An investigation into IS outsourcing success: the role of quality and change management
Outsourcing is the implementation hiring outside an organization in order to meet the in-house needs of a firm. In the Information Systems industry, outsourcing is the utilization of the services of external expert agencies to maintain, manage or process internal data and Information systems. Originally, organizations outsourced their IS function to reduce costs. Presently though, firms outsource to attain technological flexibility, eliminate recurrent staffing problems and to buy time to concentrate on competencies. In his article, David Chou points out that a number of studies and reports have shown that IS outsourcing benefitted business operations and corporate profits.
Early research on outsourcing focused on ‘why’ firms outsourced and ‘how’ to go about the outsourcing process. In recent times, research on IS outsourcing is focused on the link between the vendor and client as this association is likely to have an effect on the success of outsourced projects. The article pays keen interest on economic theories and the impact of organizational changes derived from outsourcing. A number of economic theories have been found to support the practice of outsourcing in organizations. As outsourcing becomes a key strategy in the business world, it has become increasingly crucial in the highly competitive business environment, to search for effectual ways of managing the change process in firms.
Information System outsourcing plays a significant strategic role in contemporary IT-based organizations. Hence, in such organizations, finding an appropriate method of managing outsourcing projects becomes a key success factor. The article by David Chou thus pins down to the correlation between the management of changes derived from outsourcing, the effects of outsourcing quality and the success of outsourcing. First, it discusses the theoretical foundation of Information Systems outsourcing and management of change. The author then proposes the research model to demonstrate the relationship between the outsourcing competence, outsourcing quality, transformation process and outsourcing success. Lastly, he proposes five propositions to the Information Systems outsourcing model.
Question 1: Discuss the Theoretical foundation of IS outsourcing as presented in the article
In modern organizations, the practice of outsourcing has been adopted extensively for many reasons. Although cost saving is the prevailing reason, the Outsourcing Institute’s Annual Survey has put forward the following major rationales for outsourcing as identified by end users.
i. Reduction and control of operating costs
ii. Improvement of company focus
iii. Gaining access to first-class capabilities
iv. Freeing of organizational resources for other purposes
v. Unavailability of resources internally
vi. Acceleration of reengineering benefits
vii. Difficulty of function to manage
viii. To make capital funds available
ix. Sharing of risks
x. Infusion of cash
These reasons imply a number of theories including transaction cost theory, resource-based theory, organizational change and management, competitive advantage, financial economics, and risk management and quality issues. Further, these outsourcing reasons can be categorized into three main areas; economic theories, change management and risk and quality issues.
Economic theories
Organizations that implement sourcing strategies to maximize profit would pursue targeted economic principles. The following economic theories can apply to determination of outsourcing;
Production cost economics
According to this theory, while an organization seeks to maximize its profit, it also exposes itself to its production function as well as its market opportunities for buying inputs and selling outputs. In order for a firm to be comparatively advantageous, it should seek cost advantage rather than production process. Production cost economics describes that an organization should rationalize its sourcing options with consideration of its ‘production economies’. We can refer to the notion of ‘production economies’ as a ‘make-or-buy’ choice; an organization’s decision to perform an activity internally or purchase he activity from another organization under contract. With respect to an IS outsourcing circumstance, an organization will choose to outsource or produce internally on the basis of the relative outlay of internalizing ISs in comparison with the price it ought to pay for the same Information System services. Fundamentally, outsourcing strategy in modern firms seeks to pursue a low-cost process of production.
Transaction cost theory
Within an economic organization, there are a number of economic activities that take place external to the price system. Hence ‘transaction costs’ have been identified as costs to using the market that can be done away with by using the organization. Transaction costs in organizational activities encompass the time and cost of negotiation, writing and implementing contracts between suppliers and buyers. In some cases, transaction costs may wear out organization’s relative advantages of production costs.
