University of Amsterdam
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Amsterdam Business School
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Executive Programme in Business Studies
Master Thesis:
Managing the IT outsourcing relation for small online companies
Student name: Richard Naaijkens Student number: 0582549
Date of submission: 01-07-2014
Institution: Amsterdam Business School – University of Amsterdam Course: Executive Programme in Business Studies – Strategy Track Supervisor: Dr. R.M. Singh
Preface
This thesis was written as part of the requirements for the Master of Science in Business Studies. This thesis researches how small online firms manage the risks of their IT
outsourcing relationships. The topic of the thesis originates from my personal interest in the subject and my professional background in a small online company that engages in IT outsourcing.
I could not have accomplished this thesis without the help of others. I would like to thank all interviewees who made it possible to write this thesis. Above all I would like to thank my supervisor, Dr. R.M. Singh, for her guidance and help during the whole process.
Abstract
IT outsourcing can have high risk, especially for small online firms. The study tries to understand how to manage IT outsourcing risks for these types of firms. IT is a valuable resource for an online company and small firms often do not have the required IT resources internally. They have to depend on IT outsourcing. The purpose of this research was to answer the research question: “How do small online firms manage the risks of their IT outsourcing relationships?” To answer the research question, a theoretical framework and propositions were created to analyze the influence of contractual and relational governance on managing the risks of IT outsourcing. A multiple case study was conducted, and 15 interviews with employees from multiple client and vendor firms were held to shed light on the
propositions. All interviewees gave valuable insights into governance’s influence on the risk management of IT outsourcing. The results show that a combination of contractual and relational governance is required to manage IT outsourcing risks for small online firms. Contractual governance reduces uncertainty and decreases the risks of knowledge erosion, losing control over IT resources, vendor lock, and service risks. Relational governance
ensures flexibility and reduces the risks of loss of innovative capability, loss of flexibility, and endemic uncertainty. Both governance forms reduce the risk of poor supplier quality. To manage the risks of IT outsourcing, companies need to find the right configuration of contractual and relational governance to ensure the right amount of certainty and flexibility required by the situation.
Table of contents Preface ... 1 Abstract ... 2 Table of contents ... 3 1. Introduction ... 5 2. Literature review ... 8
2.1 Small online firms ... 8
2.2 Outsourcing ... 10
2.3 Outsourcing theories ... 12
2.4 Outsourcing strategy ... 15
2.5 Outsourcing risks ... 18
2.6 Managing the outsourcing relationship ... 22
2.7 Research question ... 28
3. Theoretical framework ... 29
4. Research method ... 34
4.1 Exploratory study ... 34
4.2 Research setting ... 35
4.3 Data collection (interviews) ... 37
4.4 Coding and data analyses ... 39
5. Analysis and results ... 41
5.1 Contractual Governance ... 42
5.2 Relational governance ... 55
5.3 Contractual and relational governance ... 66
6. Discussion and limitations ... 71
6.2 Limitations and recommendations ... 77
7. Conclusion ... 80
8. References ... 81
9. Appendixes ... 87
9.1 Table of figures ... 87
9.2 Interview guide client firms ... 88
9.3 Interview guide vendor firms ... 90
1. Introduction
In 2011, 94% of Dutch households had an Internet connection, and 84% of all Internet users used the Internet on a daily basis (CBS webmagazine, 2012). The increasing level of Internet penetration over the last decades changed the way firms do business. Completely new online business models have emerged, from advertising to community-based to traditional business models adapted for online use. Rappa (2000) presented the categories brokerage, advertising, infomediary, merchant, manufacturer (direct), affiliate, community, subscription, and utility as a comprehensive categorization of business models observable on the web. Some of the largest firms in the world, such as Google, Amazon, and EBay, are online
companies. However, there are also very small online firms run by hobbyists from attics. One attribute all those online companies have in common is that their main business commercially uses the Internet.
The characteristics of online companies vary as much as the characteristics of other companies. However, all online companies need an online infrastructure. Jennex (2004) defines infrastructure as “the underlying foundation of networks, hardware, software, skills, processes, and resources that must exist before an organization can start e-commerce” (p. 264). Creating a good infrastructure is not easy. IT is one of the most resource intensive sections of an organization to structure and manage and requires high capital investments and highly skilled human resources. Because online companies rely on IT for their online
infrastructure, the importance of information-based resources and capabilities increase and IT becomes a valuable resource within online firms (Amit & Zott, 2001).
This thesis is focused primarily on small online firms. Small firms cannot be approached in the same manner as large firms. Therefore, theories that explain the management of IT in large firms cannot be used for small firms. Small firms have a completely different economic, cultural, and managerial environment. Small firms are less
likely to have the same IT skills as larger firms and thus are less likely to have internal resources for strategic software development or other IT projects. Therefore, smaller firms have a greater probability of requiring the resources from an external party, and they depend more on IT vendors and IT outsourcing than larger firms (Thong, 2001).
Belcourt (2006) explains outsourcing in this way:
Outsourcing occurs when an organization contracts with another organization to provide services or products of a major function or activity. Work that is traditionally done internally is shifted to an external provider, and the employees of the original organization are often transferred to the service provider. Outsourcing differs from alliances or partnerships or joint ventures in that the flow of resources is one-way, from the provider to the user. Typically, there is no profit sharing or mutual contribution. (p. 270)
The goal of outsourcing is to achieve financial savings, strategic focus, access to advanced technology, improved service levels, access to specialized expertise, or organizational politics. All firms must continually decide between developing something internally and acquiring it on the market.
As stated, IT is expensive to establish and maintain. An outsourcing vendor with many clients can operate on a larger scale than a single firm and can use more powerful equipment. Due to the vendor’s size, it also has bargaining power with hardware and software providers. Therefore, IT outsourcing can result in cost advantages. Another reason for IT outsourcing is improvement in performance and quality. IT technology advances quickly, and the internal IT department often has dated knowledge. The main job of an IT vendor is to stay up to date with those innovations and trends in order to provide top-of-the-bill technology. Vendors can offer more diverse and specialized skills because they face a variety of issues for different
clients and have specialized employees for areas single firms may only encounter once (Barthelemv, 2001).
However, outsourcing comes with large risks and difficulties. There are many cases where outsourcing has failed. The costs and resources required to initiate and manage an outsourcing relationship are often underestimated and firms frequently encounter hidden costs (Barthélemy 2001). If not managed well, it is even possible for outsourcing to damage the firm. Insinga and Werle (2000) stated, “Outsourcing at the operational level can easily lead to the development of dependencies that create unforeseen strategic vulnerabilities” (p. 58). A firm can even lose valuable resources or knowledge when outsourcing. For small firms, this risk is greater because they often lack experience, resources crucial to the coordination of outsourcing, and a specialized staff for financial and legal affairs (Carmel and Nicholson, 2005).
