into account when preparing the contract are:

 Elimination of the maximum ambiguity possible as it can lead to misunderstandings and conflict between the parties (Varajão, 2002).

 Helen Hyntley Gartner Inc. advises not to use standard contracts offered by service providers, since it presents an inherent inclination.

 As a general rule, service levels (SLAs) should include measurable objectives and a clear definition of the desired end results. Varajão (2002) believes that service levels must be objective, metrics have clearly defined and measurable, and they must be supervised at a reasonable cost.

 Parikh and Gokhale (2006) suggest that the agreement must specify the type of communication between the supplier and the customer during the term of the contract and an associated schedule, guaranteeing the periodic reporting on service performance. In addition, the customer must ensure the right to regularly audit the performance of the supplier.

 Typically the services may have a fixed cost, or the cost can be associated with levels of performance. It is, however, necessary to foresee all possible situations, in order to avoid the "hidden costs" and charging inflated fees amounts for services or unanticipated changes. For this

reason the agreement should include the maximum possible situations involving payments (ITANZ, 1998; Varajão, 2001; Varajão, 2002)

 Duration

 The existence of versatility in the contract is essential to deal with the change. Over time the business requirements change, technology undergoes changes in hardware and software.

According to Perry (1989, p. 221), a contract is incomplete if “it fails to specify performance obligations for the parties in all states of nature, or fails to specify the nature of the performance itself”. “Writing a Poor Contract” is addressed as one of the seven deadly sins of outsourcing according to Barthelemy (2003); to achieve outsourcing success is crucial to have a strong contract as it helps to establish equilibrium of power between the service provider and the client. A contract that is well draft allows partners to commit to short-term goals and to set real expectations. Moreover, in case the relationship miscarries it provides a safety net. Barthelemy (2003) believes that regarding the content of the contract the best ones should be simultaneously: precise, complete, incentive based, balanced and flexible.

Nevertheless, before companies rush to draft or sign contracts, they should take a step back and have a moment to think about it. Request for Information (RFI) is a good tool to be used at this stage; RFI’s collect information to help managers to decide what step to take next before get on negotiations. This information includes evidence about the service and resource information of various service providers from supply side companies and, usually, follows a standard format that can be used for comparative purposes. According to the Business Dictionary (businessdictionary.com) an RFI is a “request made typically during the project planning phase where a client cannot clearly identify product requirements, specifications, and purchase options. RFIs clearly indicate that award of a contract will not automatically follow.”

These scientific contributions sustain the importance of contract management as a critical success factor for outsourcing projects. As stated by several authors in the literature, contracts study and research in ITO is still in its early stages. More research in this area is required to help companies be in a better position when managing their relationship with service providers, therefore, helping to minimize the negative outcomes typically associated with outsourcing. However it is not possible to design a contract where all the details of an agreement between clients and service providers are cover as change is permanent and not all occurrences are predictable. Therefore contracts should be a tool of versatility enabling accommodates future changes. 4.3.3. Performance Management

Pietschmann e.a. (2011) lead a research on age-related alterations in indices of performance monitoring and they argued that “when individuals interact with their environment, reinforcement learning takes place: using feedback information, individuals discover which actions are appropriate to a given situation.” Therefore individuals are able to self-evaluate their behavior and to easily detect errors.

A recognized definition of performance management, according to Daniels' (2000) is "a scientifically based, data-oriented management system. It consists of three primary elements: measurement, feedback and positive reinforcement." Performance management consists of activities which ensure that strategic goals defined by the corporate are achieved in an efficient and effective manner. The focus of performance management can be on the organization, employees, business processes as well as many others. It can also be seen as the process by which organizations align their employees, resources and systems to priorities and strategic objectives.

According to Chen & Lin (2001) there are two possible perspectives to evaluate IT outsourcing performance: from a business perspective, is measured by the impact on business results; and from a user perspective it can be measured by how well user’s needs have been fulfilled. The authors developed a theoretical model to explain the complex IT outsourcing phenomena, and it suggests that “IT outsourcing performance is affected by many antecedent conditions mediated by three mediators - knowledge sharing, communication quality and coupling quality”.