Resource-based theory
Whereas Transaction cost theory puts forth a stagnant analysis to an organization’s production analysis, Resource-based theory, provides a dynamic analysis to organization’s analysis. According to Resource-based theory the heart of the organization depends on employment and amalgamation of specific inputs as opposed to on evading opportunism. Resource-based theory significantly contributed to the theoretical advancement of outsourcing determination due to the fact that it indicates that an organization may look for external resources for purposes of production provided that it can produce relative cost advantage over its competitors.
Competitive advantage
If organizations engage in only in those activities in which they are most competent, their total output would increase significantly. This principle particularly suits well to the present practice of international outsourcing. Evidently, the subject of competitive advantage has its core on the establishment of economic value. In order for a firm to identify its viable strategy it is crucial to identify its competitive advantages. As outsourcing can save costs and produce adequate economic value, it qualifies as a competitive strategy today’s world of business.
Economies of scale and vertical chain
Economies of scale are essential for the analysis of organizations’ horizontal boundaries. They occur each time large-sized production encompass a cost advantage compared to smaller ones. Economies of scale achieved its consideration in outsourcing practices as it demonstrates the potential of getting cost advantage by producing in large scale. The cost advantage is as a result of effectiveness in the actual operation of activities at higher scale, assuming that a lesser amount of comparative increases in the infrastructure that was required to support such activities. The vertical boundaries of an organization refer to a ‘make-or-buy’ decision which an organization will have to make during its production activities in the vertical chain. If an organization comes to a consensus to ‘make’, production will be done in-house. Conversely, if an organization comes to a consensus to ‘buy’ a particular activity, it will look for an autonomous firm to carry out such work.
Outsourcing competence
So as to efficiently implement outsourcing projects, Chou points out that firm’s must have the following competences; technical knowledge, relationship management, managerial competence and cost management. A smooth process of transformation and change management can only be achieved if a firm has sufficient outsourcing competence. The construct of outsourcing competence is made up of following components: Technical knowledge, Managerial competence, Relationship management and Cost management.
Outsourcing change management
The organizational change model is made up of four major system components: structure, people, task and technology. The system components are all interrelated and mutually dependent on one another. According to Leavitt (1965), change in any of these elements would also cause the other components to change. As a result of IS outsourcing, there have been changes in managerial structures, task, people and relationship, infrastructure and information technology. Consequently, considerable organizational changes have occurred to IS outsourcer.
Change management has the role of ensuring that standardized procedures are put in place to efficiently and promptly handle all changes. Hence, if change management is handled vigilantly, the quality of outsourcing will be high. The construct of outsourcing change management is made up of; Managerial structure change, Task and jobs changes, People and relationship changes, IT and infrastructure changes.
Outsourcing quality
A good quality outsourcing project has to fulfill the requirements of the project that is outsourced. Quality management is the processes that are needed to assure that risks have been managed and the contract is realizing its goals. This quality construct is made up of three dimensions: integration, cooperation and coordination.
Outsourcing success
The ultimate objective to be realized in every Information System outsourcing project is outsourcing. The success of IS outsourcing can be measured using two indicators;
Satisfaction; represents the level of the buyer’s satisfaction with the outsourcing vendor.
Perceived benefits: an outsourcer’s opinion of benefits obtained from a particular outsourcing relationship. The main types of benefits are technological, strategic and economic and benefits.
Discuss the relevance of the propositions for ISs outsourcing success model
In order to successfully handle change management for IS outsourcing, an organization must possess outsourcing competence. Without carefully` recognizing, planning and managing the transformational changes that arise from IS outsourcing, an organization cannot handle change management tasks and thus they cannot realize success in outsourcing. An organization that has the capacity to perform transformational processes can effectively handle the changes arising from the outsourcing process hence streaming the outsourcing process. Hence, the outsourcer will be able to control risks and achieve quality of outsourced projects.
References
Chou, D. C. (2007). An investigation into IS outsourcing success:the role of quality and change management. Information Systems and Change Management , 2 (2).
Leavitt, H. (1965). Applied organizational change in industry. New York: Rand McNally.
Outsourcing Institute. (1998). ‘Survey of current and potential outsourcing end-users'. Retrieved May 18, 2012, from outsourcing.com: http://www.outsourcing.com