In an outsourcing relationship, the firm is dependent on the vendor for the resource or capability, and risks erosion of the resource, loss of control over strategic assets, and loss of flexibility can result (Duncan, 1998). Therefore, it is important that firms do not outsource their valuable resources (Barthélemy, 2003). However, firms often do not know the future value of a resource, so there is always a risk of outsourcing potentially valuable resources. For small firms, this risk is higher because they have to deal with higher uncertainty and they evolve faster. Small online firms that engage in IT outsourcing know they are outsourcing a valuable resource, since IT is valuable to online firms. This enhances the outsourcing risks. Small online companies do not have the power and resources of large firms. In order to become competitive, outsourcing is a solution, but there is the risk of losing something valuable over time. However, small online firms survive, even after IT outsourcing. This thesis researches how small online firms manage their IT outsourcing relationships in order to protect themselves against risks.
2. Literature review
In this section, the existing literature about outsourcing is discussed to provide further insight into the topic. The question “How do small online firms manage the risks of their IT outsourcing relationships?” remains the main question. This chapter begins with a description of the characteristics of small online firms. Then, the definition of IT outsourcing is
discussed. In the third section, outsourcing is analyzed from a resource-based view (RBV) and a dynamic capability view. These theories were chosen because they fit the scope of this thesis. IT is a valuable resource for online firms, and the RBV provides a good basis to
analyze how to keep this resource valuable when outsourcing. The dynamic capability view is used to assess how firms can keep resources valuable in a dynamic environment. This is especially relevant due to the dynamic nature of small firms and information technology. The next section focuses on outsourcing strategies and risks, and the final section discusses the existing literature on managing IT outsourcing relationships.
2.1 Small online firms
Examination of the literature shows that online companies are most commonly referred to as e-business or e-commerce companies. E-business means doing business electronically. It includes e-commerce, e-markets, and Internet-based business and refers to firms that conduct commercial or innovative transactions with their business partners and buyers over the Internet (Mahadevan, 2000). Turban et al. (2002) described E-commerce as the process of buying, selling, or exchanging products, services, and information using computer networks including the Internet. Fillis et al. (2004) defined e-business as “any business carried out over an electronic network (exchanging data files, having a website, using other companies’ websites or buying and selling goods and services online)” (p. 179). There are no large differences among these definitions. To best fit this research, the following
definition for an online company is derived from the literature: “A company whose main business is carried out over the Internet.”
There are many definitions for small firms. In this thesis, the European Commission’s definition for small firms is used because it fits the thesis’s scope. The European Commission specifies small firms as companies with a turnover of less than 10 million euro, a balance sheet of maximum count of 10 million euro, and no more than 50 employees (European Commission, 2003).
Bolton (1971) described the following characteristics of small firms: the overall market share is mostly small, an owner/manager often controls the firm in a highly
personalized way, the firms are usually independent of other organizations, and many operate in niche markets and offer a specialized service or product. As a result, they can often charge higher prices than the industry average. Storey (1994) identified three key areas where small firms differ from large firms. The first area is higher uncertainty due to a limited customer base and product line and a greater diversity of owner-objectives. Second, small firms are more likely to introduce new innovations and are less committed to the existing business. This is related to the niche role of some small firms and to the fast rate of growth of small firms. Third, small firms are more likely to evolve and change than large firms, perhaps partly due to the existence of a more flexible culture within the firm. Welsh and White (1981) say a small business is not a “little” big business. According to them, small firms have to deal with
resource poverty and operate under time, financial, and expertise constraints. Time constraints refer to the limited amount of time available for activities beyond the normal individual job responsibilities. Financial constraints refer to the limited amount of finance available for activities beyond normal operations. Expertise constraints refer to the limited amount of expertise within businesses to carry out activities beyond designated job responsibilities.
Due to resource constraints, small firms often do not have a dedicated IT department or IT function (Adam and O’Doherty, 2000). Chan and Chung (2002) also showed that firm size can affect the availability of resource, e.g., IT skills within the organization. Many small firms do not have or have limited IT departments and, therefore, no CIO. For small online firms, this can be problematic. IT is a valuable resource firms need for their online
infrastructure. The availability of resources affects the source of the resources. Many of the IT-related functions of small firms are outsourced through necessity because of resource poverty. The outsourcing decision is made on an ad hoc basis rather than as part of a long-term strategic plan. Thus, IT outsourcing in small firms is typically not a strategic
phenomenon (Al-Qirim, 2003).
2.2 Outsourcing
The academic management literature has numerous definitions of outsourcing. Outsourcing can be referred to as “A variety of ‘make or buy’ decisions concerning whether corporations, through their business units, should provide certain goods or services in-house or purchase them from outsiders” (Harrigan, 1985, p. 397).
Belcourt (2006) described outsourcing as follows:
A situation when an organization contracts with another organization to provide services or products of a major function or activity. Work that is traditionally done internally is shifted to an external provider, and the employees of the original organization are often transferred to the service provider. Outsourcing differs from alliances or partnerships or joint ventures in that the flow of resources is one-way, from the provider to the user. Typically, there is no profit sharing or mutual contribution. (p. 270)
Gilley and Rasheed (2000) said that outsourcing represents the strategic decision to reject the internalization of an activity. It involves a decision to purchase a product or service instead of producing it. They described two forms of outsourcing. The first form arises by substitution of external purchases with internal activities. This type of outsourcing can be seen as vertical disintegration and is the most common form of outsourcing. The second form arises through abstention. This does not involve shifting activities to an outside supplier. In this case, a firm purchases activities from an external party, even when those activities have not been handled internally in the past. This appears similar to normal procurement, but abstention outsourcing only occurs when the firms does have the capability to internalize the outsourced activity. Abstention outsourcing also reflects a decision to reject internalization of an activity. Gilley & Rasheed (2000) also proposed two different types of outsourcing: peripheral and core. Peripheral outsourcing is the buying of non-strategic (peripheral)
resources. The assessment, strategy, and core competency of a firm determine what a core or peripheral activity is of that firm. So within one industry, this could be different for each firm.
Ulli Arnold (2000) also described these different types of outsourcing. He specified the outsourcing of core activities (activities or resources that are necessary for the company to exist), core-close activities (activities or resources that are directly linked with core activities), core-distinct activities (supporting activities), and disposable activities (activities with general availability).