Some academics argue that there is a clear and direct correlation between improved business and organizational results and using performance management programs or software. Applying performance management tools will likely result in the return of benefits to organizations. These objectives may include: motivated workforce, improved management control and ultimately financial gain. Nevertheless performance management rests on setting the right sort of goals, alone or with misaligned goals it cannot

management is the Balanced Score Card (BSC) of Kaplan and Norton (1992). A system of BSCs ensures that a manager at a glance insight into the quality of its service and knows where he may have to adjust. This type of system is cross-functional as well as cross-level; it goes from the most operational level to the strategic level.

4.3.4. Client - Service providers relationship: Relational governance

IT outsourcing arrangements between client and service provider are progressively more characterized as partnerships rather than market transactions. According to Lee & Kim (1999) these partnerships are the key to success in any ITO process. ITO partnerships stress the importance of cooperation, trust, co-specialization and sharing complementary assets. Efficient management of relationships between client and service providers should be an ongoing task that requires significant time and resources investment. Alsbridge research (2014) set that between 25% and 50% of the value (i.e. savings, deferred costs, efficiencies, productivity improvement, etc...) in a sourcing transaction is lost along the way due to poor service provider management.

From the role of the client, unrealistic expectations, the inability to clearly identify needs from outsourcing, unawareness of the rule “You get what you paid for” and not having a motivated team are the main reasons for outsourcing project fails. On the other hand, from a provider role, unfulfilled promises, lack of client’s culture and business knowledge and lack of interest after the implementation is completed (deficiency of ongoing support) are the foremost reasons for outsourcing project fails.

Companies that wish considerable contributes to success should invest in a good relationship with the service provider, as it ensures coordination, efficient means of communication and evaluates the performance of the required services. In order to achieve mutual success in the strategic inter-organizational governance structure, parties exchange data, information and resources. The value created from IT outsourcing partnership is proportional to synergy and knowledge derived from the strategic alliances process (Chen & Lin, 2001). According to Chen and Lee (2001), “What managers should do in an IT outsourcing relationship is to facilitate inter-organizational learning and to leverage core capabilities of the two parties”. To achieve the outsourcing strategic goals, good partnership quality is only one of the methods. As Gertz (2000) and Serenson Colet (2000) have said, the keys to a successful project are continuous communication with the service provider during the project and flexibility. The clearer and more open the communication between service provider and client, the better the project is likely to develop.

Aubert e.a. (2003) argued that contracts support the institution of the market in a relationship with a service provider by often incorporating behaviour constraints and incentives. That said, contracts are a crucial key to success in these partnerships.

5. Analysis

With the aim of building a theoretical framework, a questionnaire survey (Appendix A, using kwiksurveys.com tool) was carried out, targeting ITO managers of both client and service provider sides. The aim is to develop and to deploy result-oriented and value driven research and solutions enable managers to make smart data driven decisions to stay ahead in competition and to drive growth.

A general system perspective is adopted in developing the theoretical framework for IT Outsourcing Implementation and Management. There are 4 levels (Scheme 3): Goals and metrics, Contractual Governance, Performance measurement and Relational governance - which represent the process levels for trading various IT resources. The output is indirectly impacted by antecedent conditions that are contextual variables which influence process levels.

The data used in this study was collected through questionnaire survey. The survey (Appendix A) was delivered to ITO staff involved in current or past projects and processes worldwide, year 2014, in order to get a more overall and international point of view on the subject. A total of 45 questionnaire surveys were answered. Among them, 33 are useful and 12 not useful (including incomplete surveys or multiple answers from the same company). The companies that replied to the survey represent the market leaders of different fields, giving extra credibility to the results. Extremely important companies in the IT field like Google or IBM; telecommunications field, Ericsson; in the field of media, Globo.com; among others (Figure 3). The results were obtained from several parts of the world, raising the quality and relevance of data; USA, Brazil,

Netherlands, Portugal and Spain are the countries where data was collected (Figure 4). The reasoning behind this geographical dispersion is the importance and the experience level of the companies on the field of IT outsourcing implementation and management. The survey was delivered worldwide and the aim was to collect a sample from different parts of the globe in order to gather different points of view, therefore there are answers from Europe, South America and North America (Figure 4); as my networking range is not wide enough and only covers these countries. Furthermore, one should consider how difficult it is to obtain answers from companies; particularly ITO managers and staff, as technological progress along with the considerable investments of firms in technologies have made them become the target of numerous studies (Poppo & Zenger, 1998).

