Information Technology Outsourcing Market Research Articles

Research Note—IT Outsourcing and the Impact of Advisors on Clients and Vendors

There is significant information asymmetry in the information technology (IT) outsourcing market. Clients are uncertain about vendors’ capabilities and vendors are uncertain about clients’ requirements. Prior literature has examined many devices to reduce such information asymmetry, e.g., vendor reputation, client-vendor prior relationship, vendors’ Capability Maturity Model (CMM) rating, vendor location, and technological diversity of the vendor. We examine the impact of (to our knowledge) a hitherto unconsidered device, i.e., the use of an advisor. In the context of global sourcing, third-party advisors, with their accumulated knowledge of client requirements and the vendor landscape, can mitigate the information asymmetry between clients and vendors. However, in an extensive data set of IT outsourcing contracts going back two decades we found use of advisors to be rare (less than 5% of contracts go through an advisor). This motivates us to rigorously analyze their impact on clients and vendors as an open empirical question. Using a data set of 753 large IT outsourcing contracts, and through a series of econometric specifications and robustness tests, we establish that the presence of an advisor is associated with higher revenue for vendors and more positive contract outcomes. This analysis presents what is to our knowledge the first concrete evidence that third-party advisors can mitigate the information asymmetry in the IT outsourcing market and lead to better matching that benefits clients as well as vendors.

The Russian and Ukrainian Information Technology Outsourcing Market: Potential, Barriers and Management Considerations

This study describes the advantages and disadvantages of information technology outsourcing to Ukraine and Russia. The results assist technology managers who wish to make an informed decision on whether or not to outsource information technology projects to Russia/Ukraine, considering two important issues: (1) the political, economic, and social landscape, and the advantages and disadvantages of choosing to locate information technology projects in the region and (2) the Russian/Ukrainian information technology workers’ teamwork perceptions. By understanding the countries and the potential information technology workers within that country, organizations should be able to develop management policies to improve chances of success. While the results indicate that well-educated and teamwork-oriented Russian and Ukrainian information technology employees may increase the chances of information technology outsourcing success, the authors remain skeptical regarding the political, economic, legal, social, and business environments.

Special issue on global sourcing of business and IT services

I ncreasing globalization and technological developments have contributed to the growth of the outsourcing and offshoring trends worldwide. These trends started in the late 1980s–early 1990s as Information Technology Outsourcing (ITO). This has been expanding to include Business Processes and Services (BPO), and today also covers a wide range of knowledge-intensive and strategic processes and services. The global IT outsourcing ITO market has increased each year since 1989, when global ITO was only a US$9–$12 billion market. On conservative estimates, looking across a range of reports and studies, global IT outsourcing revenues will probably exceed $290 billion in 2012. With business process outsourcing revenues exceeding $175 billion in the same year, and offshore outsourcing representing more than $85 billion of these combined revenue figures, it is very clear that, with its 20 year plus history, outsourcing of IT and business services is moving into becoming an almost routine part of management, representing for many major corporations and government agencies the greater percentage of their back office expenditures. Moreover, all projections we have looked at or made suggest continued growth over the next 5 years (2012–2016). Our own synthesis of the reports from Everest, Gartner, NASSCOM and IDC suggests that ITO global growth will be in the range of 5–8% per annum, with business process outsourcing rising by 8–12% per annum, and, subsumed within these, offshore outsourcing growing at an even faster annual rate. Client organizations continue to have a strong appetite for contracting with domestic, offshore and global BPO providers, and offshoring remains strong despite some reshoring pressures in developed countries. The year 2011 saw slowing of BPO growth in many markets with a pick up later into 2012. Some, but by no means all, are now experiencing growth rates above 12% per annum. In practice, offshoring and outsourcing often retain their scale through recessionary as well as growth periods, making them attractive businesses for growing economies. A highly competitive global services market presents opportunities and revenues for countries able to offer the right mix of strong cost, reliable service and secure location. The growth of outsourcing and offshoring affects all industries and organizations, and has also attracted the attention of governments and politicians who are frequently found arguing in favour, or against, these phenomena. In Western Europe and North America, opinions are divided between seeing outsourcing as a potential danger, for example, people losing their jobs that are moved offshore, and as potential benefits – lower costs, accessing skills in short supply, supporting increased scale of expanding businesses. In the developing economies – and we have identified over 120 offshore locations for IT and business services – outsourcing and offshoring are usually perceived positively as bringing new business, foreign investment, and facilitating job creation and economic growth in these countries.

Impact of Vendor Selection on Firms’ IT Outsourcing

Information technology (IT) outsourcing is often used as a cost-saving strategy for firms. In IT outsourcing, the choice of vendor is a key factor determining success. This study examines the impact that the choice of IT vendor has on firms’ IT outsourcing in Korea. The authors empirically analyzed the impact of certain characteristics of IT vendors on the market value of client firms in Korea using the event study methodology. First, the authors found that IT outsourcing announcements significantly increased the market value of firms. The authors also found that the market response to high asset-specific services of the IT vendor was significantly greater than the response to low asset-specific services. The authors’ results also showed that the effect of Korean vendors was greater than that of foreign vendors. However, the difference between IT outsourcing to large vendors and small vendors in Korea was not significant, in contrast to the US. The information provided in this study can be used by client firms to select better IT vendors and by IT vendors to develop strategies to survive the rapidly changing IT outsourcing market in Korea.