In their research, Cheon et al. (1995) focused their definition specifically on outsourcing of information systems. They describe IT outsourcing as “The organizational decision to turn over part or all of an organization’s IS functions to external service provider(s) in order for an organization to be able to achieve its goals” (p. 219).
There are no large differences in these definitions. Part of an internal activity is moved over to an external party that has to take responsibly for this activity. Outsourcing can vary by
the activity that is outsourced. This can change from core competences to disposable activities. Finally, outsourcing differs by the way it is started. Some firm always used an external party, while others have handled the outsourced activity internally in the past. To better fit this research, the following definition for IT outsourcing is derived from the literature: “IT outsourcing is the decision to turn over part, or all, of an organization’s IT functions to external service provider(s). It involves a decision to purchase a product or service from another company instead of producing it, in order to achieve the organizations goals.”
2.3 Outsourcing theories
Before further analyzing the management of outsourcing, it is important to give a theoretical framework for IT outsourcing. There are many theories about outsourcing. The resource-based view fits best within the scope of this thesis, since IT is a valuable resource for online firms. The RBV helps firms to focus on resources/competences and is a good theory to determine how small online firms keep IT resources valuable in an outsourcing relationship. Because of the dynamic nature of both IT and small firms, the dynamic capability view is also discussed.
According to the RBV, a firm may outperform competitors by better addressing the needs of customers through its resources. The early RBV shows the existence of factor markets where firms can create or buy resources they need to compete in their particular markets. Because factor markets are imperfect, the cost of an acquired resource can be lower than the future value of that resource (Barney, 1986).
Competitive advantage can only occur in situations of resource heterogeneity and resource immobility. Resource heterogeneity entails that firms have different bundles of resources that create value. Resource immobility states that this value can stay within one
firm over time. In order for a resource to provide sustained competitive advantage, four conditions must be met. The resource must be valuable so that customers are willing to pay, rare so that scarcity arises, inimitable so that the resource cannot be copied, and
non-substitutable so that the resource cannot be replaced with something else. Valuable, rare, imperfectly imitable, non-substitutable (VRIN) resources can create sustained competitive advantage for a firm (Barney, 1991).
Peteraf (1993) gives four conditions necessary for sustained competitive advantage. The first is resources heterogeneity, which means that firms have access to superior resources that are not available to other firms. The second condition is ex post limits to competition, which means that there should be barriers for other competing firms. The third condition is ex ante limits to competition, which means that the value generated by a resource must exceed the expected value at the time of acquisition in order to generate profit. The fourth condition is imperfect mobility. This is necessary for sustained profits so that the value of a resource can stay within a firm over time. Firms can be seen as a bundle of resources and capabilities that, in the right configuration, can create competitive advantage. The ability to sustain this advantage depends on the firm’s ability to defend and gain important resources. Firms should continuously leverage resources.
Grant (1991) gave a five stage practical framework for a resource-based view of strategy:
Identify and classify the firms resource base, identify the firms capabilities, appraise the rent generating potential of resources and capabilities, select a strategy which best exploits the firms resources and capabilities to external opportunities and fifth extend and upgrade the firms bundle of resources and identify the resource gap. (p. 115) Therefore, to achieve a sustained competitive advantage firms should not just worry about deployment of VRIN resources but also about upgrading and developing these
resources. In order to fully exploit existing bundles of resources, firms should also acquire external complementary resources in order to fill the resource gap. Grant (1991) sees
outsourcing as an RBV perspective to fill this gap. In his view, firms have to choose between developing resources internally and acquiring them externally. It can be very costly to acquire the resources by acquisitions or takeovers. An organization should not limit itself to its own stock of resources and should use outsourcing to acquire new resources. Teng et al. (1995) also described outsourcing as the process of bundling resources.
For IT outsourcing, this means that there can be a gap between the IT resources of a firm and the intended strategy. Outsourcing can be a way to close this gap and
acquire/develop the resources of a firm. Almost every IT product can be acquired externally, in standard packages or through custom development, but resources may not have the same competitive value to all firms. The values may vary because the resources occur in bundles, so the value of the same resources may be spread heterogeneously across firms. This fact is key to a resource-based perspective of IT outsourcing (Duncan, 1998).
Some scholars argue that sustainable competitive advantage requires more than just the ownership of valuable resources. A firm also requires dynamic capabilities to adapt, integrate, and reconfigure bundles of resources to match the needs of a changing environment. The dynamic capability view builds upon the RBV. Compared to the RBV, which focuses on valuable resources, the dynamic capability view focuses on dynamic capabilities that
influence the resources of a company in order to deal with changing environments. Teece et al. (1997) defined dynamic capabilities as “the firm's ability to integrate, build, and
reconfigure internal and external competences to address rapidly changing environments. Dynamic capabilities thus reflect an organization's ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions” (p. 516). Dynamic capabilities are especially important in fast moving business environments to match
the demands of changing environments. Dynamic capabilities can be used to continuously create, extend, upgrade, and protect the company’s resource base. Teece (2007) split dynamic capability into three abilities: “(1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets” (p. 1319). Teece (2007) stated that processes and routines are needed as the foundation for dynamic capacities to acquire technical and evolutionary fitness. Technical fitness is a firm’s ability to respond to the current situation and evolutionary fitness is a firm’s ability to respond to the environment.
For small online firms that are involved in IT outsourcing, this means that they have to create, extend, upgrade, and protect the outsourcing relationship in order to ensure a resource retains its value.
2.4 Outsourcing strategy
Before analyzing the risks and management of IT outsourcing, it is important to understand the more practical reasons why firms outsource. These reasons may play a role in the way firms (should) manage an outsourcing relationship. The following section gives a short overview.
Romualdo and Gurbaxani (1998) described IT improvement, business impact, and commercial exploitation as the three strategic intents for IT outsourcing. IT improvement focuses on reducing the costs and improving the efficiency or quality of IT resources. Business impact focuses on improving the contribution of IT to the performance of a company within its existing lines of business. Commercial exploitation focuses on the
marketing of new technology-based products and services. Firm can pursue more than one IT outsourcing strategy.
According to Lonsdale and Cox (1998), firms have the following four potential motives for outsourcing:
• Focus on core business. By rejecting peripheral activities a firm has more resources left to focus on specific activities that create long-term competitive advantages; • Limit risks. Firms can limit their investment by outsourcing activities that require
large investments. In an outsourcing relationship, it is not the firms that make the investment but the external partner that works for multiple companies;
• Be Flexible. By changing the cost structure from fixed cost to variable cost, a firm is better able to respond to the environment and has more cost transparency;
• Imitate competitors. A company might outsource because all its competitors outsource.