This chapter presents and discusses the main results obtained. This presentation and discussion is made over four levels but which taken together constitute the overall characterization of outsourcing implementation and management of information systems. The first level is devoted to assessing the importance of defining the right goals and appropriate measures in an early stage. Following, the analysis of the aspects that are considered when drafting the ITO contract that goes through the level of completeness and by identifying the main problems faced with this type of contract, in the second level. In the third level the ITO performance measurement is assessed throughout the weight of the overall performance of IT services, knowledge sharing, the characteristics of the communication between the two parties and coupling quality. In the fourth level the relationship between se client and service provider will be analyzed according to the difficulties faced during the relationship. A theoretical framework, to help implement and manage the processes of ITO, will be proposed based on the study of literature and the results obtained.

5.1. Results analysis

In order to comprehensively characterize and assess the various aspects of managing outsourcing of information systems services a study was performed, which began by identifying the characteristics and problems that are most often faced by external service providers and clients and understand how the outsourcing process is driven. Setting goals and metrics, contracts analysis, performance measurement and the analyses of the relationship between client and service provider are the aspects that are to be analyzed more deeply.

From all the companies who participated in the study about 45%, equivalent to 15 companies, are service providers and 54%, equivalent to 18 companies, are clients who required IT outsourcing services (Figure 5).

5.2.1. Level 1 - Goals and metrics

To facilitate comparison of the features that define the level of importance regarding IT Outsourcing at the beginning of an IT outsourcing management process, managers were asked to rank these features (definition of performance goals, implementation of measuring mechanisms, definition of KPI’s and the definition of SMART goals) on the level of importance, which is presented in Table 2 below. The tool used to extract the data (kwiksurveys.com) attaches to the most important feature the value 1 and the least important value 5, in ranking questions; for this reason, when evaluating the results, one has to take into consideration that the feature that has the lowest value is, therefore, the most important. By analyzing Table 2 one can understand that the definition of performance goals is the major concern at the beginning of an ITO implementation and management process. The definition of SMART goals was considered the least important for these managers. The ‘other’ option was deliberate as medium-high level of importance and some concerns were point out: scope definition, understanding of the business, the contract management and trust the provider expertise.

5.2.2. Level 2 – Contractual governance

Considering the contract agreement as an important mechanism that minimizes the risk of an outsourcing agreement, it is pertinent to know the aspects that managers value most when it enters into a contract of this nature. In this sense, it was provided a set of 10 features identified in the literature, asking respondents to choose which of these are indeed present in the contract: an option for renewal of the contract, stipulated reductions cost over time, penalties for under- performance, contract termination clause for underperformance, bonus for outstanding performance, detailed performance targets, private arbitration, gain-sharing provisions between client and supplier, renegotiation "windows" (pre-specified periods at which client and supplier agree to renegotiate some of the features agreement) and exit strategies. Figure 6 (Appendices) presents the results obtained, verifying that, in contracts, ITO managers clearly identify the feature that is most present in the contracts - an option for renewal of the contract - specified in the contract over than 18% of the cases. Gain-sharing provisions between client and service provider and private arbitration are the features that are less address in these types of contracts, each represented in only 8% of the cases.

When asked which were the goals that had a strong influence in the decision to proceed with the outsourcing, costs reduction was clearly the most important decision driver (27% of the cases) followed by performance improvement with 15% (see Figure 7 - Appendices). In almost 55 percent of the cases the first goal that drove the decision to outsource was reflected in the contract (Figure 8).