Country Environments and the Adoption of IT Outsourcing

Research on information technology (IT) outsourcing adoption has been confined to a single-country perspective. The understanding of how country-specific variables influence the adoption of IT outsourcing is limited. This study uses new institutional economics to build a framework that links country-level factors to the adoption of IT domestic outsourcing. The authors suggest that country-level factors, such as the maturity of the IT-related legal system, social trust, uncertainty avoidance, Internet penetration, and the maturity of the IT outsourcing market, affect the opportunism costs and coordination costs involved in domestic IT outsourcing and influence its adoption among firms. The results show that the maturity of the IT-related legal system, social trust, and the maturity of the IT outsourcing market are positively associated with IT outsourcing adoption. The authors conclude the paper with a discussion of the study’s implications for practice and future research.

Survey of IT Outsourcing Experiences in US and UK Organizations

The global IT outsourcing market is estimated to exceed $121 billion by the year 2001. To assess current market practices and experiences, a survey was distributed to 600 US and UK CIOs. The 101 US and UK respondents are generally pleased with information technology (IT) outsourcing. In particular, respondents rated overall supplier performance as "good", respondents mostly realized the benefits they expected from IT outsourcing, and respondents characterized the majority of problems/issues as only "minor" in nature. The healthy IT outsourcing report card is likely explained by the scope and type of IT outsourcing practiced by responding organizations. The vast majority of respondents pursue selective outsourcing which is less risky than total outsourcing. Most respondents also use multiple suppliers rather than a single supplier, which allows for best-of-breed supplier selection. The healthy report card may also be explained by the types of IT activities selected for outsourcing. Respondents generally targeted IT infrastructure activities-such as disaster recovery, mainframe operations, network management, midrange operations, PC support, and help desk operations-rather than IT development or IT strategy. UK and US practices and outcomes were very similar, although a few exceptions are noteworthy. On average, UK organizations (30%) totally insourced IT more frequently than US organizations (8%). US organizations (29%) more frequently used a single supplier than UK organizations (9%). UK organizations (50%) use only one stakeholder to negotiate/define contracts compared to US organizations (9%). Differences may be explained by a more matured approach to outsourcing in the USA together with the higher preponderance of larger deals and organizations studied. Findings are compared to prior survey and case study research.

An Empirical Investigation of Information Technology Sourcing Practices: Lessons from Experience

Following Kodak's landmark information technology (IT) outsourcing decisions in 1989, the IT outsourcing market grew to 76 billion dollars in 1995. As the outsourcing market continues to grow and as new contracting options emerge, the accumulated experiences of firms offer significant opportunities for learning. This paper builds on a previous collection of data on 61 IT sourcing decisions made in 40 U.S. and U.K. organizations during the period 1991 to 1995. This paper reanalyzed transcribed interviews from 145 participants. Using expected cost savings as an indicator of success, five best practices were identified in the case companies. First, selective outsourcing decisions had higher success rates than total outsourcing or total insourcing decisions. Second, senior executives and IT managers who made decisions together had higher success rates than either stakeholder group acting alone. Third, organizations that invited both internal and external bids had higher success rates than organizations that merely compared external bids with current IT costs. Fourth, short-term contracts achieved higher success rates than long-term contracts. Fifth, detailed fee-for-service contracts had higher success rates than other types of fee-for-service contracts. The critical elements of three contracting models are described: fee-for-service contracts, strategic alliances/ partnerships, and buying-in of vendor resources. When the practices generated from the case studies are compared with current practices, we begin to understand which practices are proving robust and why new practices emerge. For example, in the participating companies, the rhetoric of a partnership was misused to describe contracts that are actually fee-for-service contracts. Today, practitioners who understand the inherent conflicts in fixed fee-for-service contracts are demanding what they perceive to be more favorable contracting options, such as flexibly priced contracts, performance-based contracts, and strategic alliances based on shared risks and rewards. This analysis reconciles some of the apparent discrepancies in past findings about the best ways to source IT.

Interpreting information technology sourcing decisions from a transaction cost perspective: Findings and critique

Since Kodak outsourced the majority of its information technology function, the information technology outsourcing market has grown to a $40 billion business. As more companies turn to outsourcing—most recently Xerox and British Aerospace—practitioners are gaining ample experience with both successes and failures. Several academics have proposed that transaction cost theory explains these experiences. We sought to assess the applicability of transaction cost theory to the information technology outsourcing context by analyzing 61 sourcing decisions and outcomes made in 40 U.S. and U.K. organizations. We analyzed over 1000 pages of transcripts generated from 145 interviews with case participants. Mapping participants' experiences to the transaction cost framework of efficient governance structures resulted in anomalies in 87.5% of the cases. We interpret these anomalies from two perspectives. First, transaction cost theory proponents could argue that transaction cost theory does explain the data by dismissing, explaining, or re-interpreting the “apparent” anomalies. Second, transaction cost theory opponents could argue that transaction cost theory does not explain the data by arguing that the theory's assumptions are violated in the context of information technology outsourcing. We believe this debate is important because adoption of theories from other disciplines, such as organizational economics, needs to be critically examined within our own discipline. As adopters of transaction cost theory, we found the language ambiguities and the unit of analysis as two major obstacles to operationalization of transaction cost theory in the context of information technology sourcing.