Elmuti (2003) tried to give a complete list of outsourcing strategies by researching 1500 organizations in the United States. The following ten reasons for outsourcing were found:
Reduce costs, improve quality, improve delivery and reliability, gain access to materials only available abroad, establish a presence in foreign market, use resources not available internally, reduce the overall amount of specialized skills and knowledge needed for operations, make capital funds available for more profitable operations, and focus on core competencies of the corporation. (p. 4)
Belcourt (2006) gave “financial savings, strategic focus, access to advanced technology, improved service levels, access to specialized expertise, and organizational politics” (p. 271) as the most important reasons for outsourcing.
Lacity et al. (2009, page 134) reviewed 191 IT outsourcing articles and gave a description of all the IT outsourcing strategies they found in the literature. In addition to managing resource constraints and access to IT resources, all these reasons can play a role in the IT outsourcing decision for small online firms. Table 1 gives an overview of the IT outsourcing strategies they found.
Table 1: IT outsourcing strategies
Outsourcing strategy Outsourcing reason Number
of articles
Cost reduction A client organization’s need or desire to use outsourcing to reduce or control IT costs
39
Focus on core capabilities
A client organization’s desire or need to outsource in order to focus on its core capabilities
24
Access to expertise/skills
A client organization’s desire or need to access supplier(s) skills/expertise
18
Improve
business/process performance
A client organization’s desire or need to engage a supplier to help improve a client’s business, processes, or capabilities
17
Technical reasons A client organization’s desire or need to gain access to leading edge technology through outsourcing
10
Flexibility A client stakeholder’s ability to adapt to change 7 Political reasons A client stakeholder’s desire or need to use an
outsourcing decision to promote personal agendas, such as eliminating a burdensome function, enhancing a career, or maximizing personal financial benefits
5
Change catalyst A client organization’s desire or need to use
outsourcing to bring about large scale changes in the organization
4
Commercial exploitation
A client organization’s desire or need to partner with a supplier to commercially exploit existing client assets or form a new enterprise
3
Scalability A client organization’s desire or need to outsource to be able to scale the volume of IT services based on demand
3
markets markets Alignment of IT and
business strategy
The fit or congruence between a firm’s business strategy (conceptualized as defenders, prospectors, analyzers) and its outsourcing strategy (e.g., arm’s length, independent, and embedded)
2
Cost predictability A client organization’s desire or need to use outsourcing to better predict IT costs
2
Headcount reduction A client organization’s need or desire to use
outsourcing to reduce the number of staff 2 Need to generate cash A client organization’s desire or need to generate cash
through the sale of IT assets to the supplier 2 Rapid delivery A client organization’s desire or need to engage in
outsourcing in order to speedup project delivery 1
2.5 Outsourcing risks
Duncan (1998) described the risks of outsourcing from an RBV perspective. While outsourcing can be a quick way to gain access to a resource, there can be long-term risks for the firm. In an outsourcing relationship, the firm is dependent on the vendor for the resource or capability. Therefore, the firm risks erosion of the resource and could lose the ability to spot rising opportunities associated with that resource. The risks can be divided into three categories: asset or knowledge erosion, loss of control over strategic assets, and loss of flexibility. IT knowledge resources have three dimensions: knowledge of technology,
knowledge of the firm, and knowledge of the competitive environment or industry. Each area may include very specific and detailed information, such as technology characteristics or a history of the firm or industry, but the value of the IT resource may be in the bundle of different knowledge. When a firm outsources IT, it expects to acquire knowledge of
technology or knowledge of the industry. New knowledge is then learned outside the firm at the outsourcing vendor. The knowledge of the outsourcing client becomes dated and the firm risks knowledge erosion. The firm loses the ability to specify growth and change
requirements. Gradually, the benefit of paired firm and technology knowledge is reduced. While knowledge erodes, the control of the firm over the resource also erodes. Knowledge of opportunity and resources must be paired together for the firm to move on a strategic
opportunity. In time, as a firm becomes increasingly dependent on its vendor for
technological industry expertise, it loses control over the resources needed to make strategic moves. This may also result in inflexibility for the firm, since expertise and control are
shared. Both parties must understand and agree to the strategic action before the action can be taken and implemented.
Barthélemy (2003) underlined these risks by naming “Outsourcing activities that should not be outsourced” (p. 87) as the first deadly sin of outsourcing. Firms should not outsource their VRIN resources and capabilities. VRIN resources give a firm a competitive advantage. The costs incurred by erosion of these resources are larger and, therefore, the risk is higher. When a firm outsources (too many) core activities, it is at risk of becoming a “hollow organization” without control over its own resources, leaving just a shell. In time, this can even lead to the downfall of a company.
Belcourt (2006) expressed four downfalls that can occur when firms outsource. The actual benefits might be lower than the projected benefits of the outsourcing project. There is a service risk; the external party will give service as agreed in the contract, but when the need of the company changes, the contract needs to change. This changes the flexibility of the provided service. It is also possible for the vendor to become a competitor through the risk of knowledge spillover. Outsourcing can have a negative effect on the morale and performance of employees. Finally, there is a risk that a firm loses value. If a company outsources too much knowledge and expertise, it can become a hollow company.
Earl (1996) held the client responsible for the success of outsourcing IT, giving the following 11 risks for IT outsourcing:
• Weak management: a firm should be able to manage the IT service in order to successfully manage the outsourcing relationship. If a firm cannot manage the IT resource, outsourcing is not the solution.
• Inexperienced staff: when an activity is outsourced, a portion of the staff still has to work with the vendor. Often an activity is outsourced because of better IT specialists at the vendor end, but the internal staff also plays a huge role.
• Business uncertainty: if a firm decides to outsource IT services because of costs or focus, it is assuming that the firm’s future direction and needs are clear. If the needs change, the need for outsourcing might also change.
• Outdated technology skills: when a company outsources an IT service to a third party, it cannot be sure that the vendor’s skill remains current.
• Endemic uncertainty: IT operations and development have always been inherently uncertain. Users are not sure of their needs, new technology is risky, business requirements change, and implementation is full of surprises.
• Hidden costs: there is always the risk of unexpected hidden costs.
• Organizational learning lack: much learning about the capability of IT is experiential. Organizations tend to learn to manage IT by doing.
• Innovative capacity loss: if the company has outsourced IT services and downsized as well, its ability to innovate may be impaired. Innovation needs slack resources, organic and fluid organizational processes, and experimental and entrepreneurial competences, all attributes that external sourcing does not guarantee.
• Eternal triangle dangers: employees at the vendor end cannot contact the right
employees at the client end and vice versa. Therefore, they are not receiving the right information to enable the right decisions.
• Technology indivisibility: much of IT is not divisible. Current information systems are increasingly integrated and interconnected, and problems can occur at the interface of responsibility between different vendors or between the vendor’s domains and the customer’s domain.
• Fuzzy focus: outsourcing concentrates on the “how” of IT, not on the “what.” It focuses on the supply side, not the demand side. Because it occupies substantial management resources and executive time, it can unwittingly become another form of denominator management rather than revenue creation.
Lacity et al. (2009) reviewed 191 IT outsourcing articles in order to research IT outsourcing risks. They found 43 risks in the first three articles they reviewed, indicating the literature is quite extensive in this section. Table 2 gives the most important IT outsourcing risks from the RBV perspective, derived from the above literature, which best fit the scope of this thesis.
Table 2: IT outsourcing risks IT Outsourcing
Risks
Explanation
Knowledge/asset erosion
Because new knowledge is learned outside the firm, the firm’s
knowledge becomes dated. The firm loses the ability to specify growth and change requirements. This also reduces the benefit of paired firm and technology knowledge. The firm is at risk of losing knowledge that is needed to exploit the IT resource.
Losing control over IT resources
As knowledge erodes a firm becomes increasingly dependent on its vendor for technological expertise and knowledge. In order to recognize and exploit an IT-based opportunity, a firm should have simultaneous knowledge of the opportunity and technological resources. When a firm loses control over the IT resources, it loses the ability to properly move on a strategic opportunity.
Vendor lock Due to knowledge erosion, high switching cost, and resource specificity, a firm might become so dependent on the resources from a vendor that it is unable to change suppliers and is “locked in.” This gives
bargaining power to the vendor and provides the vendor with an incentive to pursue its own interests.
Loss of innovative capability
If a firm becomes dependent on a vendor for knowledge and resources, it might no longer be able to innovate. Innovation needs slack resources, organic and fluid organizational processes, and experimental and
not guarantee. Knowledge
spillover
Because the firm relies on the vendor for a resource, the vendor also learns some firm or market specific knowledge. Knowledge spillover is the risk that the vendor becomes a competitor or that the vendor sells valuable knowledge to a competitor.
Loss of flexibility The introduction of an IT outsourcing vendor with shared expertise and control over the resource makes a firm inflexible, since both parties have to agree and be aware of strategic actions before they can be taken. A firm might also become less flexible because paired knowledge is reduced.
Service risks If the needs of the firm change, The required resources from the vendor are impacted. A vendor might be unwilling or unable to meet the new needs of the firm. This results in a service risk for the firm.
Poor supplier quality/outdated supplier skill
The vendor may deliver low quality services or products, possibly due to the outdated skill of the vendor.
Business
uncertainty If future business direction of the company changes, then the need for IT resources and outsourcing could change as well. Endemic
uncertainty IT operations, development, and resources have always been uncertain. Users are not sure of their needs, new technology is risky, business requirements change, and implementation is full of surprises. Therefore, IT resources are subject to change.
2.6 Managing the outsourcing relationship
When a company has made the decision to outsource, it is important that the client and the vendor manage their outsourcing relationship. The benefits associated with outsourcing will not be achievable unless the risks are managed. Weill and Ross (2004) showed that IT governance directly influences the benefits and risks associated with IT investments. Although there is no previous research about the management or governance of IT
outsourcing for small online firms, it is beneficial to review the existing literature about IT outsourcing management and IT governance to begin exploring the research question.
From Lacity and Hirschheim’s (1993) point of view, outsourcing vendors do not share the same profit motives as their outsourcing clients. They see a tight contract as the only way to ensure that the expectations of an outsourcing relationship are met. Contractual quality helps protect the client from potentially selfish vendor motives and has a huge impact on the outsourcing outcome. Contractual quality reduces the service risks and the risk that the vendor
asks enormous fees for services not provided in the contract. It also gives incentives for value creation because it allows partners to set expectations and to commit themselves to goals (Gulati, 1995). A good contract helps establish a balance of power between the client and the vendor, and it reduces the risks of outsourcing. All the outsourcing customers in Lacity and Hirschheim’s (1993) research agreed that the contract was the most important mechanisms to a successful outsourcing relationship. Barthélemy (2003) suggested a good contract must be precise, complete, and balanced. A contract should be precise because inaccurate contracts often result in more IT costs and low IT quality. Cost and performance requirements should be established at the start and clearly specified in the contract. A contract should be complete. The more complete the contract, the smaller the risk of potential opportunism of the vendor and the smaller the probability that the contract needs to be renegotiated. A contract should be balanced because one-sided contracts, in favor of either the vendor or the client, do not last long. If the client and the vendor can create a win-win situation, a durable relationship should result.
Lee (1996) described the complicated business and legal issues that involve an
outsourcing contract and how to deal with them. An outsourcing contract often includes issues such as service level, transfer of assets staffing, pricing and payment, warranty and liability, dispute resolution mechanisms, termination, intellectual property matters, and information security. The service level agreement should describe the types, scope, and nature of all the services required; the times when these services should be available; the level of performance required and provisions enabling the outsourcing customer to measure the vendor’s
performance; and financial penalties if the vendor delivers quality under the requirements in the contract. In order for the outsourcing vendor to perform its services, IT assets may need to be transferred to the outsourcing vendor. This transfer of assets is dealt with by a sale
In some outsourcing relationships, the transfer of staff from the client to the vendor is needed. Provisions have to be made in the contract to accomplish these transfers. Agreement on pricing, payment terms, and schedules is an important part of the contract. When, how, and to whom payments are made should be described in every thinkable situation, also the amounts and structure of payments involved should be submitted in the contract. Warranty and liability should be part of the contract to indemnify the company for any losses, costs, and liabilities arising from the vendor’s breach of contract. Instead of resorting to legal action every time there is a dispute, proper dispute resolving mechanisms must be part of the outsourcing contract. What happens when the outsourcing relationship is terminated should also be taken into account. In the contract, there should be agreement on the ownership of intellectual property rights of outsourced activities. Lee concludes by stating the importance of agreement as to what type and what level of information security will be provided. A tight contract is the key to a successful relationship while a simple contract often results in problems. If a good contract is in place, its management should not be difficult.
Lacity et al. (2009) reviewed the IT outsourcing literature and found that contractual governance was described most frequently as contract detail, type, duration, and size.
Contract detail is the number or degree of detailed clauses in the outsourcing contract, such as clauses that specify prices, service levels, benchmarking, warranties, and penalties for non-performance. Contract type specifies the forms of contracts used in the outsourcing
relationship. Examples are customized, fixed, time and materials, fee for service, and outcome-based and partnership-based contracts. Contract duration involves the time the outsourcing relationship lasts. Contract duration is measured in years. Lacity et al. (2009) found that short-term contracts had higher success frequencies than long-term contracts. Long-term relationships tend to lose their momentum and enthusiasm. Contract size is measured in dollars. Larger contracts tend to lead to more successful outcomes, but there are
no one-size-fits-all contracts. The actual content of a good contract varies according to the specific situation.
McFarlan and Nolan (1995) suggested viewing the outsourcing agreement as a
strategic alliance and managing it as such. What determines success or failure is managing the relationship less as a contract and more as a strategic alliance. They identified contract
flexibility, standards and control, areas to outsource, costs, supplier stability, and quality and management fit as vital factors in structuring the alliance. It is important that contracts are flexible over longer periods of time. Standards need to be set in order to establish control. Outsourcing can only involve part of the organization, but the parts should be large enough to cover the costs involved. The supplier should be (financially and culturally) stable to deliver quality, and should be willing to invest in innovations. There should be a strategic fit between the companies and a win-win situation for both. McFarlan and Nolan (1995) also described four management functions to manage the alliance: the CIO function, in which the firm must actively manage the partnership, make long-term plans for the alliance, follow emerging technologies, and continue learning; performance measurement, in which the firm should measure the performance of the outsourcing relationship by a set standard; mix and coordination of tasks, in which the best candidates are clearly responsible for given tasks; customer-outsourcer interface, in which the interface between client and vendor should occur at multiple levels by relationship managers.
Ishizaka and Blakiston (2012) invented the 18 Cs outsourcing model to establish a long-term relationship and enhance performance between the firm and vendor based on trust and commitment. The model describes the 18 key factors leading to success in managing an outsourcing relationship. The factors can be split into three categories related to the client, the service provider, and the interaction of both. For the client, it is necessary to have
confidence and comparative treatment” (p. 1075). For the service provider, it is necessary to have “Calibration of the company, competence, clearly defined roles, client knowledge, consistency, continuous improvement, customer focused, continuity and succession planning” (p. 1075) Factors addressing the interaction of both are “contract scale, contract flexibility, connection at the top, cultural fit and two-way communication” (p. 1075).
Barthélemy (2003) described a hard and a soft side of managing IT outsourcing. The hard side refers to the contract, and the soft side refers to trust between the client and vendor. The concept of trust is subtle, diffusive, and elusive. Zaheer et al. (1998) defined trust as the expectation that the vendor will not take advantage of the client and vice versa, even when the opportunity is available. Trust has a positive impact on IT outsourcing because it provides a context in which partners can achieve individual and shared goals. Partners become aware that joint efforts lead to better outcomes. Trust will only develop when there is some kind of interdependence between the client and the vendor (Rousseau et al., 1998). Trust can occur on a personal level or on an organizational level. Organizational trust is known as
institutionalized trust. Thong et al. (1997) found that personal trust seemed to be most
relevant in small and medium enterprises (SME) because the central role of the CEO had been identified as an important factor for IT implementation.
Lacity et al. (2009) reviewed the IT outsourcing literature and also found relational governance as one of three key factors for IT outsourcing success. Relational governance refers to the softer side of managing an outsourcing relationship. It includes trust, norms, open communication, open sharing of information, mutual dependency, and cooperation. Their research showed that a higher level of relational governance is associated with higher levels of IT outsourcing success.
Sabherwal (1999) further developed the construct “trust” in IT an outsourcing relationship and distinguished calculus-based trust, knowledge-based trust,
identification-based trust, and performance-identification-based trust. Calculus-identification-based trust deals with rewards and punishments associated with a particular project. Knowledge-based trust depends on the two parties knowing each other well. Identification-based trust follows from the two parties identifying with each other’s goals. Performance-based trust depends on early project successes. Sabherwal (1999) found that firms should pursue both relational governance and contractual governance to achieve IT outsourcing success. Sabberwal (1999) also found a reciprocal relationship between trust, contractual governance, and IT outsourcing success. Successes developed trust between a client and vendor, and failure led to a decrease in trust. Barthélemy (2003) stated that both the hard and soft sides are key in successful IT
outsourcing. In his paper, Barthélemy spoke of “contractual hazards that characterize IT outsourcing” (p. 540). When contractual hazards are high, the more likely a firm is to prefer the soft side. Many firms use the hard and soft side separately, but both sides can also be used together. IT outsourcing is doomed to fail when a firm is not good at either side. IT outsourcing managed through the soft side scores high on performance, and IT outsourcing managed through the hard side performs well in costs. Firms that are good at both the hard and soft sides have a bigger chance to be successful in both dimensions. Davos et al. (2011) found that trust is slightly more important than control in the governance of IT outsourcing in SMEs.
In the literature, there is a very clear separation between the hard side of outsourcing, which is about contractual governance and control, and the soft side of outsourcing, which is about relational governance and trust. These two forms of governance are developed further in table 3 to best fit the scope of this thesis.
Table 3: Outsourcing governance forms
Contractual governance Relational governance
• Contract detail o Service level
o Transfer of assets staffing o Pricing and payment o Standards and control o Warranty and liability
o Dispute resolution mechanism o Termination
o Intellectual property matters o Information security o Performance Measurement • Trust o Personal trust o Institutional trust § Calculus-based trust § Knowledge-based trust § Identification-based trust § Performance-based trust • Contract type o Customized o Fixed
o Time and materials o Fee for service o Outcome based o Partnership based
• Norms
o Open communication o Two-way communication o Open sharing of information o Cooperation
• Contract duration • The CIO function
• Contract size • Mutual dependency
• Contract flexibility • Commitment from top management • Aims and objectives • Cultural fit
2.7 Research question
There is much literature about outsourcing, why firms outsource and how to manage the outsourcing relationship, but IT outsourcing for small online firms has not been
researched. IT is a valuable resource for an online company, but small firm often lack internal IT resources and turn to IT outsourcing, resulting in large risks. Since these firms often survive, the following research question is proposed: “How do small online firms manage the risks of their IT outsourcing relationship?”
IT Outsourcing Risks • Knowledge/asset
erosion
• Losing control over IT resources • Vendor lock • Loss of innovative capability • Knowledge spillover • Loss of flexibility • Service risks • Poor supplier quality/outdated supplier skill • Business uncertainty • Endemic uncertainty 3. Theoretical framework
The goal of this master’s thesis is to discover how small online firms manage their IT outsourcing relationships. The presented theoretical frameworks in table 4 will be used as a tool and starting point to analyze how small online firms manage the risks of outsourcing relationships. The goal of this framework is to give structure to the research. Afterward, the research expectations and propositions are described.
Table 4: Theoretical framework
The underlying theories for this research are the resource-based view and the dynamic capability view. The RBV states that firms can achieve sustained competitive advantage by better addressing the needs of their customers with company resources. Outsourcing can be a way to acquire resources that are required for sustained competitive advantage. However, outsourcing also comes with risks for the firm’s resources. The mentioned outsourcing risks threaten to reduce the value of the firm’s resources. The RBV and dynamic capability view
Contractual governance • Contract detail • Contract type • Contract duration • Contract size • Contract flexibility • Aims and objectives Relational governance • Trust • Norms
• The CIO function • Mutual
dependency • Commitment from
top management • Cultural fit
The early RBV shows the existence of factors markets where firms can create or buy resources they need to compete in their particular market (Barney, 1986). A vendor can be seen as the market where firms can buy resources. That market is not exclusively available for a single firm. Contractual governance can be used to make agreements about an exclusive partnership between a client and a vendor, preventing other firms from buying that resource from the vendor. Furthermore, if a client buys a specific technology from a vendor and makes contractual agreements that he owns the intellectual property of that technology, other firms cannot access or use that technology. In this way, a firm can reduce competition and ensure that the future value of a resource is higher than the cost of that resource at the time it was acquired.
Peteraf (1993) described the conditions that must be met for a firm to achieve
sustained competitive advantage. For a firm to better address the needs of its customers with its resources there must be resource heterogeneity and immobility. Resource heterogeneity means that firms have access to superior resources that are not available to other firms and resource immobility means that the value of a resource can stay within a firm over time. When a firm engages in an outsourcing relationship, resources and knowledge are shifted to an external party; the firm is dependent on the vendor for the resources and knowledge instead of having them in-house. This threatens the heterogeneity and immobility of valuable resources. This vendor can sell valuable information to competitors or become a competitor itself. If this were to happen, the resources would no longer be exclusively available to the initial firm and might move from that firm to other firms. According to Lacity and
Hirschheim (1993), a contract with hard agreements can help protect the client from a vendor’s selfish motives and bring balance to the relationship. Contractual governance also gives incentives for value creation because it allows partners to set expectations and to commit themselves to goals (Gulati, 1995). Contractual governance can be used to make
agreements that protect the resources of the firm. This would ensure resource heterogeneity and immobility and create ex post limits to competition to protect the resource value of the firm. Therefore, proposition 1 is as follows:
P1: For small online firms, managing the IT outsourcing relationship through
contractual governance is more likely to have a positive impact on the risk management of IT outsourcing.
Trust can be described as the expectation that the vendor will not take advantage of the client, or vice versa, even when the opportunity is available (Zaheer et al., 1998). Trust has a positive impact on IT outsourcing because it provides a context in which partners can achieve individual and shared goals. Partners become aware that joint efforts lead to better outcomes. If there is mutual trust in a relationship, it is also unlikely that the vendor will become a competitor to the firm. Trust protects the resources of the client and ensures resource heterogeneity and immobility.
Grant (1991) described a five stage practical framework from a RBV perspective to create value for a firm. Firms should follow these guidelines to create value:
Identify the firms resource base, identify the firms capabilities, appraise the rent generating potential of resources and capabilities, select a strategy which best exploits the firms resources and capabilities to external opportunities and extend and upgrade the firms bundle of resources and identify the resource gap (Grant, 1991, p. 115). Firms can be seen as bundles of resources and capabilities that, in the right
configuration, can create competitive advantage. Firms should not only worry about the deployment of resources but also about the upgrade and development of the bundle of resources. Because resources are owned in bundles, the value of the same resources may be spread heterogeneously across firms. The ability of a firm to create value also depends on its ability to defend and gain valuable bundles of resources. When valuable IT resources are
moved externally due to an outsourcing relationship, the firm’s bundle of resources is split. This can reduce the value of the resource bundles and might prevent firms from leveraging and upgrading the bundles as a whole. The benefit of paired firm technology and industry knowledge is reduced. According to McFarlan and Nolan (1995), the softer side of managing the relationship lies more in emphasizing cooperation and communication. An outsourcing relationship should be managed like a strategic alliance. This improves the working
relationship and helps companies to cooperate and to blend their bundles of resources so that both companies benefit. Therefore, proposition 2 is as follows:
P2: For small online firms, managing the IT outsourcing relationship through
relational governance is more likely to have a positive impact on the risk management of IT outsourcing.
Teece et al. (1997) said that firms need dynamic capabilities to adapt, integrate, and reconfigure resource bundles to match the needs of a changing environment. Teece (2007) defined a dynamic capability as the ability to sense and shape opportunities and threats, to seize opportunities, and sustain competitiveness through enhancing, combining, protecting, and reconfiguring the business resource bundle. Processes and routines are required as the foundation for dynamic capacities. In the end, dynamic capabilities should lead to technical and evolutionary fitness. Technical fitness is the firm’s ability to respond to the current situation, and evolutionary fitness is the firm’s ability to respond to the environment. A firm needs dynamic capabilities to adapt, integrate, and reconfigure a resource bundle. When valuable IT resources are moved externally due to an outsourcing relationship, a firm’s bundle of resources is split. Therefore, in an outsourcing relationship, the client and vendor need to work together. Dynamic capabilities from both parties are required to adapt, integrate, and reconfigure the resource bundle.
It is important that the client and vendor know each other’s responsibilities. Contractual governance can be used to set working processes that determine how two companies are going to work together. The type of contract determines the nature of the working relationship.
However, setting up work processes is not enough. The client and vendor need to combine their dynamic capacities in order to adapt, integrate, and reconfigure the bundle of resources. Therefore, the client and vendor also need relational governance with more
emphasis on cooperation and trust. Barthélemy (2003) stated that trust creates an environment in which partners can achieve individual and shared goals. Partners become aware that joint efforts lead to better outcomes. Relational governance improves working relationships and helps companies to cooperate and to blend their dynamic capabilities to influence their bundles of resources. Therefore, proposition 3 is as follows:
P3: For small online firms, managing the IT outsourcing relationship through both
contractual and relational governance is more likely to have a positive impact on the risk management of IT outsourcing.
4. Research method
The previous chapters gave a theoretical overview of the literature on IT outsourcing. The existing literature has failed to provide a clear and comprehensive answer to the research question. While contractual and relational governance of IT outsourcing are generally
accepted in the literature as the two main governance forms, there is no clear answer as to how small online firms manage the risks of IT outsourcing. By exploring the literature on IT outsourcing, a theatrical framework for managing the IT outsourcing relationship was proposed in order to create research variables. Managing the outsourcing risks is the
dependent variable and relational and contractual governance are the independent variables. To answer the research question, these variables were observed in real life case studies. This chapter describes the research method used to answer the research question.
4.1 Exploratory study
A multiple in-depth case study was chosen to research the management of IT outsourcing in small online firms. According to Yin (2009) a case study is an empirical enquiry that investigates a contemporary phenomenon within its real-life context. A case study is the preferred research method when “how” or “why” questions are used, when the researcher cannot manipulate the behavior of those involved in the study, or when a
researcher wants to cover contextual conditions because they are relevant to the phenomenon. This argumentation applies to the research question: “How do small online firms manage the risks of IT outsourcing?” The case study’s qualitative findings offer rich data and additional insights into the complex IT outsourcing process that quantitative data cannot easily reveal. Based on the literature present regarding IT outsourcing and the management of IT
applied in this specific situation to further build theory regarding IT outsourcing for small online firms.
4.2 Research setting
Selecting cases using a theoretical sample instead of a random sample (Eisenhardt 1989) is an important technique to provide theoretical insights into phenomena that are not fully explored. Rouse and Daellenbach (1999) also argued that it is better to select significant and high performance firms to analyze specific success factors when conducting in-depth field work instead of relying on large scale studies that employ secondary sources of data. The first cases selected in this research are cases A and B. These cases were selected because they fit the research criteria and the data to be collected was accessible through the researcher’s personal network. The researched phenomenon within these cases is the IT outsourcing relationship these companies have with an outsourcing vendor. To analyze the phenomenon and cases from multiple perspectives, the outsourcing vendors are included in these cases. When the data that was gathered from the first two cases showed signs of saturation, four more cases were selected by snowball sampling. These cases were used as references for the first two cases. Cases C, D, E, and F all fit the criteria of the research question. With regard to Case D, the vendor was also studied.
Case descriptions
Case A is an online restaurant guide where consumers can write reviews about their dining experiences. Website visitors can use this information to find a restaurant to their liking. Case A’s business model is based on paid listings from restaurateurs and
advertisements on their website. Case A has a team of approximately 20 employees. The company outsources the development of its mobile website and mobile applications.
Case B is an online booking platform where consumers can find and book restaurants. Reservations are in real-time. To facilitate this, the company developed an online reservation system for restaurants. Their business model is based on a subscription fee for the use of their system and an admission fee for every booking made on their site. Case B has a team of approximately five employees. The company outsources the development and maintenance of its website and reservation system.
Case C is an online platform designed to find locations for events, such as business meetings and weddings. Its business model is based on booking fees and promotional services for locations. Case C has a team of approximately five employees. The company outsources the development and maintenance of its website.
Case D is an online platform for the self-employed. This platform offers many services to the self-employed, such as administrational tools and a market place. It also has the Freelancer of the Year award, one of its bigger projects. Freelancers and other self-employed individuals can enter a competition to win this award. Case D’s business model is based on a subscription fee. It has a team of approximately ten employees. The company outsources certain tools from their platform and the entire Freelancer of the Year award project.
Case E is an online platform for solar panels. The consumer can receive information about the advantages of solar panels. The company also offers tools to compare the benefits and cost of solar panels. Its business model is partly affiliate-based and partly transaction-based. Case E has a team of approximately ten employees. The company outsources their entire website and all the (comparison) tools on their website.
Case F is an online platform for healthcare providers. Consumers can search and compare healthcare providers. Its business model is based partly on community and partly on
advertisement. Case F has a team of approximately five employees. The company outsources their entire platform and all related IT aspects.
4.3 Data collection (interviews)
This research combines multiple data collections methods and uses interviews and observations. By triangulating the data gathered from different sources, stronger research constructs are assured. Interviews are used as the primary data source because interviews are a highly efficient way to gather rich, empirical data (Eisenhardt and Graebner, 2007). Semi-structured interviews were conducted. Open-ended questions were used as a guideline for the conversations. The interviews consisted of questions about the predetermined construct and sub-constructs derived from the literature but also left room for additional information and deviation from the predetermined questions. Appendix 1 and Appendix 2 show examples of the interview guide for client firms and for vendor firms (Saunders et. al., 2011). The interviews were recorded and fully transcribed afterwards. Interviewees with different
responsibilities and seniority were selected in order to collect data from different perspectives. The interviewees were selected based on their roles in their companies and their roles in the IT outsourcing process. Interviewees and the companies helped in this selection. According to Eisenhardt and Graebner (2007), using numerous informants with different perspectives limits bias. Interviews were also conducted at vendor firms to analyze the IT outsourcing
phenomena from different perspectives. Company documents, such as the outsourcing contract and other available documents about the outsourcing relationship, represent the secondary source of data. The primary data was compared with the secondary data after the interviews.
A total of 15 interviews were conducted with involved personnel from vendor and client firms. First, six interviewees with employees from Case A and their vendor and four
interviewees with personnel from Case B and their vendor where chosen. When the data showed saturation, the interviewees from the other cases were chosen. These cases were selected by snowball sampling. In all these cases, one employee was interviewed. In case D, an employee from the vendor was also interviewed. Table five gives a list of the interviewees.
Table 5: Interviewees
# Case Client Vendor Job title
1 A X Finance Manager
2 A X Product Manager
3 A X Marketing Manager
4 A X Creative Director
5 A X IT Manager
6 A X Commercial Director vendor
7 B X Online Marketing & Development manager
8 B X CEO
9 B X Business Analyst vendor
10 B X Project Director vendor
11 C X CEO
12 D X CEO
13 D X CEO vendor
14 E X CEO
15 F X Operational Manager
The interview guidelines from Saunders et al. (2011) were used to ensure reliability. The interviews started with an introduction about the topic and research. All interviewees were informed about their rights and asked whether the interviews could be recorded. None objected. The interview questions began with introductory questions about the interviewees’ jobs and companies. This was followed by transitional questions about the IT outsourcing projects of their companies and their personal roles in these projects. Then, the key questions were asked. The interviews concluded with questions about their opinions regarding the topic and whether they had anything else to add. Some potential example and prompt questions were also prepared to anticipate specific situations.