Regarding the main problems faced with ITO contracts Table 3 provides a general idea on what is missing to these contracts. The most addressed problem was the ‘Poor contract governance’. Non-comprehensive Service Level Agreement (SLA), ownership of intellectual property rights agreement, ambiguity and misunderstandings and lack of performance measurement methods are the features that follows right after. These results are in agreement with what has been previously described in the literature, which means that contract drafting and outline requires more close attention in order to achieve higher levels of IT Outsourcing satisfaction.

5.2.3. Level 3 - Performance measurement

In order to analyze the ITO performance several criteria were used; ITO overall performance, Knowledge sharing, communication and Coupling quality. Before proceeding with a more deep analysis, some reliability statistics were carried out; as Liker scales were applied it was necessary to find the Cronbach's Alpha. Cronbach's alpha is the most common measure of internal consistency ("reliability"). It is most commonly used when multiple Likert questions are address in a survey/questionnaire that form a scale and we wish to determine if the scale is reliable.

In Table 4 below a general view on the level of satisfaction of the ITO overall performance is provided, and in a broad approach managers feel 3.18 out of 5 satisfied, which indicates that effort has to be put in order to improve this rate. In a more detailed analysis one can understand that the feature in which managers of these ITO processes feel more satisfied is IT costs reductions; which is compatible with the previous

analysis that indicates the main objective which had a strong influence on the decision of outsourcing is cost reduction, 3.36 out of 5. Therefore, one can conclude that there is a satisfactory alignment between this initial requirement and what is actually achieved; however all features present relatively low levels of satisfaction, around the medium value. Managers feel less satisfied with the requirement fulfilment, 3.06 out of 5. This is an alert for both clients and service providers to find a more suitable solution that will increase the satisfaction index. An interesting subject raised in this question, in ‘other’ option, was the delay on answering/solving problems and SLM reports.

Table 4 - ITO overall performance

Regarding the knowledge sharing (Table 5 below) the level of satisfaction stands on 3.2 with a high value of internal consistency, 0.95 (Table 6). Concerning the communication (Table 7) between client and service provider the satisfaction level stands on a 3.12 out of 5, however the internal consistency is at a poor level, 0.567 (Table 8 – Appendices), which means that the reliability on these results is low. With regard to the coupling quality (Table 9) the satisfaction level is 3.07 with a good value of internal consistency, 0.725 (Table 10 – Appendices). One of the features addressed in the ‘Other’ option was the benefits of cost reduction.

Table 7 - Communication

Table 9 - Coupling quality

5.2.4. Level 4 – Client - Service providers relationship

The relationship between clients and service providers is an important part of the ITO implementation and management phase and which has revealed to be a difficult relation to manage. Therefore the main problems were assessed in order to reveal which are the main causes of problems, aiming to find possible solutions to improve this relationship. According to the survey results the internal consistency stands on a high value, 0.905 (Table 11 – Appendices) which indicates that these results are extremely reliable. Both clients and service providers point the readiness of the employees to think along/ proactively, the waiting times, the cultural fit and communicative skills as the main problems (these features present the lowest values), as one can retrieve from the Table 12 (Appendices).

So far the analysis has been based on the general results (for clients and service providers together), however a much more interesting analysis can be carry out; by defining an independent variable (the role of the respondents), a dependent variable and asses if there is a relationship between them. Furthermore is important to examine the directions of the relationship between the variables and to do so the following questions will be addressed:

1. “Do clients think that the given features are ‘more’ or ‘less’ important to be define at the beginning of an IT Outsourcing process?” and if so “For which ones of those features?” Where each feature is the dependent variable.

2. “Do clients think that their contracts are ‘more’ or ‘less’ incomplete than providers?” and if so “Which are the features that are missing for each of them?” Where the dependent variables are the features that define a complete contract.

3. “Do clients face ‘more’ or ‘less’ problems with contracts than providers?” and if so “Which are those problems?” Where the dependent variables are the main problems usually faced with ITO contracts.

One should take into consideration that a relationship exists between two variables in a bivariate table only if the groups defined by the independent variable have differences of 10% or more in the categories of the dependent variable. For this reason only the features that present relevant values (equal or above 10%) will be address in this research. Therefore the main results obtain were the following: