IT Outsourcing: Concepts, Methodologies, Tools, and Applications

IT Outsourcing:

Concepts, Methodologies, Tools, and Applications Kirk St.Amant East Carolina University, USA

Business science reference Hershey • New York

Director of Editorial Content: Kristin Klinger Development Editor Julia Mosemann Senior Managing Editor: Jamie Snavely Managing Editor: Jeff Ash Assistant Managing Editor, MVB: Michael Brehm Assistant Managing Editor: Carole Coulson Typesetters: Jeff Ash, Michael Brehm, Carole Coulson, Elizabeth Duke, Jennifer Johnson, Christopher Hrobak, Jamie Snavely, Sean Woznicki Cover Design: Lisa Tosheff Printed at: Yurchak Printing Inc. Published in the United States of America by Business Science Reference (an imprint of IGI Global) 701 E. Chocolate Avenue Hershey PA 17033 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.igi-global.com/reference and in the United Kingdom by Information Science Reference (an imprint of IGI Global) 3 Henrietta Street Covent Garden London WC2E 8LU Tel: 44 20 7240 0856 Fax: 44 20 7379 0609 Web site: http://www.eurospanbookstore.com Copyright © 2010 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark.

Library of Congress Cataloging-in-Publication Data

IT outsourcing : concepts, methodologies, tools, and applications / Kirk St.Amant, editor. p. ; cm. Includes bibliographical references and index. Summary: "This book covers a wide range of topics involved in the outsourcing of information technology through state-of-the-art collaborations of international field experts"--Provided by publisher. ISBN 978-1-60566-770-6 (hardcover) -- ISBN 978-1-60566-771-3 (ebook) 1. Contracting out. 2. Information technology. I. Kirk, St. Amant. II. Title. HD2365.I8 2009 004.068'4--dc22

2009015818 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book set is original material. The views expressed in this book are those of the authors, but not necessarily of the publisher.

Editor-in-Chief Mehdi Khosrow-Pour, DBA Editor-in-Chief Contemporary Research in Information Science and Technology, Book Series

Associate Editors Steve Clarke University of Hull, UK Murray E. Jennex San Diego State University, USA Annie Becker Florida Institute of Technology USA Ari-Veikko Anttiroiko University of Tampere, Finland

Editorial Advisory Board Sherif Kamel American University in Cairo, Egypt In Lee Western Illinois University, USA Jerzy Kisielnicki Warsaw University, Poland Keng Siau University of Nebraska-Lincoln, USA Amar Gupta Arizona University, USA Craig van Slyke University of Central Florida, USA John Wang Montclair State University, USA Vishanth Weerakkody Brunel University, UK

Additional Research Collections found in the “Contemporary Research in Information Science and Technology” Book Series Data Mining and Warehousing: Concepts, Methodologies, Tools, and Applications John Wang, Montclair University, USA • 6-volume set • ISBN 978-1-60566-056-1 Electronic Business: Concepts, Methodologies, Tools, and Applications In Lee, Western Illinois University • 4-volume set • ISBN 978-1-59904-943-4 Electronic Commerce: Concepts, Methodologies, Tools, and Applications S. Ann Becker, Florida Institute of Technology, USA • 4-volume set • ISBN 978-1-59904-943-4 Electronic Government: Concepts, Methodologies, Tools, and Applications Ari-Veikko Anttiroiko, University of Tampere, Finland • 6-volume set • ISBN 978-1-59904-947-2 Knowledge Management: Concepts, Methodologies, Tools, and Applications Murray E. Jennex, San Diego State University, USA • 6-volume set • ISBN 978-1-59904-933-5 Information Communication Technologies: Concepts, Methodologies, Tools, and Applications Craig Van Slyke, University of Central Florida, USA • 6-volume set • ISBN 978-1-59904-949-6 Intelligent Information Technologies: Concepts, Methodologies, Tools, and Applications Vijayan Sugumaran, Oakland University, USA • 4-volume set • ISBN 978-1-59904-941-0 Information Security and Ethics: Concepts, Methodologies, Tools, and Applications Hamid Nemati, The University of North Carolina at Greensboro, USA • 6-volume set • ISBN 978-1-59904-937-3 Medical Informatics: Concepts, Methodologies, Tools, and Applications Joseph Tan, Wayne State University, USA • 4-volume set • ISBN 978-1-60566-050-9 Mobile Computing: Concepts, Methodologies, Tools, and Applications David Taniar, Monash University, Australia • 6-volume set • ISBN 978-1-60566-054-7 Multimedia Technologies: Concepts, Methodologies, Tools, and Applications Syed Mahbubur Rahman, Minnesota State University, Mankato, USA • 3-volume set • ISBN 978-1-60566-054-7 Virtual Technologies: Concepts, Methodologies, Tools, and Applications Jerzy Kisielnicki, Warsaw University, Poland • 3-volume set • ISBN 978-1-59904-955-7

Free institution-wide online access with the purchase of a print collection!

information science reference Hershey • New York

Order online at www.igi-global.com or call 717-533-8845 ext.100 Mon–Fri 8:30am–5:00 pm (est) or fax 24 hours a day 717-533-7115

List of Contributors

Adya, Monica \ Marquette University, USA................................................................. 1593, 1997, 2404 Afsarmanesh, Hamideh \ University of Amsterdam, The Netherlands.............................................. 364 Agarwal, Ashish \ Carnegie Mellon University, USA........................................................................ 937 Agrawal, Vijay K. \ University of Nebraska - Kearney, USA........................................................ 1, 474 Akella, Ram \ University of California, USA..................................................................................... 578 Albani, Antonia \ Delft University of Technology, The Netherlands.................................................. 731 Amaral, Filipe \ Grupo Sumol, Portugal............................................................................................ 258 An, Lianjun \ IBM T.J. Watson Research, USA................................................................................ 2164 Anantatmula, Vittal S. \ Western Carolina University, USA........................................................... 1954 Araujo, Andre L. \ College of William & Mary, USA........................................................................ 893 Arisoy, Ozlem \ University of Pittsburgh, USA.................................................................................. 267 Arzi, Yohanan \ ORT Braude College, Israel................................................................................... 1935 Askarzai, Walied \ Melbourne Institute of Technology, Australia..................................................... 398 Atkins, Anthony S. \ Staffordshire University, UK..................................................................... 29, 1140 Audy, Jorge Luis Nicolas \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil......... 1723 Balakrishnan, Bindu \ San Jose State University, USA,.................................................................. 1670 Balsters, Herman \ University of Groning, The Netherlands........................................................... 2188 Bartczak, Summer E. \ Air Force Institute of Technology AFIT/ENV, USA.................................... 1664 Basu, Subhajit \ Queen’s University Belfast, Northern Ireland....................................................... 1073 Beaumont, Nicholas \ Monash University, Australia........................................................................... 89 Benamati, John “Skip” \ Miami University, USA............................................................................. 534 Beverakis, Georgia \ University of New South Wales, Australia...................................................... 2317 Bidanda, Bopaya \ University of Pittsburgh, USA............................................................................. 267 Binder, Mario \ Aston University, UK................................................................................................ 387 Bradford, Marianne \ North Carolina State University, USA........................................................... 211 Bryant, Barret R. \ University of Alabama at Birmingham, USA.................................................... 2164 Burton, Brian K. \ Western Washington University, USA................................................................ 1109 Camarinha-Matos, Luis M. \ New University of Lisbon, Portugal.................................................. 364 Cameron, Brian H. \ The Pennsylvania State University, USA....................................................... 1419 Cao, Fei \ University of Alabama at Birmingham, USA.................................................................... 2164 Caporarello, Leonardo \ Bocconi University, Italy......................................................................... 1871 Carpenter, Donald A. \ Mesa State College, USA......................................................................... 1, 474 Cartland, Steve \ HP, Australia........................................................................................................ 2148 Case, Peter \ University of the West of England, UK........................................................................ 1897 Casey, Valentine \ University of Limerick, Ireland........................................................................... 1534

Cata, Teuta \ Northern Kentucky University, USA........................................................................... 1456 Cater-Steel, Aileen \ University of Southern Queensland, Australia............................................... 1447 Cecez-Kecmanovic, Dubravka \ University of New South Wales, Australia.................................. 2317 Chakrabarty, Subrata \ Texas A&M University, USA..................................... 126, 188, 488, 967, 1782 Chen, Tao \ Huazhong University of Science and Technology, China.............................................. 2113 Chen, Yuanyuan \ JS3 Global, LLC................................................................................................. 2253 Chen, Yu-Che \ Iowa State University, USA..................................................................................... 1916 Cherukuri, Suvarna \ Siena College, USA........................................................................................ 426 Choi, Hyung Rim \ Dong-A University, Korea.................................................................................. 654 Clegg, Ben \ Aston University, UK...................................................................................................... 387 Cong, Guodong \ Huazhong University of Science and Technology, China.................................... 2113 Corbitt, Brian J. \ Shinawatra University, Thailand........................................................................ 2237 Crk, Igor \ University of Arizona, USA.............................................................................................. 634 Cunha, Maria Manuela \ Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal................................................................................................................ 1020 Dahab, Sonia \ Universidade Nova de Lisboa, Portugal.................................................................... 258 Dang, Tran Khanh \ National University of Ho Chi Minh City, Vietnam.............................. 2052, 2130 Davison, Robert M. \ City University of Hong Kong, Hong Kong.................................................... 947 Denny, Nathan \ University of Arizona, USA..................................................................................... 836 Dhar, Subhankar \ San Jose State University, USA................................................................. 229, 1670 Dholakia, Nikhilesh \ University of Rhode Island, USA.................................................................. 2265 Dick, Geoffrey N. \ University of New South Wales, Australia........................................................ 2317 do Rosário Alves de Almeida, Maria \ Open University of Lisbon, Portugal.................................. 377 Doldán Tié, Felix R. \ University of A Coruña, Spain...................................................................... 1333 Dottore, Michelle \ San Diego State University, USA...................................................................... 1168 Dowell, Scott J. \ Shirnia & Dowell LLC, USA................................................................................ 1030 Downing, Joe \ Southern Methodist University, USA......................................................................... 910 Eccarius-Kelly, Vera \ Siena College, USA........................................................................................ 426 Efendioglu, Alev M. \ University of San Francisco, USA................................................................ 1409 Eklin, Mark \ Technion - Israel Institute of Technology, Israel....................................................... 1935 England, Ellen C. \ Air Force Institute of Technology AFIT/ENV, USA.......................................... 1664 Evaristo, Roberto \ University of Illinois at Chicago, USA............................................................. 1723 Eze, Uchenna C. \ Multimedia University, Malaysia....................................................................... 1264 Fang, Xiang \ Miami University, USA.............................................................................................. 1557 Feuerlicht, George \ University of Technology, Australia, & University of Economics Prague, Czech Republic........................................................................................................ 929, 2302 Florey, David Ross \ Merrill Lynch Global Business Technology, Singapore.................................... 594 Folz, Jasmine \ Seattle Central Community College, USA............................................................... 1881 Ganguly, Auroop \ Oak Ridge National Laboratory, USA................................................................. 452 Gantz, David A. \ University of Arizona, USA................................................................................... 286 Gapova, Elena \ European Humanities University, Belarus............................................................ 2231 Gillam, Stephen H. \ Accenture, USA.............................................................................................. 1839 Gingras, Robert \ Business Process and Technology Advisor, USA................................................... 211 Goyal, Preeti \ Management Development Institute, India.............................................................. 2378 Goyal, Raj K. \ Harvard Medical School and VA Boston Health Care System, USA...................... 1223 Goyal, Rajneesh \ California State University, USA........................................................................ 1702

Guilloux, Veronique \ Université Paris, France.............................................................................. 1199 Gupta, Amar \ University of Arizona and MIT, USA............................................... 286, 452, 937, 1223 Gupta, Rajen K. \ Management Development Institute, India............................................................. 19 Hauser, Rainer \ IBM Zurich Research, Switzerland....................................................................... 2164 Hickerson, Blake \ Texas Woman’s University, USA............................................................................ 50 Ho, Luke \ Staffordshire University, UK..................................................................................... 29, 1140 Hoecht, Andreas \ University of Portsmouth, UK............................................................................ 1739 Hoelscher, Mark L. \ Illinois State University, USA........................................................................ 1392 Hoffman, James J. \ Texas Tech University, USA............................................................................ 1392 Hollis, Whitney \ University of Arizona, USA.................................................................................. 1189 Hornby, Jonathan \ SAS Institute, USA............................................................................................. 211 Howard, Michael \ Texas Woman’s University, USA............................................................................ 50 Huerta, Esperanza \ Instituto Tecnológico Autónomo de México, Mexico...................................... 1284 Huertas, Paula Luna \ University of Sevilla, Spain......................................................................... 1333 Hussein, Maha \ The American University in Cairo, Egypt............................................................. 1298 Jaiswal, Mahadeo \ Management Development Institute, India...................................................... 2347 Jeng, Jun-Jang \ IBM T.J. Watson Research, USA........................................................................... 2164 Joiner, Keith A. \ University of Arizona, USA.................................................................................. 1223 Kalika, Michel \ Université Paris, France....................................................................................... 1199 Kam, Carol S. P. \ Yahoo! Holding (HK) Ltd, Hong Kong................................................................. 947 Kamel, Sherif \ The American University in Cairo, Egypt............................................................... 1298 Kim, Gyeung-min \ Ewha Womans University, Korea....................................................................... 408 Kim, Hyun Soo \ Dong-A University, Korea...................................................................................... 654 Kim, Saem-Yi \ Ewha Womans University, Korea.............................................................................. 408 Kimble, Chris \ University of York, UK............................................................................................ 1966 King, Kevin \ Clarian Health, USA.................................................................................................... 166 King, William R. \ University of Pittsburgh, USA............................................................................ 1522 Knapp, Karl \ University of Indianapolis, USA................................................................................. 166 Knight, Shaun C. \ The Pennsylvania State University, USA.......................................................... 1419 Kotlarsky, Julia \ University of Warwick, UK........................................................................ 1583, 1656 Kreyling, Jeremy \ University of Arizona, USA................................................................................. 286 Kshetri, Nir \ University of North Carolina at Greensboro, USA.................................................... 2265 Kulkarni, Mahesh \ Center for Development of Advanced Computing, India................................ 2293 Kumar, Rachna \ Alliant International University, USA................................................................. 2099 Kundu, Sumit \ Florida International University, USA................................................................... 2211 Kuruvilla, Sarosh \ Cornell University, USA................................................................................... 1974 Kvinge, Torunn \ Fafo Institute for Labour and Social Research, Norway....................................... 340 Kwak, N. K. \ Saint Louis University, USA........................................................................................ 707 Lai, Kin-Keung \ City University of Hong Kong, China.................................................................. 2113 Langford, John \ University of Victoria, Canada............................................................................ 1360 Lau, Kwok Hung \ Royal Melbourne Institute of Technology University, Australia......................... 763 Lee, Chang Won \ Jinju National University, Korea.......................................................................... 707 Lee, Sooun \ Miami University, USA................................................................................................ 1557 Leeds, Elke \ Kennesaw State University, USA................................................................................ 1839 Leet, Christopher J. M. \ Intuit Inc., USA....................................................................................... 2278 Legorreta, Leonardo \ California State University, USA................................................................ 1702

Lehmann, Hans \ Victoria University of Wellington, New Zealand................................................. 1125 Li, Feng \ University of Newcastle upon Tyne, UK........................................................................... 1966 Li, Yuan \ University of Southern California, USA............................................................................. 947 Lin, Chad \ Curtin University of Technology, Australia................................................................... 1324 Lin, Koong \ National University of Tainan, Taiwan........................................................................ 1324 Logan, Patricia Y. \ Marshall University Graduate College, USA.................................................. 2029 Lojeski, Karen Sobel \ Virtual Distance International, USA........................................................... 1601 Lubbe, Sam \ University of KwaZulu-Natal, South Africa................................................................. 610 Ma, Wun Leong \ Royal Melbourne Institute of Technology University, Australia........................... 763 Maletzky, Martina \ Technische Universtät Berlin, Germany................................................. 310, 1617 Malik, Amit \ Management Development Institute, India................................................................ 1997 Malone, Alan \ Siemens Corporate Research, USA.......................................................................... 1534 Mani, Shivram \ University of Arizona, USA..................................................................................... 836 Martínez López, Francisco Jose \ University of Huelva, Spain...................................................... 1333 Mathiyalakan, Sathasivam \ University of Massachusetts Boston, USA.......................................... 920 McCoy, Jason \ Global Seawater, Inc., USA.................................................................................... 1206 Medlin, B. Dawn \ Appalachian State University, USA................................................................... 1790 Metri, Bhimaraya A. \ Management Development Institute, India................................................. 2378 Mirani, Rajesh \ University of Baltimore, USA.................................................................................. 518 Mishra, Alok \ Atilim University, Turkey.......................................................................................... 1428 Mishra, Deepti \ Atilim University, Turkey....................................................................................... 1428 Misra, Ram B. \ Montclair State University, USA.............................................................................. 996 Mitra, Amit \ TCS Global Consulting Practice, USA......................................................................... 634 Modrák, Vladimír \ Technical University of Košice, Slovakia.......................................................... 754 Mohapatra, Partha S. \ Morgan State University, USA..................................................................... 110 Moore, Sarah \ University of Limerick, Ireland............................................................................... 1534 Morrison, Marshelle \ Texas Woman’s University, USA...................................................................... 50 Mukherji, Sourav \ IIM Bangalore, India.......................................................................................... 452 Müssigmann, Nikolaus \ University of Augsburg, Germany............................................................. 731 Nadella, Ravi Sheshu \ University of Arizona, USA.......................................................................... 836 Nasem Morgan, Jeanette \ Duquesne University, USA................................................................... 1807 Nath, Dhruv \ Management Development Institute, India..................................................... 1997, 2404 Neubauer, Bruce J. \ University of South Florida, USA.................................................................... 782 Niederman, Fred \ Saint Louis University, USA.............................................................................. 2211 Noles, Debra \ Marshall University Graduate College, USA........................................................... 2029 Oshri, Ilan \ Erasmus University, The Netherlands................................................................ 1583, 1656 Ozcelik, Yasin \ Fairfield University, USA.......................................................................................... 371 Pai, Arjun K. \ Queen’s University Belfast, Northern Ireland.......................................................... 1073 Park, Byung Joo \ Dong-A University, Korea.................................................................................... 654 Park, Yong Sung \ Catholic University of Busan, Korea................................................................... 654 Patki, A. B. \ Department of Information Technology, India.................................................... 815, 2293 Patki, Tapasya \ GGSIP University, India, & University of Arizona, USA ............................. 815, 2293 Pennarola, Ferdinando \ Bocconi University, Italy......................................................................... 1871 Piñeiro, Erik \ Royal Institute of Technology of Stockholm, Sweden............................................... 1897 Pires, Iva Miranda \ Faculdade Ciências Sociais e Humanas, Portugal.......................................... 340 Pollack, Jeffrey M. \ Virginia Commonwealth University, USA........................................................ 902

Powell, Philip \ University of Bath, UK............................................................................................ 1098 Prikladnicki, Rafael \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil................. 1723 Putnik, Goran D. \ University of Minho, Portugal.......................................................................... 1020 Qiu, Robin G. \ The Pennsylvania State University, USA.................................................................... 71 Raisinghani, Mahesh S. \ Texas Woman’s University, USA................................................................. 50 Rajkumar, T.M. \ Miami University, USA.......................................................................................... 534 Ranganathan, Aruna \ Cornell University, USA............................................................................. 1974 Reilly, Richard R. \ Stevens Institute of Technology, USA............................................................... 1601 Richardson, Ita \ University of Limerick, Ireland............................................................................ 1534 Romaniello, Adriana \ Universidad Rey Juan Carlos, Spain.......................................................... 1790 Ross, Steven C. \ Western Washington University, USA................................................................... 1109 Rouse, Anne C. \ Deakin University, Australia............................................ 158, 276, 1648, 2237, 2335 Roussev, Boris \ University of the Virgin Islands, U.S. Virgin Islands............................................... 578 Rowe, Michelle \ Edith Cowan University, Australia....................................................................... 1258 Roy, Jeffrey \ Dalhousie University, Canada................................................................................... 1360 Ruiz Ben, Esther \ Technische Universität Berlin, Germany................................................... 310, 2082 Ryan, Geraldine \ University College Cork, Ireland........................................................................ 1829 Sabbaghi, Asghar \ Indiana University South Bend, USA................................................................. 679 Sabri, Ehap H. \ University of Texas at Dallas, USA......................................................................... 853 Saini, Sanjay \ Harvard Medical School and Massachusetts General Hospital, USA..................... 1223 Salas, Silvia \ Florida International University, USA....................................................................... 2211 Samdal, Jamie \ University of Arizona, USA...................................................................................... 836 Samson, Danny \ University of Melbourne, Australia...................................................................... 1379 Samuel, Delyth \ University of Melbourne, Australia...................................................................... 1379 Sánchez, Carlos Piñeiro \ University of A Coruña, Spain............................................................... 1333 Sando, Shawna \ University of Arizona, USA.................................................................................. 1504 Sarx, Johannes \ ALCIMED, France............................................................................................... 1206 Scavo, Carmine \ East Carolina University, USA............................................................................ 1371 Schwaig, Kathy Stewart \ Kennesaw State University, USA........................................................... 1839 Schwender, Alyssa D. \ Lions Gate Entertainment, USA................................................................. 2278 Seshasai, Satwik \ International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA........................................................................................................... 452 Sharma, Suresh \ JS3 Global, LLC.................................................................................................. 2253 Sharma, Sushil \ Ball State University, USA...................................................................................... 166 Sheng, Margaret L. \ Hamline University, USA.............................................................................. 1008 Shinnick, Edward \ University College Cork, Ireland..................................................................... 1829 Shtub, Avraham \ Technion - Israel Institute of Technology, Israel................................................. 1935 Singh, Param Vir \ University of Washington, USA........................................................................... 796 Sinha, Tapen \ Instituto Technológico Autónomo de México, Mexico, & University of Nottingham, UK......................................................................................................... 350 Sixsmith, Alan \ University of Technology Sydney, Australia.......................................................... 1514 Sofiane Tebboune, D. E. \ Manchester Metropolitan University, UK.............................................. 2389 Sorensen, Dane \ Raytheon Missile Systems, USA............................................................................. 634 Spencer, Steve \ San Diego State University, USA........................................................................... 1168 Sreecharana, Devin \ University of Arizona, USA............................................................................. 286 Sridhar, Varadharajan \ Management Development Institute, India.......................... 1060, 1997, 2404

Srivastava, Shirish C. \ National University of Singapore, Singapore.............................................. 110 St.Amant, Kirk \ East Carolina University, USA................................................. 876, 1609, 2020, 2045 Starr, Brandi \ Texas Woman’s University, USA................................................................................... 50 Subhadra, K. \ ICICI Bank, India...................................................................................................... 350 Suomi, Reima \ Turku School of Economics and Business Administration, Finland....................... 1247 Swaminathan, Manish \ University of Arizona, USA........................................................................ 836 Tachibana, Eric \ National University of Singapore, Singapore........................................................ 594 Tai, Jeffrey C. F. \ National Central University, Taiwan.................................................................. 1473 Tao, Tao \ IBM T.J. Watson Research, USA...................................................................................... 2164 Tarnay, Katalin \ University of Pannonia, Hungary........................................................................ 1048 Taylor, Hazel \ University of Washington, USA................................................................................ 1759 Teo, Thompson S. H. \ National University of Singapore, Singapore............................................... 110 Terjesen, Siri \ Queensland University of Technology, Australia..................................................... 1857 Trott, Paul \ University of Portsmouth, UK...................................................................................... 1739 Turner, Jason M. \ Air Force Institute of Technology, USA............................................................. 1664 Tyan, Jonah C. \ Taiwan Semiconductor Manufacturing Company, Taiwan..................................... 721 Tyran, Craig K. \ Western Washington University, USA.................................................................. 1109 Unhelkar, Bhuvan \ MethodScience.com & University of Western Sydney, Australia....................... 398 Vaidyanathan, Ganesh \ Indiana University South Bend, USA................................................. 618, 679 van Fenema, Paul C. \ Netherlands Defense Academy, The Netherlands.............................. 1583, 1656 Vassiliadis, Bill \ Hellenic Open University, Greece........................................................................ 2363 Vidgen, Richard \ University of Bath, UK....................................................................................... 1098 Vorisek, Jiri \ University of Economics Prague, Czech Republic............................................ 929, 2302 Walden, Eric A. \ Texas Tech University, USA......................................................................... 796, 1392 Wang, Eric T. G. \ National Central University, Taiwan................................................................. 1473 Wang, Kai \ Ming Chuan University, Taiwan................................................................................... 1473 Wang, Yue \ University of New South Wales, Australia.................................................................... 1924 Werth, Dirk \ Institute for Information Systems at the German Research Center for Artificial Intelligence, Germany.............................................................................................. 1399 Wieandt, Michaela \ Technische Universtät Berlin, Germany........................................................... 310 Woerndl, Maria \ University of Bath, UK........................................................................................ 1098 Xu, Lai \ Utrecht University, The Netherlands................................................................................... 558 Yadav, Vanita \ Management Development Institute, India............................................. 19, 2347, 2404 Yamaguti, Marcelo Hideki \ Pontifícia Universidade Católica do Rio Grande do Sul, Brazil...... 1723 Yoder, Robert C. \ Siena College, USA.............................................................................................. 426 Zage, Dolores \ Ball State University, USA...................................................................................... 1534 Zaha, Johannes Maria \ Queensland University of Technology, Australia....................................... 731 Zhang, Jinlong \ Huazhong University of Science and Technology, China..................................... 2113 Zhao, Wei \ University of Alabama at Birmingham, USA................................................................ 2164

Contents

Volume I Section I. Fundamental Concepts and Theories This section serves as the foundation for this exhaustive reference tool by addressing crucial theories essential to the understanding of IT outsourcing. Chapters found within these pages provide an excellent framework in which to position outsourcing within the field of information science and technology. Individual contributions provide overviews of why, when, and what to outsource, business determinants of offshoring intensity, and global IT outsourcing, while also exploring critical stumbling blocks of this field. Within this introductory section, the reader can learn and choose from a compendium of expert research on the elemental theories underscoring the research and application of outsourcing. Chapter 1.1. Why, When, and What to Outsource................................................................................... 1 Donald A. Carpenter, Mesa State College, USA Vijay K. Agrawal, University of Nebraska - Kearney, USA Chapter 1.2. A Paradigmatic and Methodological Review of Research in Outsourcing....................... 19 Vanita Yadav, Management Development Institute, India Rajen K. Gupta, Management Development Institute, India Chapter 1.3. IT Outsourcing: Impacts and Challenges.......................................................................... 29 Luke Ho, Staffordshire University, UK Anthony S. Atkins, Staffordshire University, UK Chapter 1.4. Information Technology/Systems Offshore Outsourcing: Key Risks and Success Factors.............................................................................................................. 50 Mahesh S. Raisinghani, Texas Woman’s University, USA Brandi Starr, Texas Woman’s University, USA Blake Hickerson, Texas Woman’s University, USA Marshelle Morrison, Texas Woman’s University, USA Michael Howard, Texas Woman’s University, USA

Chapter 1.5. Information Technology as a Service................................................................................ 71 Robin G. Qiu, The Pennsylvania State University, USA Chapter 1.6. Offshoring: Evolution or Revolution?............................................................................... 89 Nicholas Beaumont, Monash University, Australia Chapter 1.7. Business-Related Determinants of Offshoring Intensity................................................. 110 Shirish C. Srivastava, National University of Singapore, Singapore Thompson S.H. Teo, National University of Singapore, Singapore Partha S. Mohapatra, Morgan State University, USA Chapter 1.8. Making Sense of the Sourcing and Shoring Maze: Various Outsourcing and Offshoring Activities................................................................................... 126 Subrata Chakrabarty, Texas A&M University, USA Chapter 1.9. Information Technology Outsourcing............................................................................. 158 Anne C. Rouse, Deakin University, Australia Chapter 1.10. Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology: Practitioner and Academic Perspectives................................................. 166 Karl Knapp, University of Indianapolis, USA Sushil Sharma, Ball State University, USA Kevin King, Clarian Health, USA Chapter 1.11. Strategies for Business Process Outsourcing: An Analysis of Alternatives, Opportunities, and Risks........................................................................ 188 Subrata Chakrabarty, Texas A&M University, USA Chapter 1.12. Business Process Reengineering and ERP: Weapons for the Global Organization...... 211 Marianne Bradford, North Carolina State University, USA Robert Gingras, Business Process and Technology Advisor, USA Jonathan Hornby, SAS Institute, USA Chapter 1.13. Global IT Outsourcing: Current Trends, Risks, and Cultural Issues............................. 229 Subhankar Dhar, San Jose State University, USA Chapter 1.14. Outsourcing and Strategic Outsourcing........................................................................ 258 Sonia Dahab, Universidade Nova de Lisboa, Portugal Filipe Amaral, Grupo Sumol, Portugal Chapter 1.15. Strategic Decision Making in Global Supply Networks............................................... 267 Ozlem Arisoy, University of Pittsburgh, USA Bopaya Bidanda, University of Pittsburgh, USA Chapter 1.16. An Overview of IT Outsourcing in Public-Sector Agencies......................................... 276 Anne C. Rouse, Deakin University, Australia

Chapter 1.17. Evolving Relationship between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations........................................................................ 286 Amar Gupta, University of Arizona, USA David A. Gantz, University of Arizona, USA Devin Sreecharana, University of Arizona, USA Jeremy Kreyling, University of Arizona, USA Chapter 1.18. Offshoring in the ICT Sector in Europe: Trends and Scenario Analysis....................... 310 Esther Ruiz Ben, Technische Universtät Berlin, Germany Michaela Wieandt, Technische Universtät Berlin, Germany Martina Maletzky, Technische Universtät Berlin, Germany Chapter 1.19. Scales and Dynamics in Outsourcing............................................................................ 340 Iva Miranda Pires, Faculdade Ciências Sociais e Humanas, Portugal Torunn Kvinge, Fafo Institute for Labour and Social Research, Norway Chapter 1.20. Sourcing and Outsourcing Arithmetic........................................................................... 350 Tapen Sinha, Instituto Technológico Autónomo de México, Mexico & University of Nottingham, UK K. Subhadra, ICICI Bank, India Chapter 1.21. Classes of Collaborative Networks............................................................................... 364 Luis M. Camarinha-Matos, New University of Lisbon, Portugal Hamideh Afsarmanesh, University of Amsterdam, The Netherlands Chapter 1.22. IT-Enabled Reengineering: Productivity Impacts......................................................... 371 Yasin Ozcelik, Fairfield University, USA Chapter 1.23. The New Process of Work............................................................................................. 377 Maria do Rosário Alves de Almeida, Open University of Lisbon, Portugal Section II. Development and Design Methodologies This section provides in-depth coverage of conceptual architectures, frameworks and methodologies related to the design and implementation of outsourcing projects. Throughout these contributions, research fundamentals in the discipline are presented and discussed. From broad examinations to specific discussions on particular frameworks and infrastructures, the research found within this section spans the discipline while also offering detailed, specific discussions. Basic designs, as well as abstract developments, are explained within these chapters, and frameworks for designing and planning for successful outsourcing systems, structures, and architectures are presented in these chapters. Chapter 2.1. Managing the Dynamic Reconfiguration of Enterprises................................................. 387 Ben Clegg, Aston University, UK Mario Binder, Aston University, UK

Chapter 2.2. Strategic Approach to Globalization with Mobile Business........................................... 398 Walied Askarzai, Melbourne Institute of Technology, Australia Bhuvan Unhelkar, MethodScience.com & University of Western Sydney, Australia Chapter 2.3. Exploratory Study on Effective Control Structure in Global Business Process Sourcing................................................................................................... 408 Gyeung-min Kim, Ewha Womans University, Korea Saem-Yi Kim, Ewha Womans University, Korea Chapter 2.4. Understanding Global Information Technology and Outsourcing Dynamics: A Multi-Lens Model............................................................................................................................ 426 Robert C. Yoder, Siena College, USA Vera Eccarius-Kelly, Siena College, USA Suvarna Cherukuri, Siena College, USA Chapter 2.5. Offshoring: The Transition from Economic Drivers Toward Strategic Global Partnership and 24-Hour Knowledge Factory.......................................................... 452 Amar Gupta, University of Arizona, USA Satwik Seshasai, International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA Sourav Mukherji, IIM Bangalore, India Auroop Ganguly, Oak Ridge National Laboratory, USA Chapter 2.6. Planning for Information Systems Outsourcing.............................................................. 474 Vijay K. Agrawal, University of Nebraska - Kearney, USA Donald A. Carpenter, Mesa State College, USA Chapter 2.7. The Journey to New Lands: Utilizing the Global IT Workforce through Offshore-Insourcing............................................................................................................... 488 Subrata Chakrabarty, Texas A&M University, USA Chapter 2.8. Client-Vendor Relationships in Offshore Applications Development: An Evolutionary Framework............................................................................................................... 518 Rajesh Mirani, University of Baltimore, USA Chapter 2.9. An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing Decisions........................................................................... 534 John “Skip” Benamati, Miami University, USA T.M. Rajkumar, Miami University, USA Chapter 2.10. Outsourcing and Multi-Party Business Collaborations Modeling................................ 558 Lai Xu, Utrecht University, The Netherlands Chapter 2.11. Agile Outsourcing Projects: Structure and Management.............................................. 578 Boris Roussev, University of the Virgin Islands, U.S. Virgin Islands Ram Akella, University of California, USA

Chapter 2.12. Object-Oriented Software Design Patterns Applied to Management Theory............... 594 Eric Tachibana, National University of Singapore, Singapore David Ross Florey, Merrill Lynch Global Business Technology, Singapore Chapter 2.13. The Creation of a Commercial Software Development Company in a Developing Country for Outsourcing Purposes............................................................................ 610 Sam Lubbe, University of KwaZulu-Natal, South Africa

Volume II Chapter 2.14. Networked Knowledge Management Dimensions in Distributed Projects................... 618 Ganesh Vaidyanathan, Indiana University South Bend, USA Chapter 2.15. Leveraging Knowledge Reuse and Systems Agility in the Outsourcing Era................ 634 Igor Crk, University of Arizona, USA Dane Sorensen, Raytheon Missile Systems, USA Amit Mitra, TCS Global Consulting Practice, USA Chapter 2.16. A Multi-Agent System for Optimal Supply Chain Management.................................. 654 Hyung Rim Choi, Dong-A University, Korea Hyun Soo Kim, Dong-A University, Korea Yong Sung Park, Catholic University of Busan, Korea Byung Joo Park, Dong-A University, Korea Chapter 2.17. Integration of Global Supply Chain Management with Small to Medium Suppliers......................................................................................................... 679 Asghar Sabbaghi, Indiana University South Bend, USA Ganesh Vaidyanathan, Indiana University South Bend, USA Chapter 2.18. An Application of Multi-Criteria Decision-Making Model for Strategic Outsourcing for Effective Supply-Chain Linkages......................................................... 707 N. K. Kwak, Saint Louis University, USA Chang Won Lee, Jinju National University, Korea Chapter 2.19. Using Collaborative Transportation Management in Global Supply Chain................. 721 Jonah C. Tyan, Taiwan Semiconductor Manufacturing Company, Taiwan Chapter 2.20. A Reference Model for Strategic Supply Network Development................................. 731 Antonia Albani, Delft University of Technology, The Netherlands Nikolaus Müssigmann, University of Augsburg, Germany Johannes Maria Zaha, Queensland University of Technology, Australia Chapter 2.21. Virtual Logistics from Outsourcing Logistics............................................................... 754 Vladimír Modrák, Technical University of Košice, Slovakia

Chapter 2.22. A Supplementary Framework for Evaluation of Integrated Logistics Service Provider.............................................................................................. 763 Kwok Hung Lau, Royal Melbourne Institute of Technology University, Australia Wun Leong Ma, Royal Melbourne Institute of Technology University, Australia Chapter 2.23. Web Services and Service-Oriented Architectures........................................................ 782 Bruce J. Neubauer, University of South Florida, USA Chapter 2.24. Is the Business Model Broken? A Model of the Difference Between Pay-Now and Pay-Later Contracts in IT Outsourcing.......................................................... 796 Eric Walden, Texas Tech University, USA Param Vir Singh, University of Washington, USA Section III. Tools and Technologies This section presents extensive coverage of the tools and technologies that both derive from and inform IT outsourcing. These chapters provide an in-depth analysis of the use and development of innumerable devices and tools, while also providing insight into new and upcoming technologies, theories, and instruments that will soon be commonplace. Within these rigorously researched chapters, readers are presented with examples of the tools that facilitate and support continued developments and advancements in outsourcing research. In addition, the successful implementation and resulting impact of these various tools and technologies are discussed within this collection of chapters. Chapter 3.1. Innovative Technological Paradigms for Corporate Offshoring..................................... 815 Tapasya Patki, GGSIP University, India A. B. Patki, Department of Information Technology, India Chapter 3.2. Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies..... 836 Nathan Denny, University of Arizona, USA Shivram Mani, University of Arizona, USA Ravi Sheshu Nadella, University of Arizona, USA Manish Swaminathan, University of Arizona, USA Jamie Samdal, University of Arizona, USA Chapter 3.3. Best Practice in Leveraging E-Business Technologies to Achieve Business Agility...... 853 Ehap H. Sabri, University of Texas at Dallas, USA Chapter 3.4. Open Source and Outsourcing: A Perspective on Software Use and Professional Practices Related to International Outsourcing Activities........................................ 876 Kirk St.Amant, East Carolina University, USA Chapter 3.5. Instrumental and Social Influences on Adoption of Collaborative Technologies in Global Virtual Teams................................................................................................. 893 Andre L. Araujo, College of William & Mary, USA

Chapter 3.6. Improving Employee Selection with Online Testing...................................................... 902 Jeffrey M. Pollack, Virginia Commonwealth University, USA Chapter 3.7. Why First-Level Call Center Technicians Need Knowledge Management Tools........... 910 Joe Downing, Southern Methodist University, USA Chapter 3.8. Application Service Providers......................................................................................... 920 Sathasivam Mathiyalakan, University of Massachusetts Boston, USA Chapter 3.9. Enterprise Application Service Model............................................................................ 929 George Feuerlicht, University of Technology, Australia Jiri Vorisek, University of Economics, Czech Republic Chapter 3.10. Role of Wireless Grids in Outsourcing and Offshoring: Approaches, Architectures, and Technical Challenges........................................................................ 937 Ashish Agarwal, Carnegie Mellon University, USA Amar Gupta, University of Arizona and MIT, USA Chapter 3.11. Web-Based Data Collection in China............................................................................ 947 Robert M. Davison, City University of Hong Kong, Hong Kong Yuan Li, University of Southern California, USA Carol S. P. Kam, Yahoo! Holding (HK) Ltd, Hong Kong Section IV. Utilization and Application This section introduces and discusses the ways in which outsourcing has been used to revolutionize the modern face of business and proposes new ways in which services, goods, and systems can be outsourced. These particular selections highlight, among other topics, sourcing decisions in small companies, outsourcing in the healthcare industry, and virtual environments. Contributions included in this section provide excellent coverage of today’s global environment and insight into how the study and implementation of outsourcing projects impacts the fabric of our present-day global village. Chapter 4.1. Real Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms................................................................................................................. 967 Subrata Chakrabarty, Texas A&M University, USA Chapter 4.2. The Use of Outsourcing as a Business Strategy: A Case Study...................................... 996 Ram B. Misra, Montclair State University, USA Chapter 4.3. Global Integrated Supply Chain Implementation: The Challenges of E-Procurement.....1008 Margaret L. Sheng, Hamline University, USA Chapter 4.4. Environments for VE Integration.................................................................................. 1020 Maria Manuela Cunha, Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal Goran D. Putnik, University of Minho, Portugal

Chapter 4.5. Enterprise Architecture within the Service-Oriented Enterprise................................... 1030 Scott J. Dowell, Shirnia & Dowell LLC, USA Chapter 4.6. Telecommunication Management Protocols................................................................. 1048 Katalin Tarnay, University of Pannonia, Hungary Chapter 4.7. Strategic Outsourcing: Opportunities and Challenges for Telecom Operators............. 1060 Varadharajan Sridhar, Management Development Institute, India Chapter 4.8. Emerging Legal Challenges in Offshore Outsourcing of IT-Enabled Services............ 1073 Arjun K. Pai, Queen’s University Belfast, Northern Ireland Subhajit Basu, Queen’s University Belfast, Northern Ireland Chapter 4.9. Exploring ASP Sourcing Decisions in Small Firms...................................................... 1098 Maria Woerndl, University of Bath, UK Philip Powell, University of Bath, UK Richard Vidgen, University of Bath, UK Chapter 4.10. Make, Source, or Buy: The Decision to Acquire a New Reporting System............... 1109 Steven C. Ross, Western Washington University, USA Brian K. Burton, Western Washington University, USA Craig K. Tyran, Western Washington University, USA Chapter 4.11. European International Freight Forwarders: Information as a Strategic Product....... 1125 Hans Lehmann, Victoria University of Wellington, New Zealand Chapter 4.12. IT Portfolio Management: A Holistic Approach to Outsourcing Decisions................ 1140 Luke Ho, Staffordshire University, UK Anthony S. Atkins, Staffordshire University, UK Chapter 4.13. A Collaborative Learning Environment to Support Distance Learning Students in Developing Nations.......................................................................... 1168 Michelle Dottore, San Diego State University, USA Steve Spencer, San Diego State University, USA Chapter 4.14. The Role of Prisons in Offshoring.............................................................................. 1189 Whitney Hollis, University of Arizona, USA Chapter 4.15. Human Resources Outsourcing Strategies.................................................................. 1199 Veronique Guilloux, Université Paris, France Michel Kalika, Université Paris, France Chapter 4.16. Offshoring in the Pharmaceutical Industry................................................................. 1206 Jason McCoy, Global Seawater, Inc., USA Johannes Sarx, ALCIMED, France

Chapter 4.17. Outsourcing in the Healthcare Industry: Information Technology, Intellectual Property, and Allied Aspects........................................................................................... 1223 Amar Gupta, University of Arizona, USA Raj K. Goyal, Harvard Medical School and VA Boston Health Care System, USA Keith A. Joiner, University of Arizona, USA Sanjay Saini, Harvard Medical School and Massachusetts General Hospital, USA

Volume III Chapter 4.18. Governing Health Care with IT................................................................................... 1247 Reima Suomi, Turku School of Economics and Business Administration, Finland Chapter 4.19. The Role of Multinationals in Recent IT Developments in China.............................. 1258 Michelle Rowe, Edith Cowan University, Australia Chapter 4.20. E-Business Deployment in Nigerian Financial Firms: An Empirical Analysis of Key Factors.............................................................................................. 1264 Uchenna C. Eze, Multimedia University, Malaysia Chapter 4.21. Fotogenika.com: A Small Virtual Organization Serving the Mexican Market........... 1284 Esperanza Huerta, Instituto Tecnológico Autónomo de México, Mexico Chapter 4.22. Xceed: Pioneering the Contact Center Industry in Egypt........................................... 1298 Sherif Kamel, The American University in Cairo, Egypt Maha Hussein, The American University in Cairo, Egypt Chapter 4.23. IT Outsourcing Practices in Australia and Taiwan...................................................... 1324 Chad Lin, Curtin University of Technology, Australia Koong Lin, National University of Tainan, Taiwan Chapter 4.24. Information Systems/Information Technology Outsourcing in Spain: A Critical Empirical Analysis............................................................................................................ 1333 Felix R. Doldán Tié, University of A Coruña, Spain Paula Luna Huertas, University of Sevilla, Spain Francisco Jose Martínez López, University of Huelva, Spain Carlos Piñeiro Sánchez, University of A Coruña, Spain Chapter 4.25. E-Government, Service Transformation, and Procurement Reform in Canada.......... 1360 John Langford, University of Victoria, Canada Jeffrey Roy, Dalhousie University, Canada Chapter 4.26. Development and Use of the World Wide Web by U.S. Local Governments............. 1371 Carmine Scavo, East Carolina University, USA Chapter 4.27. Government Insurer Enters the Brave New World, A................................................. 1379 Delyth Samuel, University of Melbourne, Australia Danny Samson, University of Melbourne, Australia

Section V. Organizational and Social Implications This section includes a wide range of research pertaining to the social and organizational impact of outsourcing around the world. This chapter begins with an analysis of the role of social capital in outsourcing, while later contributions offer an extensive analysis of organizational development, process improvement, and workplace ethics. The inquiries and methods presented in this section offer insight into the implications of outsourcing at both an individual and organizational level, while also emphasizing potential areas of study within the discipline. Chapter 5.1. Outsourcing Information Technology: The Role of Social Capital............................... 1392 James J. Hoffman, Texas Tech University, USA Eric A. Walden, Texas Tech University, USA Mark L. Hoelscher, Illinois State University, USA Chapter 5.2. Characterization and Classification of Collaborative Tools.......................................... 1399 Javier Soriano, Universidad Politécnica de Madrid (UPM), Spain Rafael Fernández, Universidad Politécnica de Madrid (UPM), Spain Miguel Jiménez, Universidad Politécnica de Madrid (UPM), Spain Chapter 5.3. Outsourcing and Offshoring: Issues and Impacts on Venture Capital........................... 1409 Alev M. Efendioglu, University of San Francisco, USA Chapter 5.4. Enterprise Alignment and the Challenge for Organization Development..................... 1419 Brian H. Cameron, The Pennsylvania State University, USA Shaun C. Knight, The Pennsylvania State University, USA Chapter 5.5. A Study of Software Process Improvement in Small and Medium Organizations....... 1428 Deepti Mishra, Atilim University, Turkey Alok Mishra, Atilim University, Turkey Chapter 5.6. IT Service Departments Struggle to Adopt a Service-Oriented Philosophy................. 1447 Aileen Cater-Steel, University of Southern Queensland, Australia Chapter 5.7. Understanding Outsourcing of Web-Based Applications in Organizations: The Case of E-Insurance.................................................................................................................... 1456 Teuta Cata, Northern Kentucky University, USA Chapter 5.8. Virtual Integration: Antecedents and Role in Governing Supply Chain Integration..... 1473 Jeffrey C. F. Tai, National Central University, Taiwan Eric T. G. Wang, National Central University, Taiwan Kai Wang, Ming Chuan University, Taiwan Chapter 5.9. Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery............... 1504 Shawna Sando, University of Arizona, USA

Chapter 5.10. Managed Services and Changing Workplace Ethics................................................... 1514 Alan Sixsmith, University of Technology Sydney, Australia Chapter 5.11. The Post-Offshoring IS Organization.......................................................................... 1522 William R. King, University of Pittsburgh, USA Chapter 5.12. Globalising Software Development in the Local Classroom...................................... 1534 Ita Richardson, University of Limerick, Ireland Sarah Moore, University of Limerick, Ireland Alan Malone, Siemens Corporate Research, USA Valentine Casey, University of Limerick, Ireland Dolores Zage, Ball State University, USA Chapter 5.13. Perception Gaps about Skills Requirement for Entry-Level IS Professionals between Recruiters and Students: An Exploratory Study....................................... 1557 Sooun Lee, Miami University, USA Xiang Fang, Miami University, USA Chapter 5.14. Building Trust in Globally Distributed Teams............................................................ 1583 Julia Kotlarsky, University of Warwick, UK Ilan Oshri, Erasmus University, The Netherlands Paul C. van Fenema, Netherlands Defense Academy, The Netherlands Chapter 5.15. Government and Corporate Initiatives for Indian Women in IT................................. 1593 Monica Adya, Marquette University, USA Chapter 5.16. Understanding Effective E-Collaboration Through Virtual Distance......................... 1601 Karen Sobel Lojeski, Virtual Distance International, USA Richard R. Reilly, Stevens Institute of Technology, USA Chapter 5.17. The Role of Rhetoric in Localization and Offshoring................................................. 1609 Kirk St.Amant, East Carolina University, USA Chapter 5.18. Intercultural Collaboration in the ICT Sector............................................................. 1617 Martina Maletzky, Technische Universität Berlin, Germany Chapter 5.19. Managing E-Collaboration Risks in Business Process Outsourcing........................... 1648 Anne C. Rouse, Deakin University, Australia Chapter 5.20. Knowledge Transfer and Sharing in Globally Distributed Teams.............................. 1656 Ilan Oshri, Erasmus University, The Netherlands Julia Kotlarsky, University of Warwick, UK Paul C. van Fenema, Netherlands Defense Academy, The Netherlands

Chapter 5.21. Challenges in Developing a Knowledge Management Strategy: A Case Study of the Air Force Materiel Command........................................................................... 1664 Summer E. Bartczak, Air Force Institute of Technology AFIT/ENV, USA Jason M. Turner, Air Force Institute of Technology, USA Ellen C. England, Air Force Institute of Technology AFIT/ENV, USA Section VI. Managerial Impact This section presents contemporary coverage of the managerial implications of outsourcing. Particular contributions address risks, benefits, and challenges of outsourcing, vendor perspectives of outsourced projects, and business strategies for outsourcing. The managerial research provided in this section allows executives, practitioners, and researchers to gain a better sense of how outsourcing practices, projects, and research are continually informed by the changing global landscape. Chapter 6.1. Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices................................................................................................................. 1670 Subhankar Dhar, San Jose State University, USA Bindu Balakrishnan, San Jose State University, USA Chapter 6.2. Managing Risks of IT Outsourcing............................................................................... 1702 Leonardo Legorreta, California State University, USA Rajneesh Goyal, California State University, USA Chapter 6.3. Risk Management in Distributed IT Projects: Integrating Strategic, Tactical, and Operational Levels........................................................................................................ 1723 Rafael Prikladnicki, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Roberto Evaristo, University of Illinois at Chicago, USA Jorge Luis Nicolas Audy, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Marcelo Hideki Yamaguti, Pontifícia Universidade Católica do Rio Grande do Sul, Brazil Chapter 6.4. Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)............................................................................... 1739 Paul Trott, University of Portsmouth, UK Andreas Hoecht, University of Portsmouth, UK Chapter 6.5. Outsourced IT Projects from the Vendor Perspective: Different Goals, Different Risks........................................................................................................ 1759 Hazel Taylor, University of Washington, USA Chapter 6.6. Business Strategies for Outsourcing Information Technology Work............................ 1782 Subrata Chakrabarty, Texas A&M University, USA Chapter 6.7. Outsourcing Non-Core Business Processes: An Exploratory Study............................. 1790 Adriana Romaniello, Universidad Rey Juan Carlos, Spain B. Dawn Medlin, Appalachian State University, USA

Chapter 6.8. Establishing Performance Metrics for Managing the Outsourced MIS Project............ 1807 Jeanette Nasem Morgan, Duquesne University, USA Chapter 6.9. The Power of Incentives in Decision Making............................................................... 1829 Geraldine Ryan, University College Cork, Ireland Edward Shinnick, University College Cork, Ireland Chapter 6.10. Project Management Issues in IT Offshore Outsourcing............................................ 1839 Kathy Stewart Schwaig, Kennesaw State University, USA Elke Leeds, Kennesaw State University, USA Stephen H. Gillam, Accenture, USA

Volume IV Chapter 6.11. Outsourcing and Offshoring Finance Activities.......................................................... 1857 Siri Terjesen, Queensland University of Technology, Australia Chapter 6.12. High Performance IT as Strategic Partner for HR Management................................ 1871 Ferdinando Pennarola, Bocconi University, Italy Leonardo Caporarello, Bocconi University, Italy Chapter 6.13. High-Tech Workers, Management Strategy, and Globalization.................................. 1881 Jasmine Folz, Seattle Central Community College, USA Chapter 6.14. Outsourcing in High-Tech Corporations: Voices of Dissent, Resistance, and Complicity in a Computer Programming Community............................................. 1897 Erik Piñeiro, Royal Institute of Technology of Stockholm, Sweden Peter Case, University of the West of England, UK Chapter 6.15. Managing IT Outsourcing for Digital Government.................................................... 1916 Yu-Che Chen, Iowa State University, USA Chapter 6.16. Strategic Management of International Subcontracting: A Transaction Cost Perspective......................................................................................................... 1924 Yue Wang, University of New South Wales, Australia Chapter 6.17. Rough-Cut Cost Estimation in a Capacitated Environment........................................ 1935 Mark Eklin, Israel Institute of Technology, Israel Yohanan Arzi, ORT Braude College, Israel Avraham Shtub, Israel Institute of Technology, Israel Chapter 6.18. Knowledge Management Success: Roles of Management and Leadership................ 1954 Vittal S. Anantatmula, Western Carolina University, USA

Chapter 6.19. Effective Virtual Working through Communities of Practice..................................... 1966 Chris Kimble, University of York, UK Feng Li, University of Newcastle upon Tyne, UK Chapter 6.20. Employee Turnover in the Business Process Outsourcing Industry in India.............. 1974 Aruna Ranganathan, Cornell University, USA Sarosh Kuruvilla, Cornell University, USA Chapter 6.21. Project Quality of Off-Shore Virtual Teams Engaged in Software Requirements Analysis: An Exploratory Comparative Study............................................................ 1997 Dhruv Nath, Management Development Institute, India Varadharajan Sridhar, Management Development Institute, India Monica Adya, Marquette University, USA Amit Malik, Management Development Institute, India Section VII. Critical Issues This section addresses conceptual and theoretical issues related to the field of outsourcing, which include security issues, establishing trust, aligning business process, and business continuity challenges. Within these chapters, the reader is presented with analysis of the most current and relevant conceptual inquires within this growing field of study. Overall, contributions within this section ask unique, often theoretical questions related to the study of IT outsourcing and, more often than not, conclude that solutions are both numerous and contradictory. Chapter 7.1. International Outsourcing, Personal Data, and Cyber Terrorism: Approaches for Oversight.................................................................................................................. 2020 Kirk St.Amant, East Carolina University, USA Chapter 7.2. Protecting Patient Information in Outsourced Telehealth Services: Bolting on Security When it Cannot be Baked in.............................................................................. 2029 Patricia Y. Logan, Marshall University Graduate College, USA Debra Noles, Marshall University Graduate College, USA Chapter 7.3. Grey Market Informatics............................................................................................... 2045 Kirk St.Amant, East Carolina University, USA Chapter 7.4. Security Issues in Outsourced XML Databases............................................................ 2052 Tran Khanh Dang, National University of Ho Chi Minh City, Vietnam Chapter 7.5. Quality Standardization Patterns in ICT Offshore........................................................ 2082 Esther Ruiz Ben, Technische Universität Berlin, Germany

Chapter 7.6. Establishing Trust in Offshore Outsourcing of Information Systems and Technology (IST) Development.................................................................................................. 2099 Rachna Kumar, Alliant International University, USA Chapter 7.7. A Variable Precision Fuzzy Rough Group Decision-Making Model for IT Offshore Outsourcing Risk Evaluation.................................................................................... 2113 Guodong Cong, Huazhong University of Science and Technology, China Jinlong Zhang, Huazhong University of Science and Technology, China Tao Chen, Huazhong University of Science and Technology, China Kin-Keung Lai, City University of Hong Kong, China Chapter 7.8. Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data..................................................................................................... 2130 Tran Khanh Dang, National University of Ho Chi Minh City, Vietnam Chapter 7.9. Business Continuity Challenges in Global Supply Chains........................................... 2148 Steve Cartland, HP, Australia Chapter 7.10. Aligning Business Processes with Enterprise Service Computing Infrastructure....... 2164 Wei Zhao, University of Alabama at Birmingham, USA Jun-Jang Jeng, IBM T.J. Watson Research, USA Lianjun An, IBM T.J. Watson Research, USA Fei Cao, University of Alabama at Birmingham, USA Barret R. Bryant, University of Alabama at Birmingham, USA Rainer Hauser, IBM Zurich Research, Switzerland Tao Tao, IBM T.J. Watson Research, USA Chapter 7.11. Merging and Outsourcing Information Systems with UML....................................... 2188 Herman Balsters, University of Groningen, The Netherlands Chapter 7.12. IT Software Development Offshoring: A Multi-Level Theoretical Framework and Research Agenda.................................................................................. 2211 Fred Niederman, Saint Louis University, USA Sumit Kundu, Florida International University, USA Silvia Salas, Florida International University, USA Chapter 7.13. Outsourcing to the Post-Soviet Region and Gender.................................................... 2231 Elena Gapova, European Humanities University, Belarus Chapter 7.14. Analysis of a Large-Scale IT Outsourcing “Failure”: What Lessons Can We Learn?........................................................................................................... 2237 Anne C. Rouse, Deakin University, Australia Brian J. Corbitt, Shinawatra University, Thailand

Section VIII. Emerging Trends This section highlights research potential within the field of outsourcing while exploring uncharted areas of study for the advancement of the discipline. Chapters within this section highlight developments in China and India’s outsourcing practices, eSourcing relationships, and the 24-hour knowledge factory. These contributions, which conclude this exhaustive, multi-volume set, provide emerging trends and suggestions for future research within this rapidly expanding discipline. Chapter 8.1. New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China.............................................................................................................................. 2253 Suresh Sharma, JS3 Global, LLC Yuanyuan Chen, JS3 Global, LLC Chapter 8.2. Comparing China’s and India’s Evolution of Broadband Internet in the Developing World.................................................................................................................... 2265 Nir Kshetri, University of North Carolina at Greensboro, USA Nikhilesh Dholakia, University of Rhode Island, USA Chapter 8.3. Offshoring Entertainment and Media to India.............................................................. 2278 Alyssa D. Schwender, Lions Gate Entertainment, USA Christopher J. M. Leet, Intuit Inc., USA Chapter 8.4. Transformation from the Information Age to the Conceptual Age: Impact on Outsourcing....................................................................................................................... 2293 A. B. Patki, Government of India, India Tapasya Patki, University of Arizona, USA Mahesh Kulkarni, Center for Development of Advanced Computing, India Chapter 8.5. The Impact of New Trends in the Delivery and Utilization of Enterprise ICT on Supplier and User Organizations..................................................................... 2302 Jiri Vorisek, University of Economics Prague, Czech Republic George Feuerlicht, University of Economics Prague, Czech Republic Chapter 8.6. Taking Information Systems Business Process Outsourcing Offshore: The Conflict of Competition and Risk............................................................................................... 2317 Georgia Beverakis, University of New South Wales, Australia Geoffrey N. Dick, University of New South Wales, Australia Dubravka Cecez-Kecmanovic, University of New South Wales, Australia Chapter 8.7. The Governance Implications When it is Outsourced................................................... 2335 Anne C. Rouse, Deakin University, Australia Chapter 8.8. Supplier Capabilities and eSourcing Relationships: A Psychological Contract Perspective.......................................................................................................................... 2347 Vanita Yadav, Management Development Institute, India Mahadeo Jaiswal, Management Development Institute, India

Chapter 8.9. The Grid as a Virtual Enterprise Enabler...................................................................... 2363 Bill Vassiliadis, Hellenic Open University, Greece Chapter 8.10. The Fifth Perspective: Extending the Balanced Scorecard for Outsourcing............... 2378 Preeti Goyal, Management Development Institute, India Bhimaraya A. Metri, Management Development Institute, India Chapter 8.11. The Rationale Behind Strategic Alliances in Application Service Provision.............. 2389 D. E. Sofiane Tebboune, Manchester Metropolitan University, UK Chapter 8.12. Flexible Global Software Development (GSD): Antecedents of Success in Requirements Analysis.................................................................................................................. 2404 Vanita Yadav, Management Development Institute, India Monica Adya, Marquette University, USA Varadharajan Sridhar, Management Development Institute, India Dhruv Nath, Management Development Institute, India

xxviii

Preface

As businesses continue to grow, develop, and adapt to an ever-changing world, the concept of outsourcing has emerged as essential to our modern vocabulary. Companies, as well as individuals, partake in outsourcing decisions and experience the ramifications of outsourcing services and facilities. With outsourcing becoming more pervasive and mainstream, a keen understanding of the issues, theories, strategies and emerging trends associated with this rapidly developing field has become increasingly important to researchers, professionals and employees alike. The recent explosion of methodologies in the field has created an abundance of new, state-of-the-art literature related to all aspects of this expanding discipline. This body of work allows researchers to learn about the fundamental theories, latest discoveries, and forthcoming trends in the field of outsourcing. Constant technological and theoretical innovation challenges researchers to remain informed of and continue to develop and deliver methodologies and techniques utilizing the discipline’s latest advancements. In order to provide the most comprehensive, in-depth, and current coverage of all related topics and their applications, as well as to offer a single reference source on all conceptual, methodological, technical, and managerial issues in outsourcing, Business Science Reference is pleased to offer a four-volume reference collection on this rapidly growing discipline. This collection aims to empower researchers, practitioners, and students by facilitating their comprehensive understanding of the most critical areas within this field of study. This collection, entitled IT Outsourcing: Concepts, Methodologies, Tools, and Applications, is organized into eight distinct sections which are as follows: 1) Fundamental Concepts and Theories, 2) Development and Design Methodologies, 3) Tools and Technologies, 4) Utilization and Application, 5) Organizational and Social Implications, 6) Managerial Impact, 7) Critical Issues, and 8) Emerging Trends. The following paragraphs provide a summary of what is covered in each section of this multivolume reference collection. Section One, Fundamental Concepts, Methodologies, Tools, and Applications, serves as a foundation for this exhaustive reference tool by addressing crucial theories essential to understanding outsourcing practices. Some basic topics in the field are examined in this section through articles such as “Why, When, and What to Outsource” by Donald A. Carpenter and Vijay K. Agrawal. As its title suggests, this contribution provides an overview of outsourcing, identifying the primary reasons why a company outsources, the types of services that are outsourced, and the types of environments and situations that make outsourcing possible. The selection “IT Outsourcing: Impacts and Challenges” by Luke Ho and Anthony S. Atkins reviews existing literature on outsourcing and provides a framework for decision making in the field. Additional selections, such as “Outsourcing and Strategic Outsourcing” by Sonia Dahab and Filipe Amaral and “Global IT Outsourcing: Current Trends, Risks, and Cultural Issues” by Subhankar Dhar provide additional insight into the elemental concepts that define and inform modern-day

xxix

outsourcing research. These are only some of the foundational topics provided by the selections within this comprehensive section that allow readers to learn from expert research on the theories underscoring IT outsourcing. Section Two, Development and Design Methodologies, contains in-depth coverage of conceptual architectures and frameworks, providing the reader with a comprehensive understanding of emerging theoretical and conceptual developments within the development and design of outsourcing models and projects. In opening this section, the selection “Managing the Dynamic Reconfiguration of Enterprises” by Ben Clegg and Mario Binder provides a framework for restructuring and strategically managing enterprises. Similarly, the selection entitled “Strategic Approach to Globalization with Mobile Business” by Walied Askarzai and Bhuvan Unhelkar examines the phenomenon of globalization, its impact on mobile business, and strategic approaches for addressing this topic. “Planning for Information Systems Outsourcing” by Vijay K. Agrawal and Donald A. Carpenter provides both historical and current perspectives on successfully outsourcing IS projects. Later chapters, such as “An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing Decisions” by John Benamati and T.M. Rajkumar and “A Reference Model for Strategic Supply Network Development” by Antonia Albani, Nikolaus Müssigmann, and Johannes Maria Zaha present specific models that derive from and are used to inform outsourcing decisions and methodologies. Overall, these selections outline design and development concerns and procedures, advancing research in this vital field. Section Three, Tools and Technologies, presents extensive coverage of various tools and technologies and their use in informing and expanding the reaches of outsourcing. Selections such as “Innovative Technological Paradigms for Corporate Offshoring” by Tapasya Patki and A. B. Patki and “Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies” by Nathan Denny, Shivram Mani, Ravi Sheshu, Manish Swaminathan, and Jamie Samdal offer perspectives on the ways in which technology impacts and is impacted by outsourcing practices. The use of tools and technologies in the workforce is also explored in selections such as “Improving Employee Selection with Online Testing” by Jeffrey M. Pollack and “Why First-Level Call Center Technicians Need Knowledge Management Tools” by Joe Downing. The rigorously researched chapters contained in this section offer readers countless examples of modern tools and technologies that emerge from or can be applied to outsourcing practices and decisions. Section Four, Utilization and Application, examines the use and implementation of outsourcing in a variety of contexts. This section begins with “Real Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms” by Subrata Chakrabarty, which provides an in-depth investigation of two offshore-outsourced software development projects. Specific outsourcing ventures are further analyzed in selections such as “The Role of Prisons in Offshoring” by Whitney Hollis, “Human Resources Outsourcing Strategies” by Veronique Guilloux and Michel Kalika, and “Offshoring in the Pharmaceutical Industry” by Jason McCoy and Johannes Sarx. Similarly, region-specific outsourcing practices are discussed in the selections “IT Outsourcing Practices in Australia and Taiwan” by Chad Lin and “Information Systems/Information Technology Outsourcing in Spain: A Critical Empirical Analysis” by Felix R. Doldán Tié, Paula Luna Huertas , Francisco Jose Martínez López, and Carlos Piñeiro Sánchez. This section, with its focus on specific outsourcing projects and strategies, provides an essential resource for researchers, employers, and users alike. Section Five, Organizational and Social Implications, includes a wide range of research pertaining to the organizational and cultural implications of outsourcing. The section begins with “Outsourcing Information Technology: The Role of Social Capital” by James J. Hoffman, Eric A. Walden, and Mark

xxx

L. Hoelscher, a selection which addresses how connections between social networks impact outsourcing decisions and strategies. Similarly, selections such as “Building Trust in Globally Distributed Teams” by Julia Kotlarsky, Ilan Oshri , and Paul C. van Fenema investigate the ever-important role of individual trust, and the difficultly experienced in building such trust among globally divided team members. Collaboration and e-collaboration are explored at length in chapters such as “Intercultural Collaboration in the ICT Sector” by Martina Maletzky, “Managing E-Collaboration Risks in Business Process Outsourcing ” by Anne C. Rouse, and “Knowledge Transfer and Sharing in Globally Distributed Teams,” also by Ilan Oshri, Julia Kotlarsky, and Paul C. van Fenema. Ultimately, this section demonstrates needs and requirements for successful implementation of outsourcing, both at an individual and organizational level, determining that there are a multitude of factors that impact any outsourcing project. Section Six, Managerial Impact, presents contemporary coverage of the managerial and implications of outsourcing. Core concepts covered include risk and risk management in outsourcing, project management, and effective virtual workplaces. “Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices” by Subhankar Dhar and Bindu Balakrishnan begins the section with an insightful study of the potential problems and obstacles associated with outsourcing. Also included are the articles “Managing Risks of IT Outsourcing” by Leonardo Legorreta and Rajneesh Goyal and “Innovation Risks of Outsourcing within Knowledge Intensive Business Services (KIBS)” by Paul Trott and Andreas Hoecht, which expound on potential risks associated with outsourcing. This section continues with insights on topics including outsourcing in high-tech corporations, project quality, employee turnover, and decision making—a few of the subjects necessary to understand the successful management and implementation of outsourcing projects. Section Seven, Critical Issues, presents readers with an in-depth analysis of the more theoretical and conceptual issues within this growing field of study by addressing topics such as quality and security in outsourcing and outsourced goods and services. “International Outsourcing, Personal Data, and Cyber Terrorism: Approaches for Oversight” by the editor of this collection, Kirk St.Amant, “Protecting Patient Information in Outsourced Telehealth Services: Bolting on Security when it cannot be Baked in” by Patricia Y. Logan and Debra Noles, and “Security Issues in Outsourced XML Databases” by Tran Khanh Dang, address necessary security considerations. Issues regarding quality, trust, and correctness are considered in articles such as “Quality Standardization Patterns in ICT Offshore” by Esther Ruiz Ben, “Establishing Trust in Offshore Outsourcing of Information Systems and Technology (IST) Development” by Rachna Kumar, and “Ensuring Correctness, Completeness, and Freshness for Outsourced Tree-Indexed Data,” also by Tran Khanh Dang. Further discussion of critical issues includes obstacles surrounding the alignment of business process, outsourcing and gender, and IT standards. In all, the theoretical and abstract issues presented and analyzed within this collection form the backbone of revolutionary research in and evaluation of IT outsourcing. The concluding section of this authoritative reference tool, Emerging Trends, highlights research potential within the field of outsourcing while exploring uncharted areas of study for the advancement of the discipline. Innovations in outsourcing, specifically in China and India, are explored in selections such as “New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China” by Suresh Sharma and Yuanyuan Chen, “Offshoring Entertainment and Media to India,” by Alyssa D. Schwender and Christopher J. M. Leet and “Comparing China’s and India’s Evolution of Broadband Internet in the Developing World” by Nir Kshetri and Nikhilesh Dholakia. Other new trends, such as developments in the delivery and utilization of ICT, governance implications of outsourcing, and global software development are addressed at length in this concluding section. This final section demonstrates

xxxi

that outsourcing, with its propensity for constant change and evolution, will continue to both shape and define the modern face of business, culture and human interaction. Although the contents of this multi-volume book are organized within the preceding eight sections which offer a progression of coverage of important concepts, methodologies, technologies, applications, social issues, and emerging trends, the reader can also identify specific contents by utilizing the extensive indexing system listed at the end of each volume. Furthermore, to ensure that the scholar, researcher, and educator have access to the entire contents of this multi-volume set, as well as additional coverage that could not be included in the print version of this publication, the publisher will provide unlimited, multi-user electronic access to the online aggregated database of this collection for the life of the edition free of charge when a library purchases a print copy. In addition to providing content not included within the print version, this aggregated database is also continually updated to ensure that the most current research is available to those interested in IT outsourcing. As outsourcing practices, studies, and decisions continue to expand, both in variety and usefulness, this exciting and revolutionary field will prove even more necessary to everyday life. Intrinsic to our ever-modernizing, ever-expanding global economy is the propensity to become more efficient and adaptable. Continued progress and innovation will only further establish the necessity of both understanding and adapting to IT outsourcing is in today’s modern, dynamic world. The diverse and comprehensive coverage of IT outsourcing in this four-volume, authoritative publication will contribute to a better understanding of all topics, research, and discoveries in this developing, significant field of study. Furthermore, the contributions included in this multi-volume collection series will be instrumental in the expansion of the body of knowledge in this enormous field, resulting in a greater understanding of the fundamentals while also fueling the research initiatives in emerging fields. We at Business Science Reference, along with the editor of this collection, hope that this multi-volume collection will become instrumental in the expansion of the discipline and will promote the continued growth of IT outsourcing.

xxxii

Understanding IT Outsourcing:

A Perspective for Managers and Decision Makers Kirk St.Amant East Carolina University, USA

Examining iT OuTsOurcing: an OvErviEw Outsourcing has become one of the most controversial topics of the new century. To some, outsourcing is a strategy essential to remaining competitive in an age of international market integration. To others, it represents an important opportunity for economic advancement and entry into the global economy. For still others, outsourcing is a boogeyman topic associated with the relocation of jobs and the closing of local businesses. These varied opinions raise the questions “What is outsourcing?” and “What does one need to know to make informed choices about outsourcing practices?” This introduction examines these questions by providing a basic overview of outsourcing practices and trends. While the treatment presented here is by no means comprehensive, it can provide the foundational understanding needed to ask more focused questions or make more informed decisions related to outsourcing. The practice of outsourcing is not new. In fact, outsourcing is perhaps as old as commerce itself and serves as the foundation for any relationship where one person performs an activity on behalf of another. What has made outsourcing such a charged topic in recent years is the kinds of activities others have been requested to perform and the scope or the scale of such requests. One area in which outsourcingrelated tensions have perhaps run the highest is the information technology (IT) industry. Historically, the IT sector has been dominated by companies located in industrialized nations. This dominance was driven primarily by factors of access and proximity. That is, organizations needed quick and ready access to highly trained workers in order to foster the creativity and have the flexibility needed to remain competitive in the rapidly changing world of IT. The importance of access made issues of location paramount, for an organization’s workforce needed to be in relatively close geographic proximity for the organization to have quick and ready access to it. Such were the early rules of the IT industry. All of these rules suddenly changed with the advent of online media.

xxxiii

Technologies such as the Internet and the World Wide Web flattened barriers of physical distance and allowed companies quick and easy access to workers located in virtually every region. As this online access spread to more parts of the globe, the pool of skilled labor available to organizations grew almost exponentially. Within this new paradigm, IT workers who once benefited from their physical proximity to a company now found themselves competing with skilled IT workers located half way around the world. These new competitors, moreover, could often offer the same level of skills for a fraction of the cost. As a result, an increasing number of organizations began to outsource a variety of skilled knowledge work –including a range of IT work—to employees located in other nations. Thus, the era of international IT outsourcing—or IT offshoring—began. Today, outsourcing is worth some US$300 billion in value and represents over a million jobs worldwide (Ang & Inkpen, 2008; Shao & David, 2007). These numbers, however, are but a drop in the global bucket, for it is estimated that only 10% of the prospective global market for outsourcing has been tapped (Ang & Inkpen, 2008). Perhaps the largest area for growth is in various service sectors—particularly those associated with human resources, accounting, financial prep, and medical information processing—as well as in the IT products and services that support these sectors (Chan, 2007; Outsourcing, 2008). Effectively tapping this outsourcing market, however, is no easy task. Rather, a range of factors must be considered to ensure the outsourcing process is successful, for many outsourcing projects result in negative experiences (Barthelemy, 2003; Raisinghani et at., 2008). Individuals in the IT industry, therefore, need to develop an effective understanding of outsourcing if they wish to make the informed decisions essential to success in today’s global economy.

FundamEnTal cOncEpTs and ThEOriEs OF iT OuTsOurcing In essence, outsourcing involves the transfer of responsibility (Barthelemy, 2003; Outsourcing, 2008; Weimer & Seuring, 2008). In an outsourcing relationship, one party (the client) asks another party (the vendor) to perform a given task. The outsourcing vendor then assumes the responsibility of completing that task according to the client’s guidelines and expectations. Thus, outsourcing is a common activity most persons take advantage of on an almost daily basis. Few individuals, for example, grow all of their own food (a task that is outsourced to farmers) or make all of their own clothes (a task that is outsourced to garment manufacturers). Organizations and individuals also tend to use outsourcing for the same reasons—expertise and time. The idea is that no one organization or person is an expert in all tasks; rather, there are certain core areas in which a business tends to specialize and that an individual tends to enjoy (Barthelemy, 2003; Solli-Sather & Gottschalk, 2008). Pursuing such core activities, however, also requires organizations and individuals alike to engage in a range of ancillary but important activities—such as accounting functions related to the paying of taxes. From an organizational perspective, time spent on such ancillary activities takes organizations away from those core activities they do best, and time spent on such ancillary activities is time that could be spent on improving a core functions (Barthelemy, 2003; Namasivayam, 2004; Rajabzadeh, Rostamy, & Hosseini, 2006). Moreover, such ancillary activities tend to be those tasks in which the organization is not a specialist. Such ancillary activities might thus be performed more efficiently and effectively by another entity—one that has made the activity its own core function and thus has the training and materials needed to operate as a specialist in that area (Chandrasekar, 2004/05; Duarte, Sackett, & Evans, 2004/05; Rajabzadeh, Rostamy, & Hosseini, 2006).

xxxiv

Within this context, if an organization outsources that ancillary activity to a specialist, then the organization suddenly has more time to dedicate to its core operations. The more time spent focusing on these core functions, the better the organization gets at these tasks, and the more competitive the organization can become in that core area. Conversely, as the organization was not an expert in a particular ancillary area, the organization might have lacked the base of skills, knowledge, or equipment needed to perform that task efficiently—let alone remain abreast of developments related to that task effectively. Thus, by outsourcing ancillary tasks to a specialist, an organization can save time and money (Barthelemy, 2003; Outsourcing, 2008; Shao & David, 2007). According to this approach, organizations can benefit from both direct and indirect savings generated through outsourcing (Michael et al., 2005; Platz & Temponi, 2007; Rajabzadeh, Rostamy, & Hosseini, 2006). Direct savings are related to employee performance. As the outsourcing provider can perform a particular task more efficiently than the client can, the relative cost of performing that activity goes down as the quality improves. A trained accountant, for example, could likely complete a tax form more quickly and more effectively than could a computer programmer with no formal accounting training. Indirect savings are associated with those aspects related to maintaining on-site employees. These indirect factors include: • • • • •

Benefits (e.g., health insurance, retirement, continuing education, etc.) associated with employing in-house workers to perform a non-core task Training needed to keep on-site employees current in non-core tasks Materials needed to perform non-core activities Infrastructure needed to house and accommodate on-site employees so they can perform a non-core activity (e.g., office space, heating and lighting costs, software licensing, etc.) Practices associated with hiring and administering employees involved in non-core functions

Individually, each of these items can consume substantial resources in terms of cost and time (e.g., time to set up a technology, coordinate a task, or perform a process). Collectively, they can create a substantial drain on the resources an organization can dedicate to improving its core business activities. Thus, the cost of outsourcing an activity might actually be less than the combination of directly and indirect expenses related to performing such tasks in house. In fact, outsourcing can reduce a variety of IT and other service-related costs by up to 60% in some instances (Rodgers, 2005). This process is driven by a concept known as leveraging advantage. According to this perspective, the advantage is the core activity, or the task or range of tasks at the center of an organization’s business. Leveraging that advantage refers to taking every opportunity to focus on further developing and using that core activity to attract more business and to excel in the related marketplace. Accordingly, a successful use of outsourcing allows the client organization to channel the money and time saved through outsourcing back into developing its core activities vs. reporting this adjustment as savings or profit (Boguslauskas & Kvedaraviciene, 2008; Namasivayam, 2004). This allocation of savings allows organizations improve the chances they will remain competitive for the long term. Thus, outsourcing provides an organization with a mechanism for creating an advantage when competing with others in the same marketplace. On the surface, this approach seems quite straightforward. There are, however, secondary cost factors organizations need to consider when contemplating outsourcing. One more-hidden factor is that of transaction costs, and if not accounted for, it can easily negate any savings associated with outsourc-

xxxv

ing. Transaction costs, moreover, must be identified and assessed before making the final decision to outsource a process. If not, losses could ensue. In general, transactions costs involve interaction and compatibility (Bahli & Rivard, 2003; Gefen & Carmel, 2008; Solli-Saether & Gottschalk, 2008). The notion of interaction relates to the logistics of delivering a product or a service from the outsourcing vendor to the outsourcing client (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In such situations, a vendor might be able to produce an item or perform a service more cheaply and efficiently offsite. The logistics related to delivering the product to the client or providing the service to the client or the client’s customers, however, might be so complicated or costly that they negate any savings associated with outsourcing that activity. Consider, for example, a vendor that can perform database maintenance for $10 per hour less than a client organization can on site. Interacting with that vendor, however, requires the client to convert its current operating system from one platform to another and purchasing new platform-specific software (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In this scenario, the costs of making such a transition could outweigh the savings associated with outsourcing that service. For this reason, organizations must perform a preliminary analysis of transactions costs to determine if it is truly in that organization’s best interests to outsource the related process. Moreover, such a realization needs to be made before outsourcing contracts are signed and the client’s on-site abilities to perform the service are dismantled. If not, the results could be financially disastrous for the client. In the case of compatibility, the outsourced product or service can be delivered quickly and cheaply— that is, interactions between client and vendor are not problematic. The problem is the outsourced product or service is provided in a format that cannot be quickly and easily integrated into the client’s core activities. As a result, the client needs to spend un-planned time and money revising the product or process in order to integrate it into the client’s core business practices. If, for example, customers are confused by the online troubleshooting advice provided by an outsourcing vendor, they might increasingly return merchandise to the client organization for servicing. In this case, the client could find itself dedicating unexpected additional time to addressing such returns vs. producing new products or developing new services. Thus, services that do not integrate easily into the clients’ practices or meet client expectations for those services can divert resources from the client organization’s core activities. If these incompatibilities are not immediately noticed, use of that incompatible item or service could hurt the client’s core activities by affecting the quality of the products it produces or the services it provides. (This issue of compatibility was one of the major transactions cost problems that plagued early attempts at offshoring.) In this way, incompatibility can actually threaten the core business practices of an organization. Thus, the decision to outsource needs to involve an examination of transactions costs as well as the financial and strategic benefits of using outside vendors. Transaction costs thus bear risks an organization needs to consider when engaging in outsourcing. The notion of risk in outsourcing generally relates to the control a client organization can exercise over a process once it has been sent to a vendor (Barthelemy, 2003). The desire to outsource, in turn, becomes a matter of assessing and anticipating all of the risks—or potential problems—that could arise once an activity has been assumed by a vendor. After such an assessment is made, the client organization can decide how likely such risk factors are, how such factors might be successfully addressed, and if the prospective of successful outsourcing—and related savings—outweigh the risks related to engaging in such practices (Barthelemy, 2003; Raisinghani, 2008)

xxxvi

In many cases, concerns related to risk become a matter of trust. That is, the more an outsourcing client trusts the vendor with which it interacts, the more likely that client is use the vendor in outsourcing operations and the greater/more important the tasks to be outsourced to that vendor. Such trust can be established via previous relations with a vendor, by reviewing a vendor’s previous relations with other clients, or through a careful vetting of prospective vendors. Within this framework, trust in a vendor can mitigate concerns related to risk and can result in the outsourcing of various IT production and service tasks (Jain, Kundu, & Niederman, 2008). Aspects of core competencies, leveraging advantage, transactions costs, risk, and trust are but the foundational concepts of outsourcing. These concepts should not be treated lightly when making decisions related to outsourcing. Rather, there are different outsourcing practices and arrangements, as there are certain patterns for the rise of outsourcing’s prominence in a given area. For these reasons, organizations need to understand the dynamics of outsourcing development if they are to make informed decisions about how and when to engage in such practices. It is through informed decisions that organizations can effectively leverage their competitive advantage within a particular area.

iT OuTsOurcing dEvElOpmEnT and dEsign mEThOdOlOgiEs In the last half century, outsourcing has been adopted as a core business strategy by a number of industries. These applications include a variety of tasks and have recently expanded into a range of skilled activities related to a range of IT goods and services (e.g., chip manufacturing, customer support, and financial processing). While the tasks that are outsourced can vary, the outsourcing process tends to follow a relatively standard pattern across industries and activities. In general, the process begins with a small set of businesses (sometimes called early adopters) testing outsourcing as an option to reduce costs and perhaps enhance competitiveness within a particular market (Shao & David, 2007). A hospital, for example, might test-run outsourcing by having limited healthcare processing services (e.g., transcription of medial documents) tasked to an external vendor. Usually, these initial tests are done on a small scale and involve a limited number of mechanical tasks. (These mechanical tasks are simple activities that can easily be performed repeatedly and effectively by a relatively wide range of workers.) Thus, the simplicity of the task generally means goods or services of acceptable quality can be produced with minimal oversight and limited specifications related to client expectations. The idea in this case is to assess areas of risk on a small scale that is easy to mange if problems arise. The better the vendor is at performing such tasks over time, the more trust the client develops toward that vendor, and the larger and more complex (or more risky) the task outsourced to that vendor become (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008). Over time, early adopters start to benefit from outsourcing by both reducing costs and allocating more time and money to enhancing their core activities. As a result, these early adopters begin to gain a competitive advantage in their areas. Soon, competing businesses in the same marketplace realize they are losing or are in danger of losing market share to competitors that use outsourcing. These late adopters then begin to examine outsourcing as a mechanism for remaining competitive within their fields. As these secondary adopters engage in outsourcing, they see their own competitive advantages increase (Shao & David, 2007). This process triggers a sort of arms race as each organization looks for new ways to maximize its competitive advantage through outsourcing. According to this progressions, it is only a matter of time before outsourcing is no longer an option to explore, but becomes a core business strategy organizations must use to remain competitive in their fields.

xxxvii

Until quite recently, the pursuit of outsourcing options to maximize competitive advantage was constrained by one crucial factor—access. The only vendors an organization could tap for its outsourcing objectives were those to which they had quick and easy access. The limitations created by access restricted the kinds of outsourcing activities in which an organization could engage. These restrictions also affected how far afield organizations could go to find prospective vendors for the outsourcing of IT tasks. Two major developments, however, radically changed this perspective. First, the global diffusion of online media made it increasingly easy to access an international pool of skilled labor—thus reducing physical barriers to outsourcing. Second, a range of international trade agreements—such as the General Agreement on Trade in Services (GATS)—reduced many of the legal restrictions that had limited the cross-border flow of goods and services (Gupta et al, 2008; Namasivayam, 2004; UNESCO, 2004). As more nations—particularly developing nations—gained online access and fell under these trade agreements, they provided organizations in industrialized nations with important outsourcing opportunities. Thus, a new age of international outsourcing—or offshoring—began. From an IT perspective, many of these developing nations offered a range of advantages for interested clients. For example, a shortage of good-paying jobs, compared to the number of well-educated individuals seeking work meant many jobs that are offshored (e.g., IT customer support) tend to experience less employee turnover (Reuters, 2004). These overseas employees also offer organizations an additional benefit related to the costs of skilled labor. In many developing nations, skilled technical workers make a fraction of the salaries earned by counterparts in industrialized nations (Jahns, Hartmann, & Bals, 2006; Shao & David, 2007). The average IT worker in the United States, for example, earns roughly US$75,000 per year, while the average IT worker in Argentina tends to earn US $9,500 per year (King, 2008). The same employee in India, moreover, earns just under US $8,000 per year to perform the same work (King, 2008). By using such international workers to perform IT tasks, a client organization can further reduce the costs of performing this non-core activity. This concept of using different pay scales to further reduce outsourcing costs is known as labor arbitrage, and it has prompted many organizations to engage in the international outsourcing/offshoring of a range of IT work (Gefen & Carmel, 2008). These lower salaries also have important implications for the quality of offshored activities via changes in management structures. IT managers in the Philippines, for example, earn US$25,000 per year—almost a third of what the average IT worker in the US earns (Ho, 2007; King, 2008). As a result, organizations can easily afford to hire more on-site managers to supervise offshoring activities. For example, the ratio of mangers to employees tends to be 1 to 8 in Chinese outsourcing ventures vs. 1 to 20 for similar activities in the United States (Hagel, 2004). These additional managers can dedicate more time to employee training, process oversight, and quality control. The resulting environment is one that can improve the quality of the resulting product or service without incurring any major staffing costs. In this way, the addition of these managers can reduce risks associated with offshoring activities and improve levels of trust related to client-vendor relationships. By itself, savings related to labor costs are not generally enough to prompt an organization to engage in offshoring (Hamm, 2008; Namasivayam, 2004; Reuters, 2004). Rather, different educational systems, professional practices, and cultural preferences could increase transactions costs in a way that would trump savings related to labor arbitrage (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008; Qu & Brocklehurst, 2006). Many skilled IT service, for example, require a worker to follow a particular standard process that might be linked to the legal requirements of a particular nation or to the internal practices of a particular client. If an offshoring vendor did not perform an activity (e.g., software programming)

xxxviii

according to such requirements, the resulting product might be difficult to integrate quickly into the client’s core business practices. In some cases, this factor has been addressed by providing vendors with effective training in the client organization’s practices for performing a given task (Raisinghani, 2008). Unfortunately, the costs associated with training offshore workers and the subsequent monitoring used to confirm practices are being correctly performed could be cost prohibitive (a major transaction cost). As a result, some form of standardization is often essential to make sure the quality or products and services resulting from offshoring services contributed to the client’s ability to leverage its advantages. The solution, in many cases, comes in the form of automation. From an outsourcing perspective, automation means that technologies—particular computer programs—provide workers with a mechanism that allows them to perform a process in a standard manner (Namasivayam, 2004; Shao & David, 2007). In certain cases, the employee enters data into the program, and the program performs processes according to client-designed specifications. In other cases, the program reviews the employee’s work to confirm it matches client specifications before that work can be finalized. Such standardization of process means the resulting product or service would meet a client’s expectations for correctly completing a particular task (Namasivayam, 2004). Automation also means client specifications related to effectively performing a task can be met without having to engage in more costly and time-consuming training practices. (Granted, some training in the use of the related software would be required.) Thus, automation keeps transactions costs low and allows organizations to maximize the cost benefits of labor arbitrage (Namasivayam, 2004). Automation can also reduce concerns of risk and increase trust based upon a kind of “built in” guarantee a process will be performed according to the client’s expectations. As a result of these factors, automation has created more demand for IT workers and drove much of the growth in international IT outsourcing (Shao & David, 2007). This combination of standardization via automation and labor arbitrage in particular have allowed outsourcing to develop rapidly into a global phenomenon. All of these variables and approaches mean organizations need to be well informed when making outsourcing-related decisions. Fortunately, approaches to outsourcing are not as random as one might think. Rather, a series of somewhat regular best practices to outsourcing have arisen over time. Such approaches can serve as models organizations can use when trying to determine how to use outsourcing and apply outsourcing practices effectively.

usEs and applicaTiOns OF iT OuTsOurcing cOncEpTs According to a model proposed by Duarte, Sackett, and Evans (2004) decisions involving what to outsource and how to engage in outsourcing tend to be governed by two central factors. The first of these factors is financial impact and refers to either the costs saved or the value added by the use of outsourcing in relation to a particular activity. The second factor is strategic importance and involves how important outsourcing is to helping an organization succeed in its core business area (Duarte, Sackett, & Evans, 2004). An organization’s decision to outsource is then based on how it weighs these two factors in relation to how they create a competitive advantage in terms of core business activities. According to this two-part framework, most outsourcing clients—and most early outsourcing adopters—begin their foray into outsourcing by having a vendor perform a few, very basic (i.e., mechanical) tasks (Namasivayam, 2004; Shao & David, 2007). Such tasks, moreover, tend to be of relatively little financial or strategic import. This kind of outsourcing is generally referred to as functional outsourcing,

xxxix

and requires limited communication between outsourcing client and vendor in order to have the task performed effectively (Duarte, Sackett, & Evans, 2004). The basic nature of the task also means that completion of the related activity is often assessed according to relatively general and simple criteria (McLaughlin, 2003). Custodial or janitorial services, for example, are often activities subject to functional outsourcing. Like all functional outsourcing activities, custodial and janitorial tasks need to be performed to permit the organization to operate in an effective manner on a day-to-day basis. The completion of these tasks, however, is not connected to an organization’s potential for earnings (low financial impact), nor does it shape the business strategy the organization uses to remain competitive in its field (low strategic importance). Yet functional outsourcing does reduce the indirect costs associated with having to hire in-house employees to perform basic, simple activities associated with daily operations. From an IT perspective, functional outsourcing is a mechanism organizations can use to dedicate more resources to developing and maintaining IT activities. Leverage outsourcing, by contrast, relies on the concept of economies of scale to reduce cost (high financial impact). Such outsourcing, however, is not crucial to a company’s ability to perform its core activities (low strategic importance). Leverage outsourcing generally involves the production of particular goods or the use of somewhat specialized services (Duarte, Sackett, & Evans, 2004). In such outsourcing relationships, the outsourcing vendor not only specializes in producing a particular product or performing a certain task, but does so for a relatively large number of clients. This specialized production or performance of service on a large scale (high volume) means vendors can perform the activity more cheaply offsite than the client could on site (Michael et al., 2005). Leverage outsourcing generally has a relatively high financial impact on a client’s core activities by reducing overall costs associated with those activities (e.g., providing server space and related maintenance for a wide range of clients). At the same time, a relatively large number of vendors tend to perform that same activity. Thus, the service provided by the vendor is not so specialized the client is dependent on the vendor to perform that service. In this way, such outsourcing relationships are of relatively low strategic importance to a client, for the client can turn to a range of vendors for this service (Duarte, Sackett, & Evans, 2004). Thus, leverage outsourcing allows organizations to outsource more standard and mundane IT tasks (e.g., basic server maintenance) and to focus more time and attention on IT activities related to the business’s specific core functions. Strategic outsourcing marks a different situation in which there is a closer relationship between the outsourcing client and vendor. In such relationships, each party relies on the other for the successful completion of its core activities. Such relationships tend to develop around a vendor providing either a specific skill or a specific product. The activities performed by the vendor tend to be unique and involve technologically intense tasks or require specific technologies to perform (Duarte, Sackett, & Evans, 2004). From the client’s perspective, it would not be cost effective to try to perform such activities in house. In such relationships, the vendor provides the client with a service or item that is highly specialized for that client’s particular core business. The related levels of specification also mean there are relatively few vendors that perform the particular service or produce the specific product. Thus, the client is dependent on the vendor in order to engage in its core business activities—a very different case from leverage outsourcing (Duarte, Sackett, & Evans, 2004). For this reason, cost savings associated with the service or product is not a major concern. Rather, the vendor’s activities are considered an essential part of the client’s core business and thus have are of high strategic importance irrespective of costs. (Financial impact is therefore not a central factor in such outsourcing relationships.)

xl

The relatively narrow nature of the vendor’s specialized business also means there are generally few clients to which the vendor can market its services. As a result, the vendor is highly dependent on the client’s business to remain financially solvent. Thus, the client’s business has a high level of strategic importance for the vendor’s marketplace success. An example of such IT outsourcing would be software firms that produce an application for only certain industries—such as pacemaker monitoring software designed for the medical device industry. The specialized character of the task also requires close and constant communication between vendor and client. This closeness allows the vendor to make adjustments and alterations that reflect the changing nature of the client’s business and the demands of the market in which that business operates. The final and perhaps ultimate state of outsourcing development is known as critical outsourcing and involves an integration of client and vendor activities to the point that the two often seem to operate as a single entity (Duarte, Sackett, & Evans, 2004). In such relationships, the vendor is an expert in a specific intensive and important activity that is central to the success of the client’s core business. Such focused specialization allows the vendor to be more capable of remaining current with updates essential to success in the related area. Additionally, the nature of the outsourced work is usually highly complex and needs to be customized to the specific client’s core business practices. The work also tends to be highly susceptible to change based on the markets serviced by the client organization. This particular combination of factors generally means that, in critical outsourcing, client and vendor need to have a close relationship based on trust and constant communication. In fact, it is not uncommon for the vendor to have an office within the client’s facilities and to participate in the client’s strategic meetings (Duarte, Sackett, & Evans, 2004). (Both parties need access to and involvement in such processes for each to engage effectively in its core practices.) The nature of such relationships, moreover, means they have a high level of financial impact for the client/are essential for the client to succeed in its core business area. Such activities are also closely linked to client success to the point that they are also a central part of its business strategy and thus are of high strategic importance to the organization. As for the vendor, the highly customized nature of the activity usually means the vendor can only provide it to the individual client. Thus, the vendor’s core activities are, in many ways, depending on a short list of specific clients. Examples of such outsourcing relationships in IT would be those where the development and implementation of supply chain management databases and related software is outsourced to a vendor specializing in the creation of such software and its related services. The effective adoption and use of these outsourcing models are no easy process. Rather, careful research, attention to detail, and an understanding of the involved variables are essential to success in each of these four major outsourcing approaches. Such outsourcing practices, moreover, are further complicated when done on an international level. This factor is particularly important in the new specialized kinds of outsourcing sectors that have emerged in recent years. In the last decade, outsourcing has begun to evolve into a series of task-specific disciplines related to knowledge activities and IT work. The more common of these subdivisions include: •

Business Process Outsourcing (BPO): Having a vendor perform a particular business service— generally a knowledge-based service (e.g., payroll processing)—for a client including a range of standard business services associated with worker maintenance (e.g., human resources processing, accounting, and financial administration) (BPO-Business process outsourcing, 2008; Weimer & Seuring, 2008)

xli

• • •

Application Outsourcing (AO): The process of creating, deploying, and managing a software product designed to meet the needs of a specific client (Application outsourcing, 2007) Infrastructure Outsourcing (IO): Providing clients with the hardware, software, and often the support services needed for them to have a functioning information technology infrastructure for their organization (Murrain & Cohen, 2003) Knowledge Process Outsourcing (KPO): Having vendors perform skilled knowledge-based tasks that result in the production of a unique knowledge product (e.g., original text/content for a website or original research and development results) or that requires unique/situation-specific results related to a particular field (e.g., legal services or market analytics) (Sathe & Aradhana, 2008)

While all of these outsourcing areas have experienced growth—particularly international growth—in the last few years, it is KPO that seems poised to expand the most in the next few years and to do so on a global scale (Sathe & Aradhana, 2008). Also, these divisions reflect the aggregation of tasks currently assigned to outsourcing on a relatively large scale. As organizations continue to define their core activities and to look for additional ways to cut costs and increase competitiveness, new outsourcing divisions might emerge. These same forces could also result in the further subdivision of these current categories (e.g., actuarial outsourcing within BPO or even KPO). When considered with the fact that only 10% of the prospective global outsourcing market has been tapped and international outsourcing is predicted to grow by some 8% in 2008 alone, the prospects for growth in such specialty areas seems quite good (Ang & Inkpen, 2008; Heath, 2008). Curiously, when considering the various options for international IT outsourcing, aspects of cost and automation are not exclusive factors used to make final vendor selections. In fact, some research notes that companies might actually select a more expensive international vendor due to the factor of cultural proximity. The importance of cultural proximity, in turn, results from lessons learned over a decade of offshoring experimentation. Cultural proximity involves how similar or how different two cultures are (Ang & Inkpen, 2008; Gefen & Carmel, 2008). Cultures that are relatively similar have a high cultural proximity –are culturally very close in approaches and attitudes. Cultures that are quite different in terms of behaviors, attitudes, and expectations have a low cultural proximity (a great deal of difference separates them). Earlier forays into offshoring revealed that cultural proximity related to job expectations, contractual obligations, communication styles, and even language can have a major effect on offshoring practices (Beizer, 1990; Kogut & Singh, 1988; Levina & Vaast, 2008). One 2004 study in IT research and development, for example, notes that cultural proximity can have important implications for transaction costs in offshoring. According to the study, when engineers worked together in virtual international projects, such as is characteristic of offshoring, half of their work hours were spent engaging international counterparts in ad hoc interactions. Over half (57%) of these interactions involved trying to come to a common understanding of what was expected of the involved parties (Ang & Inkpen, 2008; Cherry & Robillard, 2004). Just over 30% of that time was dedicated to dispute resolution and addressing problems, and 3% of that time was spent planning future interactions (Ang & Inkpen, 2008; Cherry & Robillard, 2004). (Surprisingly, only 8% of the time spent on such interactions involved the actual offshoring task of developing software (Cherry & Robillard, 2004).) In a different study of 200 US executives, 76% of the individuals surveyed cited cultural differences as a major aspect affecting the success of international outsourcing initiatives (McCue, 2006). All of these factors, in turn, act as transaction costs related to

xlii

providing clients with products and services they can integrate into their operations (Ang & Inkpen, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003). The items causing such problems seem to be the degree of difference between two cultures in relation to a particular topic—such as expectations related to a specific job title (Gefen & Carmel, 2008; Levina & Vaast, 2008). According to this perspective, the greater the similarities between the cultures interacting—or the greater the cultural proximity—the fewer problems tend to arise in offshoring situations. The more different the cultures interacting—or the smaller the cultural proximity/greater the cultural distance—the more communication- and transaction-related problems tend to occur (Ang & Inkpen, 2008; Gefen & Carmel, 2008; Jain, Kundu, & Niederman, 2008). The same situation seems to be the case with language. That is, groups that share a common tongue (e.g., English) tend to interact more effectively than groups that have to communication across a linguistic barrier (Gefen & Carmel, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003). These factors are further exacerbated by international time difference that affect how often, how quickly, and how directly offshoring clients and vendors can communicate in order to address miscommunications (St.Amant, 2008b). The notion of cultural proximity has given rise to a gradated approach to international outsourcing. According to this approach, a company would use onshoring—outsourcing to a vendor in the same nation—for complex tasks that can’t be addressed by automation and that require constant, regular contact and communication (e.g., research and development of security software designed specifically for the client’s corporate intranet). A central factor behind such onshoring decisions is also legal jurisdiction. In such instances, an organization might not want to outsource an important activity to a nation where the client would have no mechanism for legal recourse should the vendor decide to disclose trade secrets or replicate copyrighted or patented materials (Lesk, Stytz, & Trope, 2005). (See the section “Critical Issues in Outsourcing” for a more in-depth discussion of problems involving jurisdiction and outsourcing.) For tasks that involve less direct oversight and are more standardized, but still require regular contact, nearshoring—the process of outsourcing to a vendor located in the client’s same time zone—tends to be used. In the case of the United States, Mexico and Canada tend to be important nearshoring locations. For the EU, Central and Eastern Europe tend to be the primary nearshoring venues (Ang & Inkpen, 2008; Ferguson, 2006). While nearshoring generally means less cost savings via labor arbitrage (e.g., the average Mexican IT worker earns roughly US $18,000 per year while the average IT manager in Vietnam earns only about US $15,500), the need for constant and immediate contact trumps prospective wage-related savings (Ho, 2007; King, 2008). Engineering a particular RFID tracking system to be integrated into the clients overall computing services would be an example where an IT nearshoring relationship might be preferred. Offshoring, represents the greatest geographical—and generally the greatest cultural and linguistic— distance between the outsourcing client and the related vendor (Jain, Kundu, & Niederman, 2008). Offshoring tasks are assigned to workers in far-away time zones or different hemispheres. Such practices tend to be reserved for highly standardized or automated processes where close oversight and constant, direct communication are not crucial to the success of the activity. Interestingly, many IT offshoring practices are also often outsourced to take advantage of international time differences that allow vendors to perform a task during the client’s “off hours” (McLaughlin, 2003). Activities such as IT customer service and even next-day newspaper editing are generally offshored to maximize such time differences. What often makes this kind of outsourcing successful is the use of same-language speakers (e.g., English speakers in India or the Philippines for US practices) to provide these services (Keong, 2007; Lakshman, 2008; Qu & Brocklehurst, 2003). Such services also tend to involve a relatively high degree of standardization and

xliii

automation, such as using grammatical standards or editing software to proofread a newspaper article or a standardized script cataloged in a company’s database to offer technical support to callers. In all of the outsourcing models noted here, communication plays a central role in project success. In the case of outsourcing IT products or services, the specialized nature of such tasks means clear and constant communication is essential to the success of such projects. Yet the speed with which IT practices can change creates challenges related to effective communication in outsourcing relationships. For these reasons, the tools essential to successful IT outsourcing become those that establish and maintain clear channels of communication throughout the outsourcing process. Such tools are also essential to addressing the key problem of transactions costs associated with various outsourcing activities.

iT OuTsOurcing TOOls and ThEir applicaTiOns While so much of outsourcing relies on technology for access and for operations (e.g., automation), perhaps the most important tools related to effective outsourcing are texts or documents that facilitate communication practices in outsourcing situations (Power, Desouza, & Bonifazi, 2005). As many researchers and commentators have noted, for outsourcing to be effective, client and vendor need to have a common understanding of: • • •

What activities are being outsourced? How those activities are to be performed? What constitutes the completion of an activity?

Similarly, client and vendor need to share a common understanding of what criteria will be used to assess the quality of the final product or process—a concept known as benchmarking (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Without such a shared understanding, vendors could produce items clients do not need or cannot use. Similarly, vendors could engage in processes that actually hurt a client’s core business (e.g., offering ineffective IT support to the client’s customers). Thus, the tools that help client and vendor come to a meeting of the minds on outsourcing projects are among the most valuable, yet they are also among the most overlooked (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Such communication tools, moreover, tend to apply to and affect almost all outsourcing practices and relationships. Additionally, many of the problems encountered in outsourcing—and particularly offshoring—situations involved inadequate communication (Barthelemy, 2003; Raisinghani, 2008). The first and perhaps most important tool for creating mutual understanding is the contract. The contract between the client and the vendor establishes what activity will be outsourced, what conditions the vendor must follow in performing that activity, what final products will result from the activity, and what criteria will be used to assess the effectiveness of the activity. This foundational, paper document is referred to as the legal contract. On the surface, the tenants of such a document seem self-obvious. Aspects of quality, however, are often a matter of internal organizational cultures. Over time, the internal culture of the client organization creates a series of criteria (benchmarks) that members of the organization use to determine when and if an activity is performed correctly (Ang & Inkpen, 2008; Bahli & Rivard, 2003; Power, Desouza, & Bonifazi, 2005). Such perspectives relate to how the members of that organization interpret certain words or conditions within a contract (e.g., meet minimum conditions for completion of a task). These

xliv

implicit assumptions of how one is to carry out the conditions of a contract create a second kind of contract. This implicit contract –often called a psychological contract—exists within the framework created by the legal contract and serves as the client’s method for defining success (i.e., define its actual benchmarks). What makes psychological contracts problematic is they are based upon tacit knowledge and upon common understandings, interpretations, or assumptions that have arisen over time. Thus, psychological contracts are an artifact created by the culture of the client organization (Ang & Inkpen, 2008; Barthelemy, 2003). As vendors are not a part of that organization’s culture, the vendor might associate very different assumptions and interpretations with the same legal contract. The result is the client and the vendor have two different psychological contracts they use to assess the efficacy with which the conditions of the legal contract are met (Ang & Inkpen, 2008; Levina & Vaast, 2008). Such differences can result in disputes among parties or even the creation of goods or the performance of services that do not match with the client’s expectations or needs. In this way, a mismatch between legal and psychological contracts can create risks that greatly increase transaction costs and mitigate the benefits associated with outsourcing (Bahli & Rivard, 2003; Barthelemy, 2003; Gefen & Carmel, 2008). For these reasons, individuals engaged in IT outsourcing need to view contracts as a tool for clarifying the expectations between client and vendor. Clients need to view contracts as not just a mechanism for establishing responsibilities (i.e., legal contracts), but also as a vehicle for clarifying related expectations (Ang & Inkpen, 2008; Bahli & Rivard, 2003). Such expectations would include the conditions used for benchmarking or quality assessment purposes. Vendors, in turn, need to view contracts as an initial platform from which questions can be asked, clarification can be gained, and a common interpretation can be established. This ability to clarify and to create a common interpretation is important not only for the initial success of the outsourcing agreement, but also for creating a sustained relationship between client and vendor over time. Research reveals the more client and vendor work together, the more they are able to understand and address each other’s expectations in a manner that helps the two parties better align their psychological contracts and operate more effectively. (In essence, a discussion of contracts can serve as a mechanism that increases the cultural proximity of the organizations.) It is perhaps for this reason that, when seeking a vendor to perform a service, client organizations tend to favor vendors they have worked with before over a vendor that offers a better price (Bahli & Rivard, 2003; Gefen & Carmel, 2008). In these cases, the more expensive vendor offers the key benefit of a shared or a common understanding of processes or assessment/benchmark standards. By viewing contracts as a tool for establishing a meeting of the minds, parties involved in outsourcing can more effectively establish a mutually recognized psychological contract and maximize benefits of the outsourcing relationship. Doing so reduces risk and increases trust across involved parties. While the contract establishes the initial nature of the outsourcing relationship, other documents maintain the meeting of the minds at a variety of levels during the outsourcing process (Sakthivel, 2007). Specifications, for example, are essential tools a vendor needs in order to meet the client’s expectations (its benchmarks) for creating a quality, an effective, or a complete product (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005). In IT outsourcing, specifications provide client and vendor with a common measure for how a product should be configured (e.g., coding specifications for software) or how a service should be performed (McLaughlin, 2003). In this way, specifications provide a common foundation client and vendor use to establish if the results of an outsourcing project meet client expectations for that project.

xlv

Closely related to specifications are procedures. If specifications provide client and vendor with a common benchmark for assessing results, then procedures provide the mechanism for making sure those results were achieved (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005; Qu & Brocklehurst, 2003). That is, procedures tell outsourcing vendors how (through what actions or undertakings) the client expects them to achieve a particular end. Establishing common procedures is important, for the route through which a final product is developed or service is provided can reflect the client’s intended use for that product or application of that service. In the case of IT outsourcing, specifications might require the vendor to address a particular goal through a given service (e.g., use help desk calls to market additional services). While the vendor can use those specifications to guide how to perform a task, the process through which that task is actually performed might reflect the client’s intended greater objective related to that service (e.g., to market a wider range of services to current customers). From a production perspective, a computer chip might need to be produced in a certain way in order to withstand the heat related to a certain kind of rapid processing. A final product designed according to a different procedure, however, might not meet those same client intentions for use. The mismatch of processes might result in a failure when the product is used as the client intended (e.g., the computer chip melts whenever the client tries to use it). The same situation is the case for the outsourcing of service activities. Again, the vendor might meet the objectives of a contract (e.g., answering a caller’s question related to computer help). Failure to follow the client’s expected procedure in providing this service could, however, result in problems (e.g., answering calls in a manner that conflicts with the client’s approach to offering a service or offending customers). Outsourcing clients can improve the chances vendors will match their expectations if those clients • •

Create a set of procedures that reflects how the client expects a process to be performed Explaining the reasons why the process must be performed that way

For clients and vendors to make effective use of such common tools, they must have access to them. Clients and vendors must also have access to each other so that information can be exchanged and questions can be asked in a manner that results in a successful outsourcing relationship. Central to this process is a mechanism or mechanisms that allow such communication and access to occur seamlessly. Thus, all parties can benefit from a project intranet site, or other related database, that allows clients and vendors to access needed contracts, specifications, or procedures. Such a system, in turn, needs to be designed so involved parties are alerted when updates to such items occur. The creation of centralized databases for outsourcing projects, thus, is an important IT tool for client organizations to develop. This kind of centralized repository of knowledge, moreover, becomes important if multiple vendors are working on the same project and the client needs to share information with these vendors. Interfaces, or interface design, thus becomes an important factor in outsourcing. In essence, effective interface design allows clients and vendors to quickly and easily find the information each needs to make the outsourcing relationship a success (Ang & Inkpen, 2008; Sakthivel, 2007). For this reason, the design of interfaces through which outsourcing interactions occur cannot configured randomly. Rather, the interface must be designed in a way that makes it easy for all parties to find and to exchange information (Ang & Inkpen, 2008). This interface must also provide participants with a mechanism for tracking and for being alerted to any updates or alterations made to important materials (e.g., specifications) in the system. So, when considering the design and the architecture of outsourcing-related interfaces and databases, IT professionals need to remember:

xlvi

• • •

The central items to which all parties will need access, The kinds of materials they will exchange, and The Varieties of updates that might take place.

By considering such factors, the related developer or designer can create an interface and an underlying architecture that engenders success in outsourcing interactions. Equally important are the media client and vendor use to communicate. To begin, client and vendor alike need to select a common technology through which they will interact (Sakthivel, 2007). Such a technology might be an email software, a document sharing software, or a range of other IT options. In all cases, the client must be sure the vendor possesses both the same software (e.g., shareware) and the same versions of the software that the client does. If, for example the client uses In Design to create certain materials, but the vendor uses Quark to create similar kinds of materials, it might be difficult for client and vendor to review or make use of the items they are exchanging. Similarly, if client and vendor are using different versions of the same software (e.g., Microsoft Word 2007 vs. Microsoft Word 1995), then each party could have a problem using items provided by the other. While such caveats seem rather self obvious, one needs to remember that automation—or the use of computer programs to perform certain functions—is a central component to effective outsourcing, and particularly to effective offshoring. For these reasons, client organizations need to be sure communication technologies are compatible between client and vendor to avoid unexpected transaction costs related to addressing such technology differences (Bahli & Rivard, 2003). While these text and technology tools are central to successful outsourcing, they must also be used or applied effectively so all parties can work toward a common goal. For this reason, client organizations need to work regularly with vendors to make sure there is a commonality of understanding and of tool use that makes the overall process a success (Bahli & Rivard, 2003). Managers, in turn, can be a valuable asset when addressing these factors. Organizations interested in outsourcing thus need to reconsider both the skills individuals need in order to serve as managers and the activities such manager should undertake to facilitate effective outsourcing relationships.

managEmEnT in iT OuTsOurcing EnvirOnmEnTs If effective communication is essential to successful outsourcing, then the successes of managers in outsourcing situations are directly linked to their skills as communicators as well as to their abilities to understand the organization’s business processes (Duarte, Sackett, & Evans, 2004/05; Levina & Vaast, 2008; Sakthivel, 2007). In fact, the primary objective of managers in outsourcing situations is to share their organization’s business goals and objectives with vendors. Vendors can then use this information to provide the goods or services that meet the objectives essential for the success of the client’s core business. In essence, the distributed organizations created by outsourcing make managers the central individuals who bind the different parts of the overall process together (McLaughlin, 2003). It is therefore imperative that managers of outsourcing arrangements be able to share a common vision across working groups. It is equally important managers are able to monitor projects (receive and assess communication) and provide guidance (communicate ideas) in order to help all parts of the decentralized process move toward a common goal (Solli-Saether & Gottschalk, 2008).

xlvii

To achieve these objectives, managers must first have a solid grasp of the organization’s business practices, its strategies (both long- and short-term), and its overall goals or objectives (McLaughlin, 2003). This knowledge base is imperative, for such ideas are what the manager must continually communicate to vendors if the outsourcing project is to succeed (Levina & Vaast, 2008). This knowledge base is also closely tied to the idea of using specifications and procedures to reduce transactions costs and reaping the benefits associated with outsourcing. Managers who can continually convey these ideas to vendors will thus maximize the advantages outsourcing can offer their organizations. As noted earlier, outsourcing relationships involve two different kinds of contracts—legal and psychological. The legal contract explains what the vendor is asked to do. If, however, the vendor is not familiar with the client’s expectations and practices, the vendor might not understand how specifically to perform a given activity or why an activity needs to be performed a certain way (Ang & Inkpen, 2008; Levina & Vaast, 2008). The role of the manager is to rectify such legal vs. psychological differences so vendors understand the client’s greater business objectives when performing work for that client. By communicating these concepts from the start, mangers can both educate/train vendors and monitor the quality of overall processes. If, however, a manager is not familiar with how the organization’s core business practices and objectives operate, that manager will have a difficult time communicating such ideas effectively to vendors (Levina & Vaast, 2008). Thus, an understanding of business concepts in general and the client’s core business in particular is essential to effective communication, and thus effective management in outsourcing situations. To effectively communicate the client’s business strategies, managers also need to know what the vendor is doing and how those activities relate to the client’s business objectives. For this reason, managers must have a good understanding of the contracts, specifications, and procedures that govern an outsourcing relationship. As with client business strategies, the only way managers can communicate effectively when discussing such items is to be very familiar with them. For this reason, managers need know—or have written—these materials so they can communicate about them effectively with vendors. (That is, the information contained in these documents is what vendors will use when discussing the client’s project.) Knowledge of these items allows managers to speak the vendor’s language and quickly and efficiently assess communiqués from the vendors as well as convey information to those vendors. Should a client seek to outsource a project simultaneously to multiple vendors, those contracts, specifications, and procedures become the medium the manager uses to communicate effectively across multiple organizations in order to keep all of them on task. As outsourcing practices become more international, new management skills in cross-cultural communication and project decision making become essential (Chandrasekar, 2004/2005). As noted earlier, the greater the difference between two cultures (low cultural proximity), the more difficult it can be to convey ideas and concepts across those cultures. For manages in international outsourcing/offshoring situations, this difficulty is important, for the success of outsourcing projects relies on clear, effective, constant, and often quick communication from client/manger to vendor. The more time spent having to clarify cultural differences in expectations (e.g., what a support technician is supposed to do) or culturecentered business practices (e.g., creating an IT accounting infrastructure that allows for an external audit), the more challenging the communication tasks of the manager become. Should translation also be needed to facilitate such communication, the more difficult the activities of the manager become. As Ang and Inkpen note in their 2004 study, in international collaborative projects—such as outsourcing situations—a relatively large amount of time is spent just addressing issues of miscommunication and creating common perceptions of tasks.

xlviii

What further complicates this situation is how savings from offshoring can be used to address management issues in overseas operations. As previously discussed, one benefit of the labor arbitrage is that a client organization can hire more managers per operation to create smaller ratios of managers to employees. While such practices can contribute to better oversight and more on-the-job training, they also mean the individual managing an overall outsourcing operation has more on-site managers he or she needs to communicate with to keep operations focused on achieving the client’s business goals. More managers from other cultures mean more room for cross-cultural miscommunication and more room for error (McCue, 2006). All of these factors do not mean offshoring situations are unmanageable. Rather, they mean mangers of offshoring projects need to develop a foundational knowledge of culture and communication factors (Ang & Inkpen, 2008). With this knowledge, managers can make better choices of how to interact with overseas vendors as well as when to interact (according to the vendor’s cultural expectations) to provide oversight, criticism, or updates. Managers can also use this knowledge to draft specifications, and procedures that might be better suited to the expectations of the overseas IT vendor. This same knowledge can also be used to form strategies on how to communicate the client’s business objectives when discussing the topic with vendors from other cultures. Finally, such cultural knowledge can be used to help the client company make decisions of when to offshore IT functions, what IT practices to offshore, and to where such IT practices should be offshored (Shao & David, 2007). If, for example, the manager knows that daily, real-time interactions are needed for an offshoring project to operate effectively, that manager might suggest the client company rely on nearshoring vs. offshoring. If the manager knows an IT process requires a specific understanding of certain language—and that translation might affect such understanding—that manager could advocate working with a vendor whose employees speak the same language as the client. Thus, mangers with a foundation in cultural and communication can help a client organization succeed in terms of its daily IT operations and in making important choices related to selecting an international IT vendor. More recently, offshoring situations have led organizations to value a new kind of skill for outsourcing management, and that skill is entrepreneurship. The idea is managers who are familiar with an outsourcing—and particularly an offshoring—process can look for new ways to make use of the savings resulting from offshoring (Ang & Inkpen, 2008). One example of such entrepreneurship is the development of new IT products. In industrialized nations, the cost of research and development can greatly limit what projects are approved for research. Research then becomes limited to projects that have the greatest potential returns on the original investment of resources. In offshoring situations, lower labor costs mean that research and development in other nations is a less expensive undertaking. IT vendors in those nations can thus explore a wider range of research and development options than they might be able to in the client’s home nation (Wadhwa, 2007). The results can be new products that create additional value, but the client would not have developed in house due to cost factors. A good example of this entrepreneurial approach is how Ukrainian vendor MacKiev was able to develop low-cost Mac ports of Windows products—something that might not have been undertaken/been seen as too costly if not for offshoring (McLaughlin, 2003). Managers who can recognize such potential in offshoring situations will thus have a great deal to offer client companies in terms of to maximizing competitive advantage (Ang & Inkpen, 2008). This ability to identify potential and maximize competitive advantage also relates to the international IT markets a client organization can access via offshoring. Certain product aspects, such as interface design and conditions of use, generally vary from country to country. These variations tend to be con-

xlix

nected to cultural preferences (e.g., reading direction) and national situations (e.g., the reliability of local power grids). By viewing offshoring vendors as prospective customers, a client organization can work with those vendors and modify its products or services to meet the expectations of the related overseas consumer base (Amelio, 2008). According to this perspective, managers can use offshore IT vendors as a market for testing the client’s IT goods or services for the vendor’s culture. The result is using an existing relationship to gain access to larger international markets (Wadhwa, 2006). The various opportunities outsourcing provides for managers and for client organizations are wide ranging. These opportunities, however, also often bring with them address elements of risk. To make effective outsourcing decisions and to manage outsourcing practice effectively, organizations and individuals need to understand issues and problem areas arising from outsourcing and offshoring approaches. Through such an understanding, managers and client organizations can make more effective decisions that can benefit client organizations in the short and the long term.

criTical issuEs in iT OuTsOurcing One crucial issue in IT outsourcing is the changing nature of intellectual property (IP). IP generally covers information-based products or processes developed by an organization. In most cases, such products represent the original application of an idea to create a new item or to develop a new procedure. Traditionally, the concept of IP has involved notions of copyright, patents, and trade secrets (Sakthivel, 2007). In such situations, information becomes an important commodity, for it is the information used to produce a product or perform a service that is valuable (provides an organization with a competitive advantage). Recent developments in offshoring, however, indicate current perceptions of IP need to be expanded to a range of data organizations collect and process. For these reasons, organizations need to understand various IP nuances to make effective decisions related to offshoring. From an IP perspective, copyright and patent disputes are one of the main problem areas in almost any outsourcing situation. Essentially, the moment an organization allows any information-based product or process to move beyond its prevue, the organization has relinquished its ability to direct the modification, replication, or distribution of the related knowledge. In the case of onshore outsourcing, the organization can rely on common national and cultural traditions of contract law and IP law to establish guidelines for vendors to follow (Rosenthal, 2005; St.Amant, 2008a). These same commonalities provide the client with a legal mechanism to address misuses of its IP. Such mechanisms also act as a deterrent, for both client and vendor know the penalties that can result from the misuse of a client’s IP. The rise and widespread adoption of offshoring, however, creates new legal dilemmas for outsourcing clients. The crux of these problems is jurisdiction—or the geopolitical limits to various legal traditions. In onshoring, client and vendor often exist in the same jurisdiction and operate according to the same legal framework (Lesk, Stytz, & Trope, 2005). Conversely, in offshoring, client and vendor are situated in different nations that could have vague—if not contradictory—legal mechanisms for identifying and addressing IP violations (Swire & Litan, 1998; Rosenthal, 2005; St.Amant, 2008a). In some cases, the laws related to IP protection might be weaker in the vendor’s nation. In other instances, the regulatory and oversight agencies in the vendor’s nation might simply not enforce such laws. At present, such differences have led to conflict involving a range of offshoring areas including pharmaceutical products, medical transcription, and software programming (Lakshman, 2008).

l

What makes this IP situation problematic is software-based automation used in many offshoring contexts. Equally problematic is the fact that more companies are offshoring the development of IP products and processes—such as software programming and server maintenance (Barthelemy, 2003; Heath, 2008). Further complicating this problem is some of the growing hotspots for IT offshoring are nations with records of repeated IP violations (Qu & Brocklehurst, 2003; Wadhwa, 2007). Certain research, for example, notes that Vietnam is a known international offenders in terms of software piracy (Lim, 2006). Yet Vietnam is emerging as a hub for IT offshoring and gaming development (Balfour, 2006). Organizations therefore need to carefully research both the vendor and the vendor’s related nation before deciding where to offshore certain tasks. Curiously, the more recent problems related to IP and offshoring are not as much about software as they are about the data such software processes. The crux of this problem involves personal information— particularly the health records or the financial records of specific individuals. In the US, for example, the adoption of laws such as the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the Sarbanes-Oxley Act of 2002 have required organizations to take on a new range of data collection and data processing tasks (404 tonnes of paper, 2004; Goolsby, 2001a; Goolsby, 2001b). The sheer scope of such activities has prompted a number of organizations to offshore activities such as medical transcription and financial accounting practices (Byrnes, 2005; Lesk, Stytz, & Trope, 2005; St.Amant, 2008a). Thus, large quantities of personal medical records and financial information are now sent abroad for processing. Such information is actually something that has value in relation to a range of legal (e.g., target marketing) and illegal (e.g., identity theft) activities (Michael et al., 2005; Ni & Bretschneider, 2007; St.Amant, 2008a). This information thus constitutes a new kind of intellectual—or information-based—product that can be owned (e.g., property). And, just like traditional IP, the legal context created by offshoring establishes an environment in which abuses can occur (St.Amant, 2008a). More recent examples misuses of personal data include identity theft of financial information and extortion related to the disclosure of medical records (Lazarus, 2004). These IP- and software-related situations mean organizations need to think carefully about the nature of their core activities. The re-assessment of such activities is essential undertaking, for this core should included those activities that could result in IP-related problems if offshored (Shao & David, 2007). Another issue organizations will need to consider is the threat of cyberterrorism in IT outsourcing. The same oversight limitations affecting IP outsourcing—and particularly offshoring—also constitute potential problems in terms of international terrorism (Michael et al., 2005). From an IT perspective, such concerns can take two main forms. The first is the disclosure of sensitive information. In this case, an outsourcing vendor could share or sell details about the security protocols and IT systems of a client. This disclosure leaves the related system vulnerable to attacks from terrorists who can navigate through it, override its defenses, or use known glitches or limitations to wreak havoc on the related organization (Michael et al., 2005). What makes such situations particularly troublesome is the growing number of government agencies that use offshoring for some of their IT work (Ni & Bretschneider, 2007). A related problem area involves the offshoring of software programming. In this case, the programmer could design a software product to contain certain weaknesses that terrorists could later exploit (Michael et al., 2005). Should the client distribute such software to a wide range of customers (e.g., tax preparation software), such purposeful flaws could cause widespread problems. Similarly, a programmer could design a software package to shut down or to create problems (e.g., distribute a virus) that could cause the collapse of the system in which it was used (Michael et al., 2005). (This approach to software as a sort of time-delayed weapon was actually employed successfully by the US against the

li

Soviet Union during the Cold War (Michael et al., 2005).) Again, such areas of concern are related to oversight and what constitutes a core activity to outsource or offshore. For these reasons, organizations might consider • • •

How outsourcing will be used in the development of software products What kinds of software development will be outsourced How outsourced software products will be used by the client organization and its related customers

By reviewing these factors, the client organization can more carefully determine if and when outsourcing or offshoring are effective methods for addressing certain situations. The concerns noted here represent the current context of IT outsourcing. They, however, are not the only aspects organizations need to consider when making decisions related to outsourcing. Rather, a number of emerging trends could also influence how client organizations effectively use outsourcing. Organizations must therefore familiarize themselves with such trends and consider approaches for addressing them (Lesk, Stytz, & Trope, 2005; Shao & David, 2007). Only through such foresight will clients to make effective use of outsourcing in future ventures.

OrganizaTiOnal implicaTiOns OF iT OuTsOurcing As noted earlier, current outsourcing practices mark only the tip of a potential global marketplace that remains to be tapped. It is perhaps for this reason that the most interesting emerging trends related to outsourcing involve the changes and potentials of markets in developing nations. Of these developments, perhaps the most interesting is the relatively recent move toward a new kind of outsourcing called worldsourcing. According to the worldsourcing approach, an organization does not just offshore activities to a single nation or to a few nations. Rather, clients now seek to re-distribute all non-core functions to overseas employees in several nations in order to take advantage of labor arbitrage on a truly large/ global scale (Amelio, 2008; Ang & Inkpen, 2008; Jahns, Hartmann, & Bals, 2006). As a result, some of the company’s non-core functions, such as financial services, are performed in a particular location or locations, such as India or China. Other non-core functions, such as healthcare processing, are outsourced to Russia, and legal services are offshored to New Zealand (Sathe & Aradhana, 2008). In some cases, one particular kind of IT or other work is sent to a single vendor or a group of vendors on one nation. In other cases, the same kind of work is distributed to a variety of vendors in multiple nations. Each vendor, in turn, completes a part of an overall specialized puzzle. In both cases, the objective is to re-locate any and all non-core functions to a range of overseas vendors and thus reduce labor costs on a large scale to maximize competitive advantage as much as is possible. The rise of worldsourcing has led different nations to develop their expertise in and their reputation for performing a certain kind of knowledge-based function. Such nation-based specialization has become particularly popular in the realm of knowledge process outsourcing (KPO), and tentatively, certain countries have emerged as front-runners in the quest to create a global outsourcing brand for performing a particular service. A rough breakdown of such worldsourcing services is shown in Table 1. And as more regions gain online access and seek to enter the global marketplace, the prospects for such specialized worldsourcing functions will only increase.

lii

Table 1. Worldsourcing services (Taken from Sathe & Aradhana, 2008) KPO Specialty Area

Nation

Content Development

India and the Philippines

Financial Services

India and China

Healthcare Processing

Russia and India

IT Research and Development

India, China, and Russia

Legal Processing

New Zealand and India

The rise of worldsourcing has also brought with it new perspectives of the multinational corporation. If, for example, a multinational outsources essentially all of its functions to other nations, does that organization need to have a true global headquarters? Could such an organization instead exist as a disembodied entity in which different regions performed a given function that contributed to the continued market success of the overall whole? While such an approach sounds futuristic, one organization— China’s Lenovo—has begun to examine this model of operation (A bigger world, 2008). According to this corporate framework, there is no such thing as offshoring—just different organizational functions being housed in various nations. Management from each of these divisions then meets at different regional functional location over the course of the year in order to coordinate activities and plan business strategies. This radical approach to worldsourcing means offshoring is no longer a strategy companies employ; rather, it serves as the structure of the overall company.

EmErging TrEnds and sOciETal implicaTiOns OF iT OuTsOurcing On a more modest level, the access offshoring provides to local markets has prompted a number of organizations to re-think where certain core activities—particularly research and development (R&D)— should take place. In terms of R&D, the idea has to do with how well designed products are for a larger global marketplace. According to this perspective, R&D conducted in industrialized nations leads to the development of products and services designed for consumers in those nations. From an IT perspective, such products, however, have been created to meet the income, infrastructure, and other high-tech needs of individuals in those nations. As a result, these products and services are often poorly suited for use in developing nations that lack the infrastructure and other technical aspects needed to operate the IT product or engage in the IT-related process (Farrell, Puron, & Remes, 2005). The company associated with the IT product or service must therefore ask a key question: is it easier or more cost effective to try to revise the existing product or service into a simpler format for consumers in developing nations or develop a completely new, simpler product or service for consumers in those countries? In many cases, neither of these options is cost effective. More recently companies in emerging markets have used their own R&D to develop products, such as laptop computers, designed to meet the needs of consumers in those nations. The result has been a rapid growth in market share for those companies, such as China’s Lenovo, and the use of economies of scale to reap sizable profits (A bigger world, 2008). These developments have prompted a number of companies to consider re-locating R&D activities to developing nations. The idea is that offshoring R&D to such nations will result in products or services that would be basic, and designed for success in these regions. Thus, the related company could tap those markets. At the same time, the relatively

liii

basic nature of the resulting product or service would be easier to upgrade or revise to address the needs of consumers in industrialized nations. (In sum, it’s cheaper and easier to make a simple product more complex than to try to simplify an inherently complex item.) This reasoning, in combination with the rise of successful R&D activities in developing nations has prompted a number of organizations to consider outsourcing R&D to a number of locations. (At present, India, China, and Russia appear to be the hot locations for such R&D outsourcing in IT (Sathe & Aradhana, 2008).) As noted earlier, effective management is essential to successful outsourcing, particularly international IT outsourcing. As worldsourcing gains in popularity, as more organizations become globally distributed, and as a new range of strategically important (if not core) IT functions is sent overseas, the need for effective managers becomes even greater. The problem is that many of the nations that have become centers for outsourcing activities lack formal programs in management education or have only fledgling programs in that area. As a result, the supply of trained managers in many nations might not be able to keep up with the growing demands created by increased offshoring. One solution to this problem is the expansion of online programs in management education. At present, several institutions provide online instruction to internationally dispersed students. For example, Deakin University in Australia offers a range of Web-based classes and degree programs to students located throughout Asia (Offsite Learning Part I, 2002). Similarly, the Open University of Hong Kong, the Philippines-based Systems Technology Institute (STI), and the Singapore-based Informatics Group’s Center for Open Learning all provide online courses to a growing international student base (Offsite Learning Part I, 2002). At the same time, much of the earlier skepticism about online education has begun to disappear as more companies focus on the skills a student can demonstrate vs. the institution where those skills were acquired (Offsite Learning Pt. II, 2002; Online Degrees Gain Acceptance, 2005). Within this new educational context, business—particularly business management—instruction has become a prominent area. The reason for such importance is capable online programs are able to deliver effective business and management instruction to workers in nations that have either limited or no formal instruction programs these fields (The MBA World Gets Smaller, 2001). These online programs also offer the added benefit of acculturation. That is, they actually prepare students for operating in the decentralized, distributed, and online environments at the center of IT outsourcing practices. Additionally, these programs provide students with initial exposure to working with international colleagues via online media. Such aspects have prompted a number of employers to recognize the advantages or online learning environments in relation to business education (Chassie, 2002; Offsite Learning Pt. I, 2002; Offsite Learning Part II, 2002). Thus, online instruction and the growth of international online programs—particularly in management education—could be driven by and help to address many of the demands created by outsourcing. Managers, however, are not the only trained workers in short supply. By many accounts, the number of available and qualified IT workers in several nations is not enough to keep up with the growing demands created by offshoring (Ni & Bretschneider, 2007; Shao & David, 2007; Yeo, 2006). For example, a number of US companies continually claim there is a lack of trained IT workers in the US. These organizations also cite this shortage as the reason for which they continually search for overseas vendors to perform IT functions (Herbst, 2007). In fact, the high demand for IT offshoring workers has led to a market crunch in many overseas IT hubs (Yapp, 2007; Yeo, 2006). This lack of trained IT workers has led to a variety of developments that will surely affect future practices in offshoring. To being, more IT offshoring vendors are beginning to emerge in nations such as Malaysia, Vietnam, and Sri Lanka in order to meet this demand (Augria, 2008; Birks et al., 2007; Ho,

liv

2007; Mitchell, 2004). The result has led to a boom in the IT offshoring industry in those nations. The growing demand for IT workers has also caused the salaries of employees in offshoring hotspots like India to soar (Hamm, 2008; King, 2008). As a result, the cost savings associated to offshoring IT work to India is shrinking, and India itself has begun to offshore IT and other service activities to nations where such work can be performed more cheaply (Yapp, 2007). These secondary outsourcing nations include Mexico, Ecuador, and Colombia (King, 2008). And as supply and demand continue to create pressures in offshoring, organizations might see the same online educational models used to train managers used to train IT workers as well. Conversely, in a number of industrialized nations, growing concerns over jobs lost to international outsourcing and prospective security threats have lead to a backlash against offshoring. In some cases, this backlash has taken the form of legislation designed to prevent jobs in certain areas from being offshored (Ni & Bretschneider, 2007; Shao & David, 2007). In 2002, for example, New Jersey state senator Shirley Turner introduced a bill that would keep state contracts for call center services in the US if possible (McLaughlin, 2003). In other cases, offshoring-related concerns have led a number of individuals to question the claims of a shortage of IT workers in nations such as the US. These instances have prompted numerous individuals and agencies to look into these practices and the claims of those organizations seeking to offshore IT and other kinds of technical work. The result is a kind of prospective political instability where outsourcing vendors might not be sure if they can or will be able to work with clients in the future. Such instability, in turn, could prompt organizations interested in de-centralizing their operations to actually avoid creating offices in certain regions.

cOncluding ThOughTs On iT OuTsOurcing From an organizational perspective, the decision to outsource IT-related activities is no small matter. It requires a good understanding of what the organization’s core business is, what strategies the organization uses to achieve competitive advantage in relation to that core, and what benefits IT outsourcing would offer in terms of leveraging that advantage. Effective IT outsourcing can lead to organizational success and better access to the growing global marketplace. Poorly planned and poorly executed IT outsourcing approaches, however, can result in the loss of valuable IP, a decline in market share, and even the destabilization of a business’s core activities. Thus, the more an organization knows about IT outsourcing-related variables affecting IT—basic practices, common approaches, managerial aspects, organizational structures, and potential risks—the better prepared that organization can be to make decisions on if, when, and how to engage in outsourcing activities. This introduction has provided an overview of the general areas and topics related to IT outsourcing practices. The other entries in this collection build upon and expand these ideas in a manner that provides focused insights on outsourcing practices and perspectives. These entries also present new perspectives on and approaches to IT outsourcing practices. While IT outsourcing decisions are often made on a case-by-case basis, these entries offer readers s range of ideas and approaches that can help clarify the conditions of a particular situation. By using the entries in this collection as a resource for outsourcing-related research, organizations can improve their understanding of the factors involved in IT outsourcing and develop business strategies and procedures that successfully address these aspects. In sum, effective outsourcing comes down to one simple concept—information is power, and the readings contained in this collection constitute a mechanism for achieving such empowerment.

lv

rEFErEncEs 404 tonnes of paper. (2004). The Economist. Retrieved Nov. 10, 2008, from http://www.economist.com/ finance/displaystory.cfm?story_id=E1_PVDPJPT A bigger world. (2008, Sept. 18). The Economist. Retrieved Oct. 10, 2008, from http://www.economist. com/specialreports/displaystory.cfm?story_id=12080751 Ameilo, W. J. (2008). Beyond outsourcing to worldsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/technology/content/may2008/tc20080529_101827.htm Ang, S. & Inkpen, A. C. (2008). Cultural intelligence and offshore outsourcing success: A framework of firm-level intercultural capability. Decision Science, 39, 337-358. Application outsourcing. (2007). Bitpipe.com. Retrieved Nov. 10, 2008, from http://www.bitpipe.com/ tlist/Application-Outsourcing.html Augria. (2008). IT outsourcing trends. USRCCNE. Retrieved Nov. 10, 2008, from http://www.usrccne. org/news2.phtml?m=424 Bahli, B. & Rivard, S. (2003). The information technology outsourcing risks: A transaction cost and agency theory-based perspective. Journal of Information Technology, 18, 211-221. Balfour, F. (2006). Vietnam’s growing role in outsourcing. BusinessWeek. Retrieved Oct. 12, 2008, from http://www.businessweek.com/technology/content/dec2006/tc20061211_099877.htm Barthelemy, J. (2003). The seven deadly sins of outsourcing. Academy of Management Executive, 17, 87-98. Beizer, B. (1990). Software systems techniques. New York: Van Nostrand Reinhold Company. Birks, et al. (2007). Successful IT outsourcing engagement: Lessons from Malaysia. The Electronic Journal of Information Systems in Developing Countries, 30. Retrieved Nov. 10, 2008, from http://www. ejisdc.org/ojs2/index.php/ejisdc/article/viewFile/391/206 Boguslauskas, V. & Kvedaraviciene, G. (2008). Strategic outsourcing plan and the structure of outsourcing process. Engineering Economics, 58, 60-66. BPO- business process outsourcing. (2008). Sourcingmag.com. Retrieved Oct. 20, 2008, from http:// www.sourcingmag.com/content/what_is_bpo.asp Byrnes, N. (2005). Green eyeshades never looked so sexy. BusinessWeek. Retrieved Oct. 8, 2008, from http://www.businessweek.com/magazine/content/05_02/b3915041_mz011.htm Chan, I. (2007). Asia’s outsourcing biz set to double. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/mar2007/gb20070328_802340.htm Chandrasekar, P. R. (2004/05). Tips for outsourcing. IEEE Engineering Management, 24. Chassie, K. (2002, August/September). The allure of e-learning. IEEE Potentials, 33-35. Cherry, S. & Robillard, P. N. (2004). Communication problems in global software development: Spotlight on a new field of investigation. In Proceedings of the International Workshop on Global Software Development. International Conference on Software Engineering. Edinburgh, Scotland, 48-52.

lvi

Duarte, G. M., Sackett, P., & Evans, S. (2004 Aug./Sept.). One style does not fit all. IEEE Manufacturing Engineer, 44-48. Duarte, G. M., Sackett, P., & Evans, S. (2004/05). Step by step: Breaking outsourcing down into manageable phases. IEEE Engineering Management, 28-30. Farrell, D., Puron, A., & Remes, J. K. (2005). Beyond cheap labor. Lessons for developing economies. McKinsey Quarterly. Retrieved Nov. 6, 2008, from http://www.mckinseyquarterly.com/Beyond_cheap_labor_Lessons_for_developing_economies_1545 From Russia with technology? (2006). BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/magazine/content/06_05/b3969420.htm Ferguson, T. (2006). Eastern Europe outsourcing to triple. BusinessWeek. Retrieved Sept. 10, 2008, from http://businessweek.mobi/detail.jsp?key=4200&rc=bs Gefen, D. & Carmel, E. (2008). Is the world really flat? A look at offshoring at an online programming marketplace. MIS Quarterly, 32, 367-384. Goolsby, K. (2001a). How to get ready for HIPAA: Outsourcing for privacy and security. Outsourcing Center. Retrieved Oct. 10, 2008, from http://www.outsourcing-journal.com/apr2001-headlines.html Goolsby, K. (2001b). Healthcare’s biggest challenge. Outsourcing Center. Retrieved Oct. 12, 2008, from http://www.outsourcing-journal.com/apr2001-aspfocus1.html Gupta, A. et al. (2008). Evolving relationships between law, offshoring of professional services, intellectual property, and international organizations. Information Resource Management Journal, 21, 103-126. Hagel, J. III. (2004). Offshoring goes on the offensive. The McKinsey Quarterly. Retrieved Oct. 20, 2008, from http://www.mckinseyquarterly.com/Operations/Outsourcing/Offshoring_goes_on_the_offensive_1406 Hamm, S. (2008). Outsourcing the offshore operations. BusinessWeek. Retrieved Nov. 5, 2008, from http://www.businessweek.com/technology/content/jul2008/tc20080715_289971.htm Heath, N. (2008). Global outsourcing to grow 8% in 2008. BusinessWeek. Retrieved Nov. 10, 2008, from http://www.businessweek.com/globalbiz/content/jan2008/gb20080110_489999.htm Herbst, M. (2007). Outsourcing: How to skirt the law. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070621_912042.htm Ho, V. (2007). Asia IT managers among the lowest paid. BusinessWeek. Retrieved Nov. 3, 2008, from http://www.businessweek.com/globalbiz/content/oct2007/gb20071023_093538.htm Jahns, C., E. Hartmann, & L. Bals. (2006). Offshoring: Dimensions and diffusion of a new business concept. Journal of Purchasing & Supply Management, 12, 218-231. Jain, N. K., S. K. Kundu, & F. A. Niederman. (2008). Offshoring proprietary information technology services: A firm and country level analysis. Management International Review, 48, 447-461. Keong, L. M. (2007). Outsourcing rivalry doesn’t phase Malaysia. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/dec2007/gb20071214_820595.htm

lvii

King, R. (2008). The new economics of outsourcing. BusinessWeek. Retrieved Nov. 3, 2008, from http:// www.businessweek.com/technology/content/apr2008/tc2008043_531737_page_2.htm Kogut, B. & Singh, H. (1988). The effects of national culture on the choice of entry mode. Journal of International Business Studies, 19, 411-432. Lakshman, N. (2008). Copyediting? Ship the work out to India. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/jul2008/gb2008078_678274.htm Lakshman, N. (2008). Test time for India’s drugmakers. BusinessWeek. Retrieved Oct. 10, 2008, from http://www.businessweek.com/globalbiz/content/mar2008/gb20080312_325398.htm Lazarus, D. (2004). Looking offshore: Outsourced UCSF notes highlight privacy risk. SF Gate. Retrieved Nov 10, 2008, from http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2004/03/28/MNGFS3080R264. DTL Lesk, M., Stytz, M. R., & Trope, R. L. (2005, March/April). Averting security missteps in outsourcing. IEEE Security & Privacy, 70-73. Levina, N. & Vaast, E. (2008). Innovating or doing as told? Status differences and overlapping boundaries in offshore collaboration. MIS Quarterly, 32, 307-332. Lim, J. (2006). Software piracy still a scourge in Asia. BusinessWeek. Retrieved Nov. 15, 2008, from http://www.businessweek.com/globalbiz/content/may2006/gb20060524_858766.htm The MBA world gets smaller. (2001, November 12). The Economist. Retrieved September 10, 2005, from http://www.economist.com/business/globalexecutive/displaystory.cfm?story_id=860807 McCue, A. (2006). Culture clashes harm offshoring. BusinessWeek. Retrieved Sept. 10, 2008, from http:// www.businessweek.com/globalbiz/content/jul2006/gb20060717_515205.htm McLaughlin, L. (2003 May/June). An eye on India: Outsourcing debate continues. IEEE Software, 114-117. Meyer, D. (2008). Nokia: Linux needs to learn business. BusinessWeek. Retrieved Oct. 10, 2008, from http://www.businessweek.com/globalbiz/content/jun2008/gb20080612_288518.htm Mitchell, A. (2004). Offshore labor markets impact IT outsourcing. TechNewsWorld. Retrieved Oct. 10, 2008, from http://www.technewsworld.com/story/36949.html?wlc=1226954419 Michael, J. B. et al. (2005, July/Aug.). The role of policy in balancing outsourcing and homeland security. IT Pro, 19-23. Murrain, M. & Cohen, D. (2003). Infrastructure outsourcing. techsoup. Retrieved Oct. 10, 2008, from http://www.techsoup.org/learningcenter/techplan/archives/page9765.cfm Namasivayam, S. (2004, Jan. Feb.). Profiting from business process outsourcing. IT Pro, 12-18. Ni, A. Y. & Bretschneider, S. (2007, May/June). The decision to contract out: A study of contracting for e-government services in state governments. Public Administration Review, 531-544. Offsite learning: On target? Pt. I. (2002, October 7). The Economist. Retrieved December 5,

lviii

2005, from http://www.economist.com/displaystory.cfm?story_id=1377339 Offsite learning: On target? Pt. II. (2002, October 7). The Economist. Retrieved December 5, 2005, from http://www.economist.com/displaystory.cfm?story_id=1377324 Online degrees gain acceptance. (2005, October 24). eMarketer.com. Retrieved October 24, 2005, from http://www.emarketer.com/Article.aspx?1003647&printerFriendly=yes Outsourcing. (2008). The Economist. Retrieved Nov. 12, 2008, from http://www.economist.com/business/management/displaystory.cfm?story_id=12323287 Platz, L. A., & Temponi, C. (2007). Defining the most desirable outsourcing contract between customer and vendor. Management Decision, 45, 1656-1666. Power, M. J., Desouza, K. C., & Bonifazi, C. (2005, July/Aug.). Developing superior outsourcing programs. IT Pro, 32-38. Qu, Z. & M. Brocklehurst. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67. Rajabzadeh, A., Rostamy, A. A. A., & Hosseini, A. (2006). Designing a generic model for outsourcing process in public sector: Evidence of Iran. Management Decision, 46, 521-538. Raisinghani, M. R. et al. (2008). Information technology systems offshore outsourcing: Key risks and success factors. Journal of Information Technology Research, 1, 72-92. Reuters. (2004). France outsources, Senegal calls. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/print/0,1294,64262,00.html Rodgers, T.J. (2005). The truth about outsourcing. IEEE Design & Test of Computers, 12-13. Rosenthal, B. E. (2005). New outsourcing risks in 2005 and how to mitigate them. Outsourcing Center. Retrieved Oct. 12, 2008, from http://www.outsourcing-journal.com/jan2005-risks.html St.Amant, K. (2008a). The privacy problems related to international outsourcing: A perspective for technical communicators. In B. Thatcher & C. Evia (Eds.), Outsourcing Technical Communication: Issues, Policies, and Practices (pp. 165-184). Amityville, NY: Baywood Publishing Company. St.Amant, K. (2008b). Virtual office communication protocols: A system for managing international virtual teams. In G. F. Hayhoe & H. M. Grady (Eds.), Connecting People with Technology: Issues in Professional Communication (pp. 219-228). Amityville, NY: Baywood Publishing Company. Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50, 69-75. Sathe, D. & Aradhana. (2008). Knowledge process outsourcing: The big game. Sourcingmag.com. Retrieved Oct. 20, 2008, from http://www.sourcingmag.com/content/c060503a.asp Shao, B. M. & David, J. S. (2007). The impact of offshore outsourcing on IT workers in develop countries. Communications of the ACM, 50, 89-94.

lix

Solli-Saether, H. & Gottschalk, P. (2008). Maturity in IT outsourcing relationships: An exploratory study of client companies. Industrial Management & Data Systems, 108, 635-649. UNESCO. (2004). Higher education in a globalized society. Paris: United Nations Educational, Scientific and Cultural Organization. Wadhwa, V. (2007). Why small tech companies aren’t outsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/smallbiz/content/jul2007/sb20070720_787886.htm Wadhwa, V. (2006). The real problem with outsourcing. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/smallbiz/content/nov2006/sb20061107_874214.htm Weimer, G. & Seuring, S. (2008). Information needs in the outsourcing lifecycle. Industrial Management & Data Systems, 108, 107-121. Yapp, E. (2007). India’s outsourcing status under threat. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/jul2007/gb20070716_925725.htm Yeo, V. (2006). India drives to upgrade IT outsourcing workforce. BusinessWeek. Retrieved Sept. 10, 2008, from http://www.businessweek.com/globalbiz/content/dec2006/gb20061204_840686.htm

lx

About the Editor

Kirk St.Amant is an associate professor of technical and professional communication at East Carolina University where he teaches courses in professional communication in international contexts. He has worked on international projects for companies such as Medtronic, VERITAS Software, the Braun Corporation, and Unisys, and for the non-profit organizations the Humanitarian Demining Information Center (HDIC) and the Consortium for the Enhancement of Ukrainian Management Education (CEUME). Kirk serves on the editorial board for the journal Technical Communication and is the Associate Editor for Globalization and Outsourcing for the IEEE Transactions on Professional Communication—the journal of the IEEE Professional Communication Society.

Section I

Fundamental Concepts and Theories This section serves as the foundation for this exhaustive reference tool by addressing crucial theories essential to the understanding of IT outsourcing. Chapters found within these pages provide an excellent framework in which to position outsourcing within the field of information science and technology. Individual contributions provide overviews of why, when, and what to outsource, business determinants of offshoring intensity, and global IT outsourcing, while also exploring critical stumbling blocks of this field. Within this introductory section, the reader can learn and choose from a compendium of expert research on the elemental theories underscoring the research and application of outsourcing.

1

Chapter 1.1

Why, When, and What to Outsource Donald A. Carpenter Mesa State College, USA Vijay K. Agrawal University of Nebraska - Kearney, USA

absTracT

inTrOducTiOn

This chapter presents an overview of the outsourcing phenomenon, focusing on the question of why, when, and what to outsource. It provides an extensive set of guidelines for a business student to understand the nature of outsourcing. Drawing extensively on recent scholarly literature, the chapter presents a wide range of concepts. There are many causes that might lead a company to a decision to outsource. Similarly, there are many factors that contribute to an environment that is conducive to outsourcing. The question of what to outsource is answered by examining core competencies and critical success factors. The chapter also presents trends in outsourcing in specific countries and industries to help the reader understand what is possible.

Today’s business environmental, organizational, and technological factors require businesses to operate efficiently and effectively in order to be competitive. Toward those goals, managers employ many strategies to improve productivity, including standardization, automation, and business process reengineering. Additionally, they restructure the business organizations to be lean and flat so that they can become flexible in responding quickly to changes in environment and customers’ needs. Outsourcing is another valuable strategy managers use to achieve the above goals. Whenever a business procures resources purely from an external source to accomplish business objectives, it engages in outsourcing (Gartner, 1997).

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Why, When, and What to Outsource

Hence, the term “outsourcing” is one that can be used to describe any external up-line function in a supply chain. When a manufacturer acquires raw materials from a supplier, it engages in outsourcing. When a wholesale company contracts with an external delivery firm, it engages in outsourcing. When a firm hires a computer consultant, it engages in outsourcing. Outsourcing has taken on a new emphasis in today’s business environment. In the interest of either efficiency or effectiveness, a modern organization often contracts out entire business functions to other companies that are specialists in their specific fields. A firm might turn over to external suppliers its human resource functions, its information technology functions, its shipping functions, or any other functions for which an external supplier is more efficient and effective than is the host company. While such outsourcing is not a new strategy — businesses have used outside consultants for as long as there have been businesses — it has gained more attention and usage in recent years. Outsourcing has also received unprecedented attention from politicians and the press in recent elections. Some candidates and journalists have painted outsourcing as an evil to be avoided as economically undesirable to a country’s economy. Those reports often confuse outsourcing with one or two of its logical extensions, namely nearshore outsourcing and off-shore outsourcing, also known as off-shoring. A distinction between those two is that the former typically refers to outsourcing to a country that is on the country of origin’s same continent, for example, a U.S. company outsourcing to one in Mexico; the latter refers to outsourcing to a country across an ocean, for example, a U.S. company outsourcing to a supplier in India. Collectively, both are known as off-shore outsourcing and off-shoring and will be referred to in this chapter as such. Business managers see off-shore outsourcing to lower-wage countries such as China, India, Ireland, and the Philippines in the same light as

2

reducing labor cost by automation or technology. Conversely, politicians, the press, and a large proportion of the general population view off-shoring as a threat to local economies. Regardless of one’s perspective, in the absence of government regulation to the contrary, outsourcing and off-shoring, in particular, will grow steadily (Robinson & Kalakota, 2005, p. 16)

hisTOrical pErspEcTivE The predominant supply chain model for several decades was vertically integrated. Each member of a supply chain was considered to be part of the same industry. Automobile manufacturers purchased parts from automotive parts manufacturers, and then sold completed cars to automobile dealers. All the ancillary activities that support the supply chain directly or indirectly were included within the automobile manufacturer. Steadily, products became complex and the scale of operations increased and management of entire operations within one corporation became less feasible. This resulted in the increasingly popular use of outsourcing and has resulted in vertical disintegration of corporations and supply chains. As travel and communication became easier in the 1970s and 1980s, as trade restrictions increased, and as the gap in wages between developed and developing countries increased, outsourcing began to move off-shore. Arguably, the advanced industrialized economies of the United States, Japan, and Europe are the principal candidates for origination of outsourcing transactions (Koveos & Tang, 2004, p. 52). For decades, U.S. industry has outsourced blue-collar jobs to the lower wage countries. That trend now includes white-collar jobs as well. Economic development in Japan and Europe in the past couple decades has generated an environment that has fostered outsourcing practices. In addition, some developed Asian economies have both the experience and the location advantage in outsourcing

Why, When, and What to Outsource

to China and India. Taiwan and Korea are such examples. In 2002, for instance, India had 90% of U.S. organizations’ information technology (IT) off-shore business. However, many Fortune 500 companies that have outsourced to India are looking to diversify the risk associated with dependence on one country (Gupta, 2002). China looms as India’s biggest competitor, although some consider the two as noncomparable at this time. Other countries considered to be attractive as off-shore outsourcing sites include Malaysia, the Czech Republic, Singapore, the Philippines, Brazil, Canada, Chile, Poland, Hungary (Kearney, 2004), Russia, and Vietnam (Computerworld, 2004). In the age of the Internet and World Wide Web, a company’s location hardly matters. In the past, the educated and skilled labor from low-cost countries immigrated to the U.S. During the last decade, faster communications and improved information allow companies to easily send information oriented work to any location on the globe. Ultimately, countries with low-paid but well-educated workers will benefit greatly. However, the country of origin of the outsourcing also benefits. McKinsey Global Institute estimates that every dollar in spending that is diverted offshore creates $1.45-$1.47 of value, of which the U.S. captures $1.12-$1.14 or 78% of the value (Arora & Arora, 2004, p. 23).

why dO Firms OuTsOurcE? Companies outsource functions for reasons that are organizationally driven, improvement driven, financially driven, revenue driven, or cost driven (Outsourcing Index, 2003). Moreover, outsourcing can be viewed as a component of corporate and industry international expansion and restructuring. A recent McKinsey Global Institute Report (Farrell, 2003) identifies five horizons of the global industry value chain:

• •

•

•

•

Market entry: Entering a country for purposes of market expansion. Product specialization: Specialization takes place in different locations. Each location may engage in final goods trade with each other. Value chain disaggregation: Product components are manufactured in a certain location and assembled elsewhere. Value chain reengineering: Reengineering processes to capture additional advantages from production cost differentials. New market creation: New market segments are penetrated as a matter of capturing the full value of the company’s global activities. According to another McKinsey study:

effective outsourcing implies identifying and managing the ‘natural owner’ of every activity in he value chain. Off-shore outsourcing arises from the basic reality of the global environment: any company, in any country, may be the natural owner! It can then lead to a drastic restructuring, including ‘unbundling,’of the companies affected. Indeed, as total interaction costs among companies and industries are changing, companies around the world are reorganizing themselves by providing the answer to their question: what business are we in? (Hagel & Singer, 2004, p.1) A firm can use an outsourcing to supplement its core competencies, by contracting with outside providers for activities in which the firm has no unique capabilities. This “strategic outsourcing” (Quinn & Hilmer, 1995, p.1) can generate several benefits: •

Extracting the maximum benefits from internal activities, since they represent what the firm does best

3

Why, When, and What to Outsource

•

• •

Maximizing their competitiveness and protecting or even expanding their market share Effectively utilizing suppliers capabilities Decreasing risks, shortening cycle times and fulfilling customer needs

A survey of 500 human resources executives (Arora & Arora, 2004, pp. 19-20) found that: • •

• • •

92% of the firms that had moved jobs overseas did so to cut costs. An average of 13% of jobs at each company are already located off-shore and an additional 12% could be relocated within the next three years. 45% of the 500 firms have overseas operations. 71% of the remaining companies planned to move some jobs abroad by 2005. Of the firms who are currently using offshore labor, 29% began doing so in the years 1995-1999, while 43% began in 20002003.

whEn TO OuTsOurcE: FacTOrs ThaT suppOrT OuTsOurcing Characteristics of today’s outsourcing environment are many and varied. The strategic change to outsourcing is highly evident in the software industry. Frequent changes to software especially often result in an organization turning to outsourcing as a solution. Reasons studied for this (Agrawal, Haleem & Sushil, 2001; Agrawal, 2005a) can be generalized to all outsourcing, and include: • •

4

The turbulent market will need corporations to be customer focused. There are pressures on corporations to continuously develop new product at reduced cost.

• •

Extensive customization is enabled by IT through mass customization. The market need can be fulfilled by flexible and adaptable organizational structure which is possible with IT-enabled processes.

Previously identified factors include timecompression, short product life cycles, strategic discontinuity, increase in knowledge intensity, and customer-focused approach (El Sawy, Malhotra, & Young, 1999). These changes and others will be discussed in subsequent paragraphs.

customer Focus In a traditional sellers’ market, products and services provided by producers and suppliers are consumed. Today, most products and services exist in a buyers market, in which there is extreme competition with customers as a focal point. Moreover, customers have become much more sophisticated and knowledgeable, especially with the huge amount of product and service information available to them on the World Wide Web (Turban et al., 2006, p. 14). In many instances, customers can customize products or services and even name their own price. This provides customers with a huge amount of power (Pitt et. al., 2002). Companies need to be able to respond to that power. A company with no experience in doing so might be wise to turn to outsourcing as a solution to create and operate their customer relationship management (CRM) functions and related information systems (Greenberg, 2002).

shrinkage in product/systems life cycle Intense competition tends to decreases in the length of product or service life cycles. As new products or services are brought to market, the power of the modern consumer comes into play with demands for customization. Such continual customization is labor-intensive. Outsourcing,

Why, When, and What to Outsource

especially off-shoring provides a solution to contain those costs. This impact is particularly evident in the software industry. In a survey of 118 senior financial executives, 73% of the respondents expected to have shorter replacement cycles for software over the next five years (Hoffman, 2005a). Shrinkage in systems life cycle is unfavorable for development of proprietary software and leads to extensive usage of off-the-shelf enterprise-wide software solutions (Agrawal et al., 2001; Agrawal, 2005a).

global Economy Many factors have led to the development of a global economy in which the boundaries of national and regional economic systems have become blurred. A reasonably more stabile world political environment has fostered trade between former Cold War opponents, especially those, like Russia and China that have moved into market oriented economic systems (Naisbitt, 1994). Regional agreements such as the North American Free Trade Agreement (United States, Canada, and Mexico) and the creation of a unified European market with a single currency, the euro, have contributed to increased world trade. Further reduction of trade barriers has allowed production and services to flow more freely around the globe (Turban et al., 2006, pp. 13-14). The existence of a global economy makes it much easier for companies to shift resources from firm to firm internationally. It especially allows them to take advantage of the difference in labor costs. Labor that costs, say, $25 per hour in the U.S. might only cost $1 per hour in many developing countries. Immense advances in telecommunication networks, the Internet and World Wide Web have made the global economy possible (Clinton & Gore, 1997; Kanter, 1995; Negroponte, 1995). The transition to an off-shore economy represents a new form of Internet-enabled globalization, the impact of which will dwarf prior globalization efforts (Robinson & Kalakota, 2005, p. 10).

competition and real-Time Operations Strong competition is one of the hallmarks of today’s business environment. The advent of the global economy logically has led to global competition. Rapid communications systems and improved transportation systems foster such international competition. When governments become involved to modify the competitive arena, challenges to businesses increase. Such government involvement might take the form of subsidies, tax policies, import/export regulations, and other incentives (Turban et al., 2006, p. 14). For companies not accustomed to dealing in such an intensely competitive environment, outsourcing of business functions that deal directly with competition or government regulations can provide the solution. As the world economy moves ever faster, decisions must be made and actions must be taken more quickly in order for firms to remain competitive (Gates, 1999; Davis, 2001; Huber, 2004). Some companies, for example, Cisco Systems, have chosen to respond by closing their accounting books in one day, rather than the ten days previously required (McCleanahen, 2002). Developing systems to handle that might be beyond the capacity of a firm and that firm might turn to outsourcing to fill that need.

changing workforce and Job loss The workforce in both developed and developing countries is changing rapidly and becoming more diversified with more women, single parents, minorities, persons with disabilities, and employees who have deferred retirement in the workforce than ever before work in all types of positions (Turban, et al., 2006, p. 4). Additionally more workers are becoming knowledge workers (Drucker, 2002) and telecommuters. As much as half the U.S. workforce will spend two or more days per week working away from the office by

5

Why, When, and What to Outsource

the year 2010 (Cole et al., 2003). Those factors, plus the aging population and declining birth rates in developed countries will foster off-shoring (Robinson & Kalakota, 2006, pp. 12-13). World demographics are changing. Developed countries have older average populations than developing countries. According to Business Week, 53% of India’s population is considered to be the MTV generation (under the age of 25), vs. 45% in China. By 2020, 47% of Indians are going to be between 15 and 59 years old, compared with 35% now (Kriplani & Engardio, 2003). A recent survey predicts that an aging U.S. population and slower population growth will lead to a shortfall in the domestic labor supply of 5.6 million jobs by 2010. Of these, immigrant workers will fill nearly 3.2 million jobs and another 1.3 million jobs will be filled by off-shoring (Arora & Arora, 2004, p. 23). Another survey indicates that 3,322,138 U.S. jobs will move off-shore by 2015, with the following breakdown by job category: management, 288,281; business, 348,028; computer, 472,632; architecture, 184,347; life sciences, 36,770; legal, 76,642; art/design, 29,564; sales, 226,564; and office, 1,659,310 (Forrester, 2002). In the IT field, that could translate to as many as 35% to 45% of U.S. and Canadian IT workers being replaced by contractors, consultants, off-shore technicians and part-time workers (Hoffman, 2003). While the most alarming predictions point to the potential negative impacts of off-shoring on the U.S. economy and workforce, as well as those of other developed nations, there is evidence to suggest that off-shoring can lead to domestic job growth rather than reduction (Nakatsu & Iacovou, 2004). The logic supposes that U.S. companies that use off-shoring will keep their product and service prices lower, thereby sustaining competitiveness and maintaining or even increasing market share. As a result, U.S. companies will be able to expand their labor pools. Furthermore, jobs lost by offshoring in one industry are offset by growth in other industries (Times of India, 2004). The sav-

6

ing created by outsourcing to India alone, could create $30 billion per year in new investments for U.S. companies by fostering 12,000 new strategic projects at an average of $2.5 million per year per project (Press Trust of India, 2004).

Technological innovations and Obsolescence Technology has played a critical role in creating an environment for global economy that fosters trans-border outsourcing, especially in the area of Web-based information technology (Carr, 2001; Evans & Motiwalla & Hashimi, 2003; Wurster, 2000). Technology also provides for other key factors in the outsourcing arena, such as creating and supporting substitutes for products and alternative service options, as well as providing products and services of a high quality (Turban et al., 2006, p. 15). Another contribution of technology stems from its tendency to become obsolete quite rapidly. Such obsolescence, whether planned or not, thereby spawns competition to develop replacements, whether it is in the IT field itself or in medicine, biotechnology or any other technologydependent field. Other impacts of technology on the outsourcing game exist. Technology allows businesses to be more competitive by allowing them to provide their products and services on a 24/7/365 basis. Higher degrees of automation reduce the dependency on specialists, possibly allowing for easier outsourcing. Conversely, the lack of need for specialists might eliminate the need for outsourcing (Agrawal et al., 2001; Agrawal & Haleem, 2003).

societal, political, and Ethical Factors The increase in outsourcing and off-shoring, in particular, in turn gives rise to many societal, political and ethical issues. The interface between businesses and consumers becomes more trans-

Why, When, and What to Outsource

parent as consumers become more powerful and businesses focus on customer relationship management. That transparency results in a tendency for consumers to place demands on businesses. A case in point is the New Jersey state social services department which hired a company named eFund to provide electronics processing of food stamp and welfare benefits. In 2002, eFund moved its customer call center to Mumbai, India. The resulting public outcry that the move was inconsistent with the agency’s intent to get people off welfare and into jobs caused eFund to move the call center back to the U.S. at an additional cost of $900,000 per year. The irony was that eFund’s U.S. call center was in Wisconsin, which did nothing to create jobs for New Jersey citizens (Hopkins, 2003). A similar situation existed in Indiana, where the public demanded the state cancel a $15 million IT contract with India’s Tata Consultancy Services (Robinson & Kalakota, 2005, p. 15). Despite such consumer involvement in business affairs, off-shoring is an unstoppable megatrend. That will not stop politicians, however, to shape off-shore outsourcing via regulations to appease their constituents. However, government regulations cost money and make it more difficult to compete with countries that lack such regulations (Turban et al., 2006, p. 16). In general, deregulation fosters competition and lower prices to consumers. That concept is sometimes lost on the general public and politicians in today’s fierce political environment. Several national elements that encourage or discourage outsourcing have been identified (Koveos & Tang, 2004). They are: • •

Countries’ attitudes toward international business: Openness breeds openness! Economic conditions: Certain forms of outsourcing generate a great deal of resistance at home, especially when the domestic economy is struggling. Wage rate and productivity differentials between the home

•

•

•

•

•

•

•

•

•

•

country and the provider country can also be a significant factor in the decision. Labor market: Regulations that make it harder to shift operations obviously add to the cost of engaging in an outsourcing activity off-shore. Labor inflexibility: Companies operating in many European countries, including France, Germany, and Scandinavian region find it very costly to lay off workers and restructure effectively. The tax environment: Higher taxes for domestic companies and for providers may serve as an obstacle. Government intervention: The freer the country is from government interference, the greater the ability to engage in off-shore transactions. On the other hand, incentives designed to keep business at home may discourage off-shore activity. Culture, including language: Similarities in the cultural attributes of the two countries can facilitate transactions. Quality of labor force: The greater the level of education and training of a country’s workforce, the lower the costs of adjustment. Technological sophistication: The higher technological sophistication of the home economy, the greater opportunity to benefit significantly from outsourcing activities. Infrastructure: Outsourcingt companies tend to materialize within the countries that have a supporting national infrastructure. The information and communications technology environment: Adequate technologies are critical to support outsourcing of services related to or supported by IT. The legal system, including protection of property and intellectual rights: Lack of a well formulated legal system causes outsourcers to look elsewhere, especially if their intellectual property is not protected.

7

Why, When, and What to Outsource

•

•

Local market characteristics, such as competition and suppliers: A competitive market promotes outsourcing for cost advantages. Experience with international market: A history of success encourages future outsourcing endeavors.

Unfortunately, mention must also be made about the impact of terrorist attacks. Since September 11, 2001, there is ever increasing attention paid by organizations to protect themselves against terrorism. Geographically diversifying is one solution and off-shore outsourcing plays a large role in that. Another countermeasure is intensified security systems, and even intelligent systems that identify possible behavioral patterns to prevent cyber-terrorist attacks. The host company might not have the in-house expertise to handle such systems, thereby creating more opportunity for outsourcing (Turban et al., 2006, p. 16). Other outsourcing issues relate to culture and ethics. Just as each country has its own culture, so does each country have its own norms for ethics. The same can be said of corporations and individuals. What is culturally acceptable and ethical to one country, company, or individual might not be culturally acceptable or ethical to the next. That provides challenges on both sides of the outsourcing equation to insure culture and ethical norms of the other party are not compromised or violated.

Organization structure and corporate culture Some organizations will implement outsourcing sooner, more effectively, and more efficiently than others for a variety of internal reasons, not the least of which is a company’s self perception. Managers of some companies have a “small business” mindset and intend their firm to remain small. If a proposed new task can’t be handled in the normal scheme of the business, then there is no reason to

8

implement that new task. Such companies will be content to remain with classical outsourcing of legal, accounting, janitorial, or similar functions. Other companies similarly limit themselves by a “not invented here” mentality. If we haven’t done it previously, why do we need to do it at all? On the other end of the scale are those firms that consider changes as a normal phenomenon for survival and growth. Such companies tend to promote outsourcing as a means to reduce costs (Agrawal et al., 2003). The companies who are most successful with outsourcing will have identified and understand their core competencies and critical success factors. This will be elaborated in a subsequent section of this chapter.

whEn TO OuTsOurcE: ThE risks OF OuTsOurcing Despite the purported benefits of outsourcing and the wide range of success stories that have stimulated an unprecedented growth rate, there are potential risks as well. An outsourcing project might fail because of poor selection of the vendor, mismanagement of the outsourcing contract, inferior performance by the vendor, lack of acceptance by the end consumer, or other reasons (Quinn & Hilmer, 1995). It might also be that outsourcing may have higher costs than insourcing the same function (King, 2005; Mears & Bednarz, 2005; Thibodeau, 2005a). A survey of 25 large firms with a combined $50 billion in outsourcing contracts found 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. A quarter of the companies brought outsourced functions back in-house and nearly half have failed to see the cost savings of outsourcing they had anticipated (Mears, 2005). In a time of lower revenues, outsourcing provides a tool to manage costs. However, there are other factors to consider that might cause increased costs. Disgruntled employees, ones who

Why, When, and What to Outsource

did not lose their jobs due to outsourcing, can cause problems and increase costs. When some business functions are outsourced, employees might not have an opportunity to apply as much skill variety, which can lead to lower productivity. Public perception can cause for a more negative corporate image within the community and can result in lower sales.

whaT TO dO and nOT dO TO OuTsOurcE core competencies and critical success Factors Decisions as to what and whether to outsource should be tied to an identification and understanding of an organization’s core competencies and its critical success factors (Luftman, Bullen, Liao, Nash, & Neumann, 2004, p. 320). Such an identification and understanding can be a lengthy process. However, it is the one true way to determine whether a project should be or should not be outsourced. While that recommendation was first applied to IT projects, it can be generalized to all business functions. If a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are at the heart of the company. Success or failure of such functions is directly tied to success or failure of the company as a whole. In general, such functions are critical to an organization’s day-to-day operations, ability to competitively differentiate itself, ability to deliver value to customers and partners, and ability to innovate (Luftman et al., 2004, p. 320). Tasks that are core competencies but not critical success factors should be reassessed. Why engage in such tasks if they are not critical? Often the answer to that is “because we can.” It is typically not a good business decision to continue to engage in such tasks.

Those tasks which are not core competencies are the most likely candidates for outsourcing. The question is how to go about it. If such as task is a critical success factor, it might be wise to establish a strategic alliance; otherwise, a transaction partnership might suffice. The former is a more tightly-coupled arrangement than the latter. Strategic partnerships might even establish some form of mutual ownership or revenue sharing, whereas transaction partnerships are more typical outsourcing arrangements where a company simply contracts with a vendor to provide the service or product. There is another consideration that lies outside the core competency-critical success factor matrix. If an organization intends to bring an outsourced task back in-house at some future time, managers should be cautious. There is overwhelming evidence that certain outsourced activities cannot be reversed, particularly in the IT arena (Luftman et al., 2004, p. 323). Once the expertise has been released to the outsourcer, it is difficult — if not impossible — to regain such expertise in-house.

Outsourcing Trends and Future projections As explained above, the overall trends toward outsourcing and off-shoring in all sectors are expanding. In particular, the trend in the IT sector is growing at a phenomenal rate. However, those trends vary geographically. United States: Successful outsourcing and off-shoring by U.S. organizations from the early 1970’s to the present day is well-documented (Rishi & Saxena, 2004, p. 63). U.S. off-shoring began as a means of taking advantage of cheaper labor in a handful of Latin American and Asian countries, such as Mexico, Korea, Malaysia, and Singapore. In the late 1980s and early 1990s, those practices expanded to include many more countries, including mainland China. The success of the North American Free Trade Agreement

9

Why, When, and What to Outsource

(NAFTA) in the mid-1990s greatly expanded U.S. outsourcing efforts in Mexico due to its geographically proximity. The Y2K problem in IT and need to change information systems to handle the new euro currency in the late 1990s spurred U.S. expansion into India to take advantage not only of cheaper labor but also of greater expertise. Lack of caps on temporary L-1 visas allowed for foreign workers to be trained in U.S. businesses, then return to their country of origin to establish consulting firms with their new-found expertise. By 1999, 41% of software services were provided in India rather than on-site at the client’s location, compared to only 5% in 1990 (Bajpai, Sachs, Arora & Khurana, 2004). Current estimates indicate that spending for global sourcing of computer software and services is expected to grow at a compound annual rate of almost 26%, increasing from approximately $10 billion in 2003 to $31 billion in 2008 (ITAA, 2004). Japan: In Japan, outsourcing was stimulated differently (Koveos & Tang, 2004, p. 43) and is tied more to cyclical and structural challenges in the macro and micro foundations of the Japanese economy (Vietor & Evans, 2001). That included a number of measures aimed at restructuring the Japanese economy as well as purposeful promotion of greater integration of Japanese economic and business systems with the rest of Asia and the World. Outsourcing was introduced in Japan in the 1980s by a company initially dealing with one service provider as a means of acquiring temporary help. In the 1990s, outsourcing evolved to include third party logistics (3PL) providers. Today, companies engage in strategic outsourcing policies to allow them to focus on their core competencies (WIT, 2001). A 1997 survey conducted by Japan’s Ministry of International Trade and Industry, 20.1% of outsourcing firms outsourced job training services, 19.7% outsourced information systems services, 17.4% production processes, 14% accounting services, and 13% engaged in

10

R&D outsourcing. More than 70% of Japanese firms had achieved their strategic outsourcing objectives (Murphy, 2000). In Japan, the market for IT system development alone has been estimated at 6.7 trillion Yen a year (approximately $104 billion U.S.) (Rowley, 2004) with expected annual growth of 15.6% up to 2008 (Kajino, Kinoshita & Kobayashi, 2004, p. 1). Japanese companies have established relationships with providers in many countries, especially in Asia but also expanding to Europe and North America. Primarily, Japanese companies increasingly look to China (Rowley, 2004) and Russia (Outsourcing-Russia, 2004). They envision North America as a market in which they can offer their own outsourcing services (Koveos & Tang, 2004). Europe: In Europe in the 1990’s, various countries’ economies have faced challenges such as budgetary issues, slumping demand at home, lack of global competitiveness, labor market inflexibility, lower levels of innovation, and production inefficiencies. Outsourcing certainly provided means to cut costs and provide greater organization flexibility, with more than 100 major companies routinely participating, each dealing with numerous subcontractors. However, their approach is seemingly haphazard and even counterproductive rather than as focused as in Japan (Quinn & Hilmer, 1995, pp. 2-13). There are indicators that outsourcing is becoming better planned. A recent survey reports that 40% of Europe’s 500 largest companies have engaged on off-shoring (Farrell, 2003). While the continent has already achieved more in post European Union (EU) times, Europe’s economic and business environment are still plagued by preEU elements that might not be compatible with global sourcing practices, such as labor inflexibility, language differences, cultural openness, and tax laws (Pradhan, 2004). There are bright spots in Europe, such as the Spanish automobile industry, which has intensified outsourcing as it expanded substantially and

Why, When, and What to Outsource

became more export-oriented (Pallares-Barbera, 1998). Likewise, throughout the United Kingdom (UK) the general European reluctance to outsourcing is not as evident (Dash, 2001; Gray, 2003a). The International Trade Agreement (ITO) and other trade arrangements might hold promise for expanded European outsourcing as tactical and strategic mechanisms. ITO’s emphasis is on individual systems or applications rather than entire systems which fosters outsourcing (Gray, 2003b, p. 5; Outsourcing Center, 1999). Of the 58 billion euros ($76 billion) worth of major (greater than $40 million) outsourcing contracts awarded last year, Europe represented 49% of the value, while the U.S. took 44% and Asia 7%. European contracts doubled from 2002 to 2004. Germany is leading the way, accounting for 12.5% of the value of the worldwide contracts awarded in 2004, coming in at the heels of only the UK, with 20%, and the U.S. as the largest country market. Germany’s share has increased from less than 1% in just four years (Pruitt, 2005). Other Asian countries: Korea, Hong Kong, Taiwan, and other Asian countries besides Japan have developed outsourcing arrangements. For instance, Taiwan’s MiTAK-SYNNEX Group can globally deliver 98% of its orders in two days, generating about $20 million per year, due to outsourcing 70% of its back-end operations to China (Miau, 2004). Nonetheless, Asian businesses are known more as suppliers of outsourcing contracts rather than as those that place contracts with others. Specific industries and applications: Outsourcing of manufacturing has been a most logical application historically, primarily due to the labor cost savings and that such jobs only require the untrained labor pools available in developing countries. Consequently, outsourcing of production jobs perhaps is the most visible form as well. Rather than discuss manufacturing applications, the remainder of this chapter will present other less well known outsourcing applications.

Outsourcing of information technology functions is a huge marketplace (Hirschheim, Beena, & Wong, 2004). IT outsourcing began as a cost-reduction tool, but has evolved into a component of businesses’ overall corporate strategies (Linder, 2004). It has grown from simple applications to a much wider set of business functions: logistics, payroll, human resources, legal, and so forth. It has become pervasive and strategic. Outsourcing has evolved from the one vendor-one client contracts to complex multiple vendor-multiple client partnerships and alliances, with parties sharing risks, rewards, and equity positions (Gallivan & Oh, 1999). There are four growth areas in IT outsourcing. Web-based and e-business outsourcing partnerships are common and high growth areas (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Another is the application service provider (ASP) industry, which buys, installs, and manages enterprise applications at remote data centers and hosts them for customers via a broadband connections (Kern, Lacity & Willcocks, 2002; Susarla, Barua & Whinston, 2003). A third is “back-sourcing,” where companies try to bring back in-house previously outsourced functions when contracts end (Hirschheim, 1998; Overby, 2003). The fourth is IT off-shoring (Morstead & Blount, 2003; Robinson & Kalakota, 2005) which dominates overall off-shoring, rising 890% to $1.66 billion from 2002 to 2003 (E-Business Strategies, 2004). Typical IT functions that are outsourced include: •

•

Applications development, maintenance and support, where 80% of code development is expected to go off-shore (Jepsen, Laplante, Williams, Christensen, Farrante, Chang, & Miller, 2004) Software quality assurance, where $16 billion is spent annually to save the $60 billion per year that software glitches cost U.S. industry alone (Computerworld, 2005)

11

Why, When, and What to Outsource

•

• •

•

Security functions such as firewall management and network vulnerability assessment (Vijayan, 2005) Technical support via telephone and Web (Thibodeau, 2005c) Transaction processing for purchases, sales orders, deposits, withdrawals, time cards, and paychecks, insurance claims processing and policy administration, medical record administration and medical diagnostics, medical and legal transcription, digitizing of physical documents, e-mail response centers, and other lower level business processing services (Robinson & Kalakota, 2005, p. 185) Knowledge work such as reading CAT scans, MRIs, and ultrasounds at as little as half the cost of on-shore radiologists (Brice, 2003)

Outsourcing of pharmaceutical functions traditionally has taken the form of outsourcing drug development and manufacturing to contract research organizations (CROs) and contract manufacturing organizations (CMOs). Research and development and marketing were kept in-house as those were core competencies and critical success factors. Today, some of the research and development is also being outsourced globally in the light of proliferation of new technologies and new knowledge (Doshi, 2004, pp. 125-127). The cost of developing one new product increased from $131 million in 1987 to $802 million in 2001 and the average successful launch of a new drug is $250 million. Meanwhile, in 2000-2002, only one of thirteen discovered and clinically trialed drug makes it to market, compared to one out of eight in 1995-2000 (Gilbert, Preston, & Singh, 2003, p. 4). This huge and costly decline in R&D productivity has increased global pharmaceutical outsourcing opportunities to $40 billion per year. Outsourcing of customer care functions by moving entire contact centers off-shore has become very popular. The functions performed by customer service centers are more important

12

than their location. The discrepancy between labor, real estate and infrastructure costs on-shore vs. off-shore, makes this a logical function to outsource. Customer contact centers are a $650 billion industry (Cleveland, 2003). “The number of companies outsourcing and off-shoring their contact centers is rising steadily. For example, General Electric Information Services, which offers customer credit cards for retailers such as J.C. Penney, has 3,000 call center employees in the United States and 11,000 in India” (Goldstein, 2003). However the cost and complexity of increasing customer satisfaction has escalated over the past three decades. Robinson and Kalakota (2005, p. 107) estimate that live voice costs between $4 and $8 per contact, interactive voice response (IVR) costs about $1-$2 per contact, Web selfservice between $0.05 and $0.3 per contact, and e-mail averages $3-$10 per contact. Outsourcing finance and accounting (F&A) functions have been prevalent since the beginning of business. Now, there is a growing trend for F&A functions to be outsourced off-shore, primarily to save labor costs (Robinson & Kalakota, 2005, p. 131). For instance, Ford Motor Company has more than 400 people in its business services center in Chennai, India, conducting accounting operations for Ford worldwide. U.S. firms spent about $590 million on off-shore F&A services in 2004, while their European counterparts spent about $480 million. That is expected to increase by 2008 to more than $2 billion (Thibodeau, 2005b). Outsourcing of human resource (HR) functions, such as payroll, recruitment, hiring, training, benefits management, employee assistance programs, executive compensation, as well as health, safety, and regulatory compliance, is gaining momentum (Robinson & Kalakota, 2005, p. 159). While providing and servicing qualified personnel might be critical success factors, they are not viewed as core competencies. There are also multiple points of potential failure in complex HR systems. It appears to be a logical application for outsourcing. For instance, British Telecom

Why, When, and What to Outsource

(BT) (BT, 2003) used outsourcing to handle its HR functions with Accenture HR Services in 2000, transferring 1000 HR employees to Accenture HR, which Accenture was able to reduce to just 600 staff members (Accenture, 2003). It is projected that HR outsourcing will increase at an annual rate of 16.1% to $16 billion in 2009 (Gonsalves, 2005). Outsourcing in the entertainment industry has grown with many U.S. film companies contracting with Indian film companies to handle part of their production work (Abraham, 2005). For example, Global One Entertainment Inc outsourced the production of its film “The Woman from Georgia” to Fast Track Entertainment, an Indian company. They will save 80% of their production costs vs. shooting in the U.S. Outsourcing of research and development (R&D) functions takes various forms. Above, the outsourcing of R&D in the pharmaceutical industry was discussed. In that instance, drug companies contract with outside firms to explore new compounds for possible testing and launching. A different form of R&D outsourcing is used by companies such as Dell, Motorola, and Philips which buy complete design of digital devices from Asian developers, tweak them to their own specifications, and attach their own brand names (Engardio & Einhorn, 2005). Another approach is that used by Boeing Co. which contracts with India’s HCL Technologies to co-develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet (Engardio & Einhorn, 2005). Boeing is also in negotiations with India’s Larsen & Toubro (L&T) to outsource engineering as well as aircraft-related IT services and aircraft parts manufacturing (Hardsamalani, 2005). Such trends will help control R&D budgets and reflect the shift in thinking about where R&D fits in a particular company in terms of critical success factors and core competencies (Engardio & Einhorn, 2005).

summary This chapter has explored the questions of what, when, and why to outsource. Definitions of outsourcing with off-shoring were examined and compared. An historical perspective on outsourcing was presented. On the surface, the question of why to outsource is relatively simple. While there are many secondary reasons, there are two primary thrusts. In the case of on-shore outsourcing, the emphasis is on expertise that a company might not possess and finds the need to contract with an outside vendor. In the case of off-shore outsourcing, a primary motivator is cost savings, mainly due to lower labor costs in developing countries. In actual practice, the decision is usually more complex. The question of when to outsource is equally complex. There are many factors that can support and promote outsourcing effectively. Many of those are internal to an organization. For instance, a company might set an intention to provide customer service, a company might see the life cycle of its products or services shrink, or a company might feel the impact of the global economy or increased competition. There are also many factors that are external to a company. These include changes in the labor pool and other economic factors, as well as political, ethical and societal considerations. The question of what to outsource is answered by examining a company’s core competencies and critical success factors. The chapter presents rules of thumb for each of the four possible combinations of those two factors. It also discusses outsourcing trends in specific companies and industries.

rEFErEncEs Abraham, T. P. (2005, May 24). Now, the mother of all outsourcing. The Economic Times. Retrieved June 15, 2005 from http://economictimes.com

13

Why, When, and What to Outsource

Accenture. (2003, Dec. 11). BT-human resources outsourcing. Retrieved March 13, 2005, from http://www.accenture.com Agrawal, V. K., Haleem, A., & Sushil. (2001). Trends in the demand for different categories of software and human resources. In Proceedings of the Annual Conference of Midwest Decision Sciences Institute (pp. 4-7). Agrawal, V. K., & Haleem, A. (2003). Culture, environmental pressures, and the factors for successful implementation of business process engineering and computer-based information systems. Global Journal of Flexible Systems Management, 4(1-2), 27-46. Agrawal, V. K. (2005). From proprietary software to off-the-shelf/ERP solutions: Identifications of critical factors. National Social Science Journal, 23(2), 9-32. Agrawal, V. K. (2005a). Critical factors influencing the requirements of human resources engaged in IT applications. National Social Science Journal, 24(1), 1-32. Agrawal, V. K. (2005b). Implications of environmental and cultural factors on the growth in end-user computing. National Social Science Journal, 24(2), 1-14. Agrawal, V. K., Haleem, A., & Sushil. (2005c, June). Implications of environmental and cultural factors on the growth in the requirements of inhouse software professionals. Indian Journal of Economics and Business, 4(1), 115-137. Agrawal, V. K. (2005d). Implications of environmental and cultural factors on the trends in usage of various categories of software. National Social Science Journal, 25(1), 1-15. Arora, H. K., & Arora, S. (2004). A primer on offshore outsourcing. Indian Journal of Business and Economics, Special Issue, 3(3), 1-10.

14

Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004). Global services sourcing: Issues of cost and quality (CGSD Working Paper No. 16) New York: The Earth Institute at Columbia. Brice, J. (2003, Nov 1). Globalization comes to radiology. Diagnostic Imaging. Retrieved March 13, 2005, from http://www.diagnosticimaging. com/db_area /archives/2003/0311.coverstory. di.shtml BT. (2003, Dec 11). Outsourcing gives BT focus and adds value to bottom line. Retrieved March 13, 2005, from http://www.btglobalservices.com Carr, N. G. (Ed.). (2001) The digital enterprise. Boston: Harvard Business School Press. Cleveland, B. (2003, May 5). Author is the president of the Incoming Call Management Institute (ICMI). Retrieved April 15, 2005, from http:// www. outsourceworld.org. Clinton, W. J., & Gore, A. Jr. (1997, July). A framework for global electronic commerce. Retrieved March 13, 2005, from http://www.iitf.nist.gov/ elec comm/ecomm. Cole, C. L., Gale, S. F., Greengard, S., Kiger, P. J., Lachnif, C., Raphael, T., et al. (2003, June). Fast forward: 25 trends that will change the way you do business. Workforce, 82(6), 43. Computerworld. (2004). Special report: Outsourcing offshore buyer’s guide. Retrieved March 13, 2005, from http://www.computerworld.com/ managem enttopics/outsourcing/report/ Computerworld. (2005, April 1). Indian software testing moves from boredom to boom. Hindustan Times. Retrieved June 15, 2005, from http://www. hindus tantimes.com Dash, J. (2001). U.K. financial firms hand routine IT to CSC. Computerworld. Retrieved March 13, 2005, from http://www.computerworld.com/ printhis/2001/0,4814,62661,00.html

Why, When, and What to Outsource

Davis, B. (2001). Speed is life. New York: Doubleday.

http://www.forrester.com/ER/ Research/Brief/ Excerpt/0,1317,15900,FF.html

Dibbern J., Goles, T., Hirschheim R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. Database, 35(4), 6-102.

Gallivan, M. J., & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. In Proceedings of the 32nd Annual Hawaii International Conference on System Sciences (p. 15).

Doshi, K. (2004). Pharmaceutical outsourcing: The next wave. Indian Journal of Business and Economics, Special Issue, 3(3), 125-136. Drucker, P. F. (2002). Managing in the next society. New York: Truman Talley Books. E-Business Strategies. (2004, August 10). Offshoring statistics: Dollar size, job loss, and market potential. Retrieved August 10, 2004 from http:// www.eb strategy.com/outsourcing/trends

Gartner Group. (1997). Gartner Group glossary of information technology acronyms and terms. Lake Dallas, TX: InfoEdge Gates, H. B. (1999). Business @ the speed of thought. New York: Penguin Books. Gilbert, G., Preston H., & Singh, A. (2003). Rebuilding Big Pharma’s business model. The Business and Medicine Report, 21(10).

El Sawy, O. A., Malhotra, G. S., & Young, K. M. (1999). IT-intensive value innovation in the electronic economy: Marshall Industries. MIS Quarterly, 23(3), 305-335.

Goldstein, M. (2003, January 20). Customer call center jobs exported from U.S. to India. New York Daily News. Retrieved March 13, 2005, from http://www. nydailynews.com/

Engardio, P., & Einhorn, B. (2005, Mar 21). Outsourcing innovation: Special report. Business Week, 84-94.

Gonsalves, A. (2005, April 19). North America to have fewer developers than Asia/Pacific. TechWeb, Retrieved March 13, 2005, from http://www.tech web.com.

Evans, P. B., &. Wurster, T. S. (2000). Blown to bits: How the new economics of information transforms strategy. Boston: Harvard Business School Press. Farrell, D. (2003). Can Germany win from offshoring? San Francisco: McKinsey Global Institute, McKinsey & Co. Retrieved March 13, 2005, from http://www.mckinsey.com. Farrell, D. (2004). Multinational company investment: Impact on developing countries. San Francisco: McKinsey Global Institute, McKinsey & Co. Retrieved March 13, 2005, from http:// www.mckinsey.com Forrester Research, Inc. (2002, November 11). 3.3 million US services jobs to go offshore. Research report. Retrieved March 13, 2005, from

Gray, N. (2003a). Bike’s manufacturer’s redesign gets in high gear with product lifecycle management. OutsorcingAsia.com, Outsourcing Center. Retrieved March 13, 2005, from http://www. outsourcing-asia.com/bike.html Gray, N. (2003b). European outsourcing catching up with U.S.: BPO becomes the big party in town. OutsourcingInformationTechnology.com, Outsourcing Center. Retrieved March 13, 2005, from http://www.out sourcing-information-technology. com/Europe.html Greenberg, P. (2002). CRM at the speed of light: Capturing and keeping customers in Internet real time (2nd ed.). New York: McGraw-Hill.

15

Why, When, and What to Outsource

Gupta, S. D. (2002, December 11). Outsourcing blues for Indian IT. Business Standard. Retrieved March 13, 2005 from http:// www.neoit.com/gen/ newsevents/news_contents/ Outsourcing_blues_ for_Indian_IT.pdf Hagel, J. III, & Singer, M. (2004, September). Unbundling the corporation. McKinsey Quarterly. Retrieved March 13, 2005, from http://www. mckinsey quarterly.com. Hardsamalani, R. D. (2005, May 28). Boeing in talks with L&T on outsourcing. Times of India. Retrieved June 15, 2005, from http://timesofindia. indiatimes.com Havenstein, H. (2005, April 28). Pittsburg Medical Center taps IBM for IT consolidation. Computerworld. Retrieved June 15, 2005, from http://www. computerworld.com/ printthis/2005/0,4814,101375,00.html Hirschheim, R. A. (1988, September). Backsourcing: An emerging trend? Infoserver. Retrieved March 13, 2005, from http://www.infoserver.com/ sep1998/html/academic.html. Hirschheim, R., Beena, G., & Wong, S. F. (2004). Information technology outsourcing: The move towards offshoring. Indian Journal of Economics and Business, Special Issue, 3(3), 103-124. Hoffman, T. (2003, January 24). Big shift in IT jobs to outsourcing predicted. Computerworld. Retrieved March 13, 2005, from http://www. computer world.com/action/ article.do?comman d=viewArticleBasic&articleId=77860 Hoffman, T. (2005a, April 1). IT users prepare to buy as budget thaw. Computerworld. Retrieved March 13, 2005, from http://www.computer world. com/action/article.do?command=viewArticleBas ic&article Id=100806 Hopkins, S. M. (2003, August 10). State’s contracts ship work to India. Charlotte (NC) Observer. Retrieved March 13, 2005, from http://www. charlotte.com/mld/charlotte/

16

Huber, G. (2004). The necessary nature of future firms: Attributes of survivors in a changing world. San Francisco: Sage Publications. Information Technology Association of America. (2004). 2004 IT workforce study. Retrieved March 13, 2005, from http://www.itaa.org Jepsen, T., Laplante, P., Williams, J., Christensen, K., Farrante, D., Chang, J. M., et al. (2004, JulyAugust). Software in the new millennium: Virtual roundtable. IT Professionals, 6(4), 10-17. Kajino, M., Kinoshita, T., & Kobayashi, T. (2004, February 1). Japan’s IT market: Racing towards the second phase of growth (NRI Papers, 43). Tokyo: Nomura Research Institute. Retrieved March 13, 2005, from http://www.nri. co.jp/english/opinion/papers/2004/pdf/ np200473.pdf Kanter, R. M. (1995). World class: Thriving locally in the global economy. New York: Simon and Schuster. Kearney Business Consulting. (2004). Poland outsourcing services center attracts foreign companies to invest. Retrieved March 13, 2005, from http://esmeap3.moeasmea.gov.tw/ smesr/ info/ E11information3.htm. Kern, T., Lacity, M. C., & Willcocks, L. (2002). Net sourcing: Renting business applications and services over a network. Upper Saddle River, NJ: Prentice Hall. King, J. (2005, March 28). Homegrown. Computerworld. Retrieved April 15, 2005, from http:// www.ruralsource.com/press/Homegrown.pdf Koveos, P., & Tang, L. (2004). Offshore outsourcing: Japan, Europe and the rest of the world. Indian Journal of Economics and Business, Special Issue, 3(3), 43-62. Kriplani, M., & Engardio, P. (2003, Dec 8). The rise of India. Business Week. Retrieved March 13, 2005, from http://www.businessweek.com/

Why, When, and What to Outsource

Lewin, S. G., Lewin, S., & Mesisel J. (1987). Dynamic analysis of the adoption of a new technology: Case of optical scanners. Review Economics and Statistics, 69(1), 12-17. Linder, J. (2004). Outsourcing for radical change. New York: AMACOM. Luftman, J. N., Bullen, C. V., Liao, D., Nash, E., & Neumann, C. (2004). Managing the information technology resources: Leadership in the information age. Upper Saddle River, NJ: Pearson Education. McCleanahen, J. (2002, April). The book on the one-day close. Industryweek, 31-33. Mears, J. (2005, April 25). Study: Outsourcing loosing luster. Computerworld. Retrieved June 15, 2005, from http://www.computerworld.com/ printthis/2005/0,4814,101380.00.html Mears, J., & Bednarz, A. (2005, May 30). Take it all: Outsourcing on wane. Computerworld. Retrieved June 15, 2005, from http://www.computerworld. com/printthis/2005/ 0,4814,102168,00.html Miau, M. (2004, Aug 31). The outsourcing model of MITAC-SYNNEX (lecture). Retrieved March 13, 2005, from http://www.gvm.com.tw/theme/in page_cover.asp?ser=9833. Morstead, S., & Blount, G. (2003). Offshore ready: Strategies to plan and profit from offshore ITenabled services. Houston, TX: ISANI Press. Motiwalla, L., & Hashimi, A. (2003). Webenabling for competitive advantage: A case study of Himalayan Adventures. Annals of Cases on Information Technology, 5, 274-289. Hershey, PA: Idea Group Publishing. Murphy, M. (2000, February). Outsourcing Japan. OECD Observer, 219. Retrieved March 13, 2005, from http://www.oecdobserver.org/news/ full story.php/aid=162 Naisbitt, J. (1994). Global paradox. London: N Breadly.

Nakatsu, R., & Iacovou, C. (2004, Dec 13). Debunking 10 myths of IT offshore outsourcing. Computerworld. Retrieved March 13, 2005, from http://www.computerworld.com/ managementtopics/outsourcing/story/0,10801,98252,00.html Negroponte, N. (1995). Being digital. New York: Knopf. Outsourcing Center. (1999, January). Changing nature of outsourcing fuels growth. Outsourcing Journal. Retrieved March 16, 2006, from http://www. outsourcing-journal.com/jan1999suppliera.html Outsourcing Index. (2003). Outsourcing rationale. Retrieved March 13, 2005, from http://www. outsourcingindex.com. Outsourcing-Russia.com. (2004, Jul 4). Delegation of Japanese IT companies visited Russia for first time. Retrieved March 13, 2005, from http://www. outsourcing-russia.com/news/ 2004/07/09/01/ Overby, S. (2003. March). Bringing IT back home. CIO. Retrieved March 13, 2005, from http://www. findarticles.com/p/articles/mi_kmcio/is_200303/ ai_ kepm295310 Pallares-Barbera, M. (1998). Changing production systems: The automobile industry in Spain. Economic Geography, 74(4). 344-359. Pitt, L. F., Berthon, P. R., Watson, R.T., and Zinkhan, G.M. (2002, July-August). The Internet and the birth of real consumer power. Business Horizons, 45(4), 7-14. Pradhan, B. (2004). Why Europe is indifferent to outsourcing. Rediff.com. Retrieved March 13, 2005, from http://www.rediff.com/cms/print. jsp?doc path=?money/2004/mar/02basab.htm Press Trust of India. (2004, December 16). Outsourcing to India benefits U.S. economy. Press Trust, from http://www.ptinews.com/pti/ptisite. nsf

17

Why, When, and What to Outsource

Pruitt, S. (2005, January 14). Europe overtakes U.S. in big outsourcing deals. Computerworld. Retrieved March 13, 2005, from http://www. computer world.com/printthis/2005/0,4814, 99086,00.html

Thibodeau, P. (2005b, May 5). Datamonitor: Financial services sector outsourcing to grow. Computerworld. Retrieved June 15, 2005, from http://www.com puterworld.com/ printthis/2005/0,4814,101544,00.html

Quinn, J. B., & Hilmer, F. G. (1995). Strategic outsourcing. The McKinsey Quarterly, 1. Retrieved March 13, 2005, from http://www.mckinsey quarterly.com.

Thibodeau, P. (2005c, May 2). Offshore tech support still stirs controversy. Computerworld. Retrieved June 15, 2005, from http://www. computerworld. com/printthis/2005/0,4814, 101456,00.html

Rishi, M., & Saxena, S.W. (2004). Is outsourcing really as bad as it is made to sound? Reassessment and some perspective. Indian Journal of Economics and Business, 3(3), 63-80. Robinson. M., & Kalakota, R. (2005). Offshore outsourcing: Business models, ROI and best practices. Alpharetta, GA: Mivar Press. Rowley, A. (2004, April 27). Japan’s IT outsourcing has 6.7t yen potential. Business Times. Retrieved March 13, 2005 from http://www.asiaone. com.sg/cgi-bin/utils/it/printf.pl? newsprt Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-123. Thibodeau, P. (2005a, March 7). Premier 100 Q & A: McKesson’s Cheryl Smith on outsourcing. Computerworld. Retrieved March 13, 2005, from http://www.computerworld.com/ printthis/2005/0,4814,100247,00.html

Times of India, The. (2004, Dec 5). Developed nations need not fear outsourcing. Retrieved March 13, 2005, from http://timesofindia.indiatimes.com/ articleshow/947001.cms. Turban, E., Leidner, D., McLean, E., & Wetherbe, J. (2006). Information Technology for Management: Transforming Organizations in Digital Economy. New York: John Wiley. Vietor, R. H. K., & Evans, R. (2001). Japan: Beyond the bubble. Harvard Business Online. Product #702004. Retrieved March 13, 2005, from http:// www.hbsp.harvard.edu. Vijayan, J. (2005, Mar 8). Premier 100: Outsourcing security offers benefits, risks. Computerworld. Retrieved March 13, 2005, from http://www.comp uterworld.com/printthis/2005/0,4814,100266,00. html WIT. (2001). Win by borrowing other’s abilities. Wit Solution Journal Online. Retrieved March 13, 2005, from http://www.ntt-west.co,jp/solution/ eng/journal/tokushu_09/001spe_01. html

This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, and M. Schniederjans, pp. 17-41, copyright 2007 by IGI Publishing (an imprint of IGI Global).

18

19

Chapter 1.2

A Paradigmatic and Methodological Review of Research in Outsourcing Vanita Yadav Management Development Institute, India Rajen K. Gupta Management Development Institute, India

absTracT Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment and synthesis of research activities to date. This article addresses this need and examines the academic literature on information systems outsourcing and business process outsourcing using a paradigmatic and methodological lens. The objective of this article is fourfold. Firstly, it examines the status of outsourcing research from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework. Thirdly, it compares and contrasts the outsourcing research work published

in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and the directions for future research.

inTrOducTiOn Eastman Kodak’s decision to outsource its information systems (IS) function in 1989 to IBM, DEC, and Businessland formally launched the phenomenon of outsourcing in the corporate world which aroused interest worldwide. Outsourcing is defined as the procurement of products and services from sources that are external to the organization (Lankford & Parsa, 1999). The e-commerce revolution has forced the transformation of traditional IS outsourcing structures into new outsourcing service configurations,

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

A Paradigmatic and Methodological Review of Research in Outsourcing

like Internet service outsourcing, application service outsourcing, and business process (BP) outsourcing (Watjatrakul, 2005). Businesses today are growing in complexity and the world is moving towards globalization. As a result the forces of outsourcing have become a present-day reality and are poised for phenomenal growth in the future. The importance of outsourcing in industry has led to extensive research in this area. Most of the research done in outsourcing is in the field of IS outsourcing. In the last few years, there has been a rise in another more process-centric approach to outsourcingbusiness process outsourcing, in which the outsourcing vendor offers to take responsibility for an entire client process (Harmon, 2003). Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment of research activities to date. This article aims to address this need of exploring and synthesizing the academic literature on outsourcing. Although Dibbern, Goles, Hirschheim, Rudy, and Jayatilaka (2004) and Gonzalez, Gasco, and Llopis (2006) have carried out a survey and analysis of literature in the field of IS outsourcing, the goal of this research is to extend existing insights. The focus of Gonzalez et al.’s (2006) IS outsourcing review was to identify the main topics of IS outsourcing, the methodologies most often applied, and the authors and countries that have contributed most to the area of IS outsourcing. The focus of Dibbern et al.’s (2004) IS outsourcing review was on research objectives, methods used, and theoretical foundations to view outsourcing as an organizational decision process using Simon’s model of decision making. In contrast, our study covers IS as well as BP outsourcing research, and carries out a methodological and paradigmatic examination of literature. Hence this study makes a contribution to the philosophical and methodological foundations of research in outsourcing. Additionally, it also presents a comparative analysis of the outsourcing research trends in leading American and European journals. 20

The objective of this article is fourfold. Firstly, it examines the status of outsourcing research in from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework of Meredith, Raturi, Amoako-Gyampah, and Kaplan (1989). Thirdly, it compares and contrasts the outsourcing research work published in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and directions for future research. The article is organized as follows. In the next section, the review of existing research literature on IS and BP outsourcing is presented. Subsequently, the choice of methodology for collecting and analyzing data is explained, followed by discussion of the results. The article ends with implications of the study, directions of future research, and contributions.

liTEraTurE rEviEw Outsourcing Outsourcing involves contracting with an external provider for the provision of a service which may have been provided using in-house staff (Domberger, Fernandez, & Fiebig, 2000). Outsourcing has been around for more than a decade, but it got formal recognition only after the famous Kodak deal in 1989. Since then it has generated a stir in the practitioner community. Academics, by and large, have been relatively slow to research this phenomenon (Dibbern et al., 2004). While academic research has been slow to follow the practitioner community, it is now being recognized as an important area of research. This article focuses on the following two kinds of outsourcing:

A Paradigmatic and Methodological Review of Research in Outsourcing

•

•

Information Systems Outsourcing: Willcocks and Kern (1998) define IS outsourcing as the handing over to a third party management of IT/IS assets, resources, and/or activities for required results. Cheon, Grover, and Teng (1995) define information technology outsourcing as the organizational decision to turnover 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. Business Process Outsourcing: The Accenture Institute for Strategic Change suggests that BP outsourcing goes further than technology infrastructure or even applications. The outsourcing service provider takes primary responsibility for ensuring that the process works, interfaces effectively with other company functions, and delivers the outcome intended. BP outsourcing refers to an outsourcing relationship where a third-party provider is responsible for performing the entire business function for the client organization (Dibbern et al., 2004). A number of industries are considering BP outsourcingin particular, government, financial services, healthcare, transportation, and logistics (Millar, 1994).

research paradigms in is research Orlikowski and Baroudu (1991) and Chen and Hirschheim (2004) indicate that positivism dominates IS research while other paradigms are relatively small in number. The following three references outline the paradigmatic analysis of IS research between 1985 and 2001: •

Orlikowski and Baroudu (1991) examined 155 articles on IS research published between 1985 and 1989 in MIS Quarterly (MISQ), Communications of the ACM (CACM),

•

•

Management Science (MS), and Proceedings of the International Conference on Information Systems (ICIS). Their findings indicated that positivist paradigm overwhelmingly dominated the IS research community and little attention was paid to interpretive paradigm. Chen and Hirschheim (2004) analyzed 1,893 articles on IS research published between 1991 and 2001 in MISQ, Information Systems Research (ISR), Journal of Management Information Systems (JMIS), ICIS, Information and Organization (I&O), Information Systems Journal (ISJ), Journal of Information Technology (JIT), and European Journal of Information Systems (EJIS). Their analysis indicates that while there has been some paradigmatic change in the IS research community since 1990, this change has not significantly manifested itself in journal publications. In most research journals, positivism maintains its prevailing dominant position. Dibbern et al. (2004) examined 84 articles on IS outsourcing published between 1988 and 2000 in I&O, CACM, EJIS, JIT, JMIS, Information and Management (I&M), ISJ, ISR, MISQ, Academy of Management Journal (AMJ), Academy of Management Review (AMR), Decision Sciences (DS), MS, Organization Science (OS), Strategic Management Journal (SMJ), Harvard Business Review (HBR), California Management Review (CMR), Sloan Management Review (SMR), ICIS, and Hawaii International Conference on System Sciences (HICSS). Their results indicate that there is a balanced aggregation of research approaches in IS outsourcing on the positivism-interpretivism continuum. However, the American outlets were dominated by the positivist paradigm and the European outlets were dominated by the interpretive paradigm.

21

A Paradigmatic and Methodological Review of Research in Outsourcing

mEThOdOlOgy Journal representations For the purpose of this research, the focus was on mainstream journals that would reflect progress in the field of IS and BP outsourcing in the last 10 years, ranging from 1995 to 2005. The rationale behind the choice of leading journals in IS and management fields has been investigated by Walsham (1995), Orlikowski and Baroudu (1991), and Chen and Hirschheim (2004). The following academic journals were examined: •

•

•

Three mainstream American IS journals: Information Systems Research, MIS Quarterly, and Journal of Management Information Systems. Three mainstream European IS journals: Journal of Information Technology, European Journal of Information Systems, and European Management Journal. Two mainstream management journals: Management Science and Decision Sciences.

paradigmatic representations For paradigmatic analysis, this article uses the Operations Research Paradigm framework by Meredith et al. (1989) as shown in Figure 1. This framework has been used by researchers in the operations management area (Meredith et al., 1989; Sachan & Datta, 2005). It serves as a comprehensive analysis tool in a two-dimensional format and is in the same way applicable to the field of IS research also. Hence this research extends the body of knowledge in the IS arena by using this Operations Research Paradigm framework to analyze the research paradigms in IS and BP outsourcing literature. Here it may be useful to mention that a paradigmatic perspective goes beyond the dichotomous classifications of research methods and techniques. Such a perspective helps

22

the research community to undertake a reflective examination of its ontological and epistemological assumptions including the underlying values held by the community. The analysis of this article focuses on the following paradigms: axiomatic, positivist, interpretive, direct observation of object reality, people’s perception of object reality, and artificial construction of object reality.

methodological representations The analysis of research methodology used in the identified journal papers focuses on the following areas: empirical vs. non-empirical; quantitative vs. qualitative; cross-sectional vs. longitudinal; research designs (survey, focus group, case study, experiment, and action research); sources of data; hypothesis testing; and the data analysis techniques (descriptive analysis, regression, factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, structural equation modeling).

Empirical vs. Non-Empirical The empirical studies rely on observations and data, and the non-empirical studies rely on ideas and concepts. The categorization in this research is established as empirical if the articles obtain real data or observations, which could be gathered through quantitative, qualitative, or a mixed approach, including archival data (Chen & Hirschheim, 2004).

Quantitative vs. Qualitative The criterion for categorizing research methods as quantitative or qualitative in this article is based on whether studies use a statistical or numerical approach to collect and analyze data (Chen & Hirschheim, 2004). There is a possibility that research could use both quantitative and qualitative methods in different stages of the study. On

A Paradigmatic and Methodological Review of Research in Outsourcing

such occasions, they are categorized as a mixed research method.

non-empirical pieces, or descriptive/argumentative as noted in Galliers’s (1991) classification. Research with secondary data such as public records or existing datasets is also included in this category.

Cross-Sectional vs. Longitudinal Chen and Hirschheim (2004) described longitudinal study as a research that evolves over an uninterrupted period of time and focuses on process. Cross-sectional study, on the other hand, is research that collects data through one snapshot at a particular point of time (Orlikowski & Baroudi, 1991).

Sources of Data The sources of data involve collecting data from primary data sources or secondary data sources. The articles involving scenarios and examples have been categorized under the others category.

Research Designs

Hypothesis Testing

Adapting the research design categorizations from Orlikowski and Baroudi (1991) and Chen and Hirschheim (2004), the following research designs were identified:

A hypothesis is a specific statement of prediction (Sachan & Datta, 2005). The development of science can be seen as a sequence of revisions of hypotheses. Our knowledge of reality involves sequence of trials and errors (Sachan & Datta, 2005). Under hypothesis testing, it is checked in the research paper whether the study involves explicit formulation and testing of research hypotheses.

• • •

•

•

•

Survey: Research articles involving data collection via questionnaires. Focus Group: Group discussions exploring a specific set of issues to generate data. Case Study: Research articles that are involved with a single site or a few sites over a certain period of time that involved in-depth study of a phenomenon. The case study inquiry usually relies on multiple sources of evidences (Yin, 1994). Experiment: Studies that take place within a designed, controlled environment and usually involve special treatment of different groups to contrast the precise relationships among variables (Galliers, 1991). Action Research: The researchers are an integral part of the phenomenon under study. The researchers’ input often influences the outcomes of the phenomenon, and his/her role could change from researcher to subject (Galliers, 1991). Others: Articles that are practitioner oriented (systems or tools development),

Data Analysis Techniques Data analysis techniques help researchers in: • • • •

summarizing data; understanding the effect of variable (s) on the variable under study; minimizing confounding effects inherent in data, such as questionnaire data; and assessing alternative future scenarios.

Major techniques used for data analysis are descriptive analysis, regression factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, and structural equation modeling.

23

A Paradigmatic and Methodological Review of Research in Outsourcing

rEsulTs This article assessed the state of research in IS and BP outsourcing by examining the research paradigms and research methodologies adopted in 70 articles in eight leading academic journals between 1995 and 2005. The findings of the study reveal that on IS and BP outsourcing, between 1995 and 2005, there were 20 articles in the three American IS journals, 41 articles in the three European IS journals, and nine articles in two management science journals (see Figure 2). The European journals indicated more research in the outsourcing field (see Figure 3).

methodological representations Empirical vs. Non-Empirical Forty-three articles fell under the empirical category and 22 under the non-empirical category (see Figure 4). In American IS journals there were 10 indicating empirical approach and 10 indicating non-empirical approach. The European IS journals had 29 empirical articles and eight non-empirical articles. The management journals had four empirical articles and four non-empirical articles. American journals had an equal balance of empirical and non-empirical articles, whereas the European journals indicated applying mostly empirical approaches (see Figure 5).

Quantitative vs. Qualitative Thirty-eight articles fell under the qualitative category and 24 under the quantitative category (see Figure 6). In American IS journals there were six indicating qualitative approach, 12 indicating quantitative approach, and two indicating mixedmethod approach. The European IS journals had 30 qualitative articles, six quantitative articles, and one mixed-method article. The management journals had two qualitative articles and six quantitative articles. The American journals mainly

24

were quantitative research focused, whereas the European journals were qualitative research focused (see Figure 7).

Cross-Sectional vs. Longitudinal Thirty-four articles fell under the cross-sectional category and 6 under the longitudinal category (see Figure 8). In American IS journals there were 12 indicating cross-sectional approach and one indicating longitudinal approach. The European IS journals had 21 cross-sectional articles and four longitudinal articles. The management journals had one cross-sectional article and one longitudinal article. Both the American and European journals involved mostly cross-sectional approaches (see Figure 9). The longitudinal approach was insignificant in number.

Research Designs Fifteen articles fell under the survey research, one under focus group, 18 under case study, and 38 under the ‘others’ category. There were no articles under action research and experimental research. Research in the ‘others’ category included: one literature review paper, nine conceptual modelbuilding papers, 10 mathematical model-building papers, one research commentary paper, and 17 papers based upon secondary data analysis. Case study research was the most predominant research design, followed by secondary data analysis and survey research (see Figures 10 and 11).

Sources of Data There were 30 articles using primary data sources, 31 articles using secondary data sources, and 13 articles in the others category, which included examples and scenarios (see Figure 12). In American IS journals there were eight indicating primary data sources, 13 indicating secondary data sources, and seven indicating other sources. The European IS journals had 20 primary data sources

A Paradigmatic and Methodological Review of Research in Outsourcing

articles, 14 secondary data sources articles, and five other sources articles. The management journals had two primary data sources articles, four secondary data sources articles, and one ‘other’ sources article. European journals mainly relied on primary data sources, whereas the American and management science journals relied on secondary data sources (see Figure 13).

Hypothesis Testing Eight articles indicated hypotheses testing out of the 70 articles reviewed (see Figure 14). The American IS journals had five articles indicating hypotheses testing, the European IS journals had two articles involving hypotheses testing, and the management journals had one article indicating hypotheses testing. Thus the American journals indicated a greater trend towards hypothesis testing than the European journals (see Figure 15).

Data Analysis Techniques There were 28 articles which indicated descriptive analysis, nine involving applied regression, four involving factor analysis, three involving correlation, two indicating Logit model, two involving structural equation modeling, and 23 under the ‘others’ category (see Figure 16). There were no articles applying cluster analysis, conjoint analysis, and path analysis. The ‘others’ category involved qualitative analysis of interview transcripts. American journals applied higher quantitative statistical analysis techniques whereas the European journals were restricted to mainly descriptive and qualitative techniques (see Figure 17).

paradigmatic representations The paradigmatic analysis for IS and BP outsourcing research in 70 papers using the operations research paradigm framework is tabulated in Figure 18.

The literature review highlighted that the American journals are predominantly positivist in approach, but the results show that in the area of IS and BP outsourcing, they are also adopting interpretive paradigms. Although American journals are still more inclined towards positivism (positivist and axiomatic11 articles), the trend towards interpretive research (nine articles) is evident. The European journals belong predominantly to the interpretive paradigm (interpretive30 articles; positivist and axiomaticseven articles).

implicaTiOns Analysis of previous review papers in IS research highlights that positivist paradigm holds a dominant position. A paper by Galliers and Meadow (2003) offers a possible explanation in this regard. They discovered that editorial board members of North American journals like ISR and MISQ were primarily North American researchers (between 75% and 87.5% for ISR, and 51.2% and 86.8% for MISQ), and these journals tended to publish articles written by North American researchers (74% for ISR and 83% for MISQ). A similar situation was reported for European journals where the editorial board members were largely European, as were the papers published (Galliers & Meadow, 2003; Chen & Hirschheim, 2004). Galliers and Meadow (2003) concluded that the IS field maintained a “homegrown” perspective. Further, traditional wisdom has long recognized that positivist research is more easily accepted because its research tradition has been more successfully established (Hirschheim & Klein, 2002). The mainstream North American journal, MISQ, had publicly announced its acceptance of alternate research approaches in 1993. Chen and Hirschheim (2004) reported from their empirical analysis of 1,893 articles that even after years of advocacy of paradigmatic pluralism, not much has changed. On the contrary our findings indicate that a change is noticeable as the American journalsthough

25

A Paradigmatic and Methodological Review of Research in Outsourcing

still more inclined towards positivism (positivist and axiomatic11 articles)are also publishing interpretive research (nine articles). However, this can also be attributed to the recency of the phenomenon of outsourcing. Another interesting observation is that highlighted by the comparison between empirical and non-empirical studies. Our analysis revealed that 66% of the papers were empirical in nature. Chen and Hirschheim (2004) have also reported that researchers have increased their use of empirical data collection. Interestingly, our study revealed that the American journals had an equal balance of empirical and non-empirical articles whereas the European journals indicated applying mostly the empirical approach. Chen and Hirschheim (2004) state that as a field matures, theoretical and conceptual developments become less appealing, and empirical studies become more popular because of the need for theory testing and practical relevance. The European journals indicated more research in the outsourcing field (58%) as compared to the American journals (29%). For this reason the European journals could possibly regard outsourcing research as a mature field and show greater adoption of empirical studies. Both the American and European journals mainly involved cross-sectional studies. Longitudinal approach was insignificant in quantum. It can be due to the contention that cross-sectional studies enjoyed more popular positions (Chen & Hirschheim, 2004) and prevalence of a ‘publish or perish’ research publication notion (Walsham, 1995). Also, research using literature reviews, conceptual model building, mathematical model building, and research commentaries were the most predominant research designs followed by case study and survey research. The European journals mainly relied on primary data sources whereas the American journals relied more on secondary data sources. Finally, the American journals applied higher quantitative statistical analysis techniques and indicated a greater trend towards hypothesis testing, whereas the European

26

journals applied mainly descriptive and qualitative techniques. To summarize, this study reveals that in the area of outsourcing, interpretive paradigm is beginning to dominate if two sides of the Atlantic are put together. This can probably be attributed to the reality that European journals are publishing more in this area and they are more interpretively inclined. Newness of outsourcing could also be one possible explanation as the more positivist inclined American journals were also reporting interpretive research in this area.

dirEcTiOns FOr FuTurE rEsEarch The IS and BP outsourcing industry is poised for phenomenal growth, and this area has high potential for future research. Outsourcing has emerged as a multifaceted subject. There is a great deal of diversity in terms of research objectives, theoretical foundations, and methods (Dibbern et al., 2004). Additional exploratory content analysis of the papers revealed various emerging research areas. These are summarized as follows: •

•

Longitudinal studies: An evident need for longitudinal studies is a key finding of this study. There is an opportunity for researchers to move beyond the snapshot studies and broaden the perspective of outsourcing by incorporating temporal effects to answer questions like, How does the outsourcing process change over time? Client-vendor relationships: An in-depth understanding of the key issues underlying client-vendor relationships is required. Most of the studies were from the client perspective, and there was a need for further examining the vendor perspective. Additionally, dyadic studies incorporating both the client and vendor perspective would offer better understanding of the dynamics of such engagements.

A Paradigmatic and Methodological Review of Research in Outsourcing

•

•

•

•

Client-vendor governance arrangements: An increasing number of varied outsourcing contracts have increased the complexities of governance mechanisms. There is a need to explore such engagements and understand the dynamics of control. Additionally, the impact of informal relationship between the client and vendor organizations can lead to interesting studies. There is an emerging nature of such relationships. This promising trend to move beyond the contractual engagements can be explored. What is the impact of trust on the governance of such arrangements? How does an outsourcing contract-relationship evolve over time? Risk management: Turning over the entire business process to a vendor brings with itself various risks. Studies conceptualizing and examining comprehensive risk assessment frameworks can aid in better understanding the dynamics of outsourcing risks. Operationalization and measurement of outsourcing success: Success is defined differently in various papers by various stakeholders and researchers. The complicated nature of the perception of success makes it a difficult variable to operationalize. Hence an all-inclusive view of success can be explored. Emerging role of countries: The emerging role of countries—like India, China, the Philippines, and othersfrom cost-saving outsourcing destinations to strategic valueadding outsourcing destinations is also a fertile area for future research.

Furthermore, the dataset of this research was limited to eight journals only. Hence this study can be taken forward by researchers for larger assessment by including other management science journals in the area of information systems, operations, human resources, organizational behavior, finance, and strategy.

cOnclusiOn The purpose of this article was to study the literature on IS and BP outsourcing using a methodological and paradigmatic lens. The analysis of publication trends brings out a growing awareness of non-positivist approaches to doing research in outsourcing. However, the analysis also brings out a continuing divide across the Atlantic Ocean. The authors hope that awareness of such a divide would trigger a meaningful dialogue over the underlying perspectives so that it stimulates more wholesome research across the globe. A better balance between the positivist and interpretive is also likely to save us from making unnecessary blunders due to cultural blindness of the positivist paradigm in the outsourcing phenomenon, which by its very nature straddles far-flung continents and cultural worlds. The analysis also shows the paucity of longitudinal and action research studies, which actually have great potential to generate deeper insights about the challenges to the management of outsourcing. In sum, the article attempts to stimulate a reflective introspection in the research community interested in the emerging phenomenon of outsourcing.

rEFErEncEs Ang, S., & Beath, C.M. (1993). Hierarchical elements in software contracts. Journal of Organizational Computing, 3(3), 329-361. Chen, W., & Hirschheim, R. (2004). A paradigmatic and methodological examination of information systems research from 1991 to 2001. Information Systems Journal, 14, 197-235. Cheon, M.J., Grover, V., & Teng, J.T.C. (1995). Theoretical perspectives on outsourcing of information systems. Journal of Information Technology, 10, 209-210.

27

A Paradigmatic and Methodological Review of Research in Outsourcing

Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102. Domberger, S., Fernandez, P., & Fiebig, D.G. (2000). Modeling the price, performance and contract characteristics of IT outsourcing. Journal of Information Technology, 15, 107-118. Galliers, R.D. (1991). Choosing appropriate information systems research approaches: A revised taxonomy. In H.E. Nissen, H.K. Klein, & R. Hirschheim (Eds.), Informations systems research: Contemporary approaches and emergent traditions (pp. 327-345). North Holland: Elsevier Science. Galliers, R.D., & Meadow, M. (2003). A discipline divided: Globalization and parochialism in information systems research. Working Paper. Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834. Harmon, P. (2003). An overview of business process outsourcing. Business Process Trends, 1(9), 1-12. Hirschheim, R., & Klein, H.K. (2002). Information systems research in the making: A critical reflection on the current state of the IS discipline. Working Paper.

MacCrimmon, K., & Wehrung, D. (1986). Taking risks: The management of uncertainty. New York: The Free Press. Meredith, J.R., Raturi, A., Amoako-Gyampah, K., & Kaplan, B. (1989). Alternative research paradigms in operations. Journal of Operations Management, 8(4), 297-326. Millar, V. (1994). Outsourcing trends. Proceedings of the Outsourcing, Cosourcing and Insourcing Conference, Berkeley, CA. Nash, J.F. (1953). Two-person cooperative games. Econometrica, 21, 128-140. Orlikowski, W., & Baroudi, J.J. (1991). Studying information technology in organizations: Research approaches and assumptions. Information Systems Research, 2, 1-28. Sachan, A., & Datta, S. (2005). Review of supply chain management and logistics research. International Journal of Physical Distribution & Logistics Management, 35(9), 664-705. Walsham, G. (1995). Interpretive case studies in IS research: Nature and method. European Journal of Information Systems, 4, 74-81. Watjatrakul, B. (2005). Determinants of IS sourcing decisions: A comparative study of transaction cost theory versus the resource-based view. Journal of Strategic Information Systems, 14, 389-415.

Klepper, R. (1995). The management of partnering development in IS outsourcing. Journal of Information Technology, 10(4), 249-258.

Willcocks, L.P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of UK inland revenue. European Journal of Information Systems, 7(1), 29-45.

Lankford, W.M., & Parsa, F. (1999). Outsourcing: A primer. Management Decision, 37(4), 310-316.

Yin, R.K. (2003). Case study research: Design and methods. London: Sage.

This work was previously published in Information Resources Management Journal, edited by M. Khosrow-Pour, pp. 27-43, copyright 2008 by IGI Publishing (an imprint of IGI Global).

28

29

Chapter 1.3

IT Outsourcing:

Impacts and Challenges Luke Ho Staffordshire University, UK Anthony S. Atkins Staffordshire University, UK

absTracT This chapter provides both practitioner and academic insights into outsourcing. It begins with a review of the literature and practice of outsourcing, followed by a retrospect of its developments since the 1960s, up to present-day emergent trends such as best/smart-sourcing, rural-sourcing and business application grids. Recent legal developments are highlighted, along with their corresponding impacts. Outsourcing decisions tend to focus solely on the short-term benefits of cost reduction and service level improvement and, hence, often lack strategic direction, thus indicating the need for strategic management frameworks in the decision process. This chapter introduces a generic framework for such decision-making and highlights other strategic frameworks developed by researchers. The chapter then concludes by summarizing suggested action points that enable both clients and service providers to best

exploit the recent developments in outsourcing, in order to maintain the strategic edge in an increasingly complex and competitive business environment.

inTrOducTiOn The term outsourcing was coined in the 1970s to describe an agreement where an external organization provides services for a client that were previously carried out internally (Cap Gemini Ernst & Young, 2003). Initially, an arrangement of necessity, and later, a major cost-cutting move, it has evolved to become a mainstream strategy in a myriad of industries. The increasingly competitive markets have introduced further pressures to cut costs, and companies are now more inclined than ever to utilize outsourcing, which has spurred its continued growth over the past years. Reports of

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

IT Outsourcing

outsourcing mega-deals (i.e., deals with total contract value of $1 billion or more) are increasingly commonplace, indicating the large scale of the outsourcing market. In 2003 alone, a record number of 15 mega-deals were awarded out of the 78 mega-deals publicly announced since that of Kodak Eastman back in 1989. One of the most high-profile of these is the United Kingdom (UK) Inland Revenue organization’s mega-deal with the Cap Gemini Ernst & Young consortium, involving what was reported to be the world’s largest transfer of 3,500 staff in a 10-year deal worth $7-9 billion (Cullen, 2003). Recent statistics indicate that outsourcing is now a $180 billion industry (Anderson, 2004), and Information Technology Outsourcing (ITO) now accounts for one-third of global IT spending (Cap Gemini Ernst & Young, 2003). The promise of massive cost savings in the region of millions is driving the trend towards more outsourcing mega-deals. However, there have been a number of failed high-profile cases, which raises questions about the potential risks involved, particularly the lack of flexibility of long-term contracts. This was highlighted by the collapse of the Bank of Scotland’s (BoS) 10-year $1.2 billion mega-deal with IBM, which was indicated to have failed because of its inflexibility to accommodate the business change following the merger of BoS with Halifax (“Bank bins £700m IBM deal,” 2002). Another trend that has been in the media spotlight is that of Offshore Outsourcing, which has gained considerable negative publicity because of the controversial connotation of job losses to the client country and the potential of long-term adverse effects to its economy. Currently, 50% of all phone calls to the U.K. National Rail Enquiries are handled by operators in India (Nash, 2003); also, IBM plans to move up to 4,700 programming jobs overseas to save costs, and HSBC will transfer 4,000 customer service jobs to Asia by the end of 2005. These statistics illustrate the extent of the trend towards Offshore Outsourcing, which is becoming increasingly prevalent in various

30

industries; however, there are risks associated with loss of control and confidentiality issues. In 2003, this was highlighted in a case involving medical transcription, a commonly outsourced process for the medical industry, which the University of California San Francisco (UCSF) Medical Centre had been outsourcing for the past 20 years. Unknown to them, part of the outsourced work was subcontracted to a service provider in Texas, which, without the knowledge of anyone, further subcontracted the work to a physician in Pakistan (Bagby, 2003). The arrangement went without a hitch for 18 months, until the company in Texas refused to pay the physician in Pakistan, who threatened to post the patient medical histories on the Internet if not given the back pay, thereby infringing privacy and confidentiality laws. Although short of total failure in the sense that the outsourcing arrangement was salvaged following private financial settlement with the Pakistani physician, the incident illustrates the potential risks of outsourcing. The decision by businesses to outsource raises a number of critical issues for corporate management (Currie, 1995). To achieve success in outsourcing, companies will need to be aware of the emergent trends, understand their potential impact and utilize framework techniques for strategic management.

backgrOund Outsourcing is defined by Griffiths (2001) as the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. Laudon and Laudon (2000) define it as the process of turning over an organization’s computer operations center, telecommunications networks or application development to external vendors. Incorporating the common theme between these and other slightly different definitions, the authors define outsourcing as the third-party management of assets and resources

IT Outsourcing

at a required performance standard pre-defined by negotiation. Theorists such as Lonsdale and Cox (2000) perceive outsourcing as one way in which the boundary of a firm (i.e., company) can be adjusted in response to changing economic pressures. This is based on the theory proposed by Ronald Coase in his article “The Nature of a Firm,” which suggested that the motivation behind adoption of their chosen structure is related to the trade-off between the costs of accessing the market and the problem of diseconomies of scale (Coase, 1937). In recent years, outsourcing decision-makers have adopted the concept of core competence from the much publicized article “The Core Competence of the Corporation” by Hamel and Prahalad (1990), which advocates that firms should focus solely on their core business and consider outsourcing the rest. The exact history of outsourcing is somewhat vague: Although documented instances of its use first appeared in the 1950s, outsourcing in the form of subcontracting of work was indicated to have begun as early as the 1800s. In the early years of American history, the making of clipper ships’ sails and covered wagons’ covers was outsourced to workers in Scotland, with raw materials imported from India (Kelly, 2004). It was purported that by the 1830s, England’s textile industry became so efficient that eventually Indian manufacturers were unable to compete, and the work was outsourced to England. Within the U.K., outsourcing was introduced in the 1980s as a public sector management tool to provide a means to cut operational cost, reduce the risk of union strikes and downsize blue-collar workforces. This began primarily on the local government level, then progressed to the central government level in the 1990s, following the government white paper “Competing for quality: buying better public services” by the HM Treasury (1991).

developments of iT Outsourcing Origins Although outsourcing is often marketed as the latest strategic management tool, it is in fact the renaissance of a practice that has existed for decades. There are conflicting accounts of when outsourcing first begun, but the first documented practice of outsourcing appeared to be in the area of information systems when General Electric Corp. contracted with Arthur Andersen and Univac in 1954 (Klepper & Jones, 1998).

The 1960s In the 1960s, outsourcing took the form primarily as a facilities management service (Kelter & Walstrom, 1993; Teng, Cheong, & Grover, 1995). During this time period, computing usually involved the mainframe in a centralized computing model under which numerous users shared the same computer (Currie, Desai, Khan, Wang, & Weerakkody, 2003). As computing capability was very expensive, only the larger companies could afford such mainframes. Smaller companies often had to “piggy-back” their computing needs onto that of larger companies in return for a monetary fee. This arrangement, which involved sharing of the computer process time of the mainframes, was then known as “time-sharing.”

The 1970s Prior to the 1970s, companies who were clients of major hardware (e.g., mainframes) manufacturers had access to a library of software that was bundled in the cost of the hardware (Software History Center, 2002), which ranged from the computer’s operating systems to various utility programs. In the 1970s, generic software from such bundled sources was deemed unable to meet specific needs unique to individual companies, and hence, the need for customized software arose.

31

IT Outsourcing

Development of such customized software inhouse was inherently expensive, particularly for smaller companies, due to the skill sets required and the additional personnel that would have to be hired to provide the required expertise. Given the high costs associated with such software development, it was often contracted out, and hence, outsourcing in the form of contract of programming was prevalent in the 1970s.

The 1980s By the 1980s, the cost of computing capability had begun to plummet, due to the arrival of low-cost versions of mini-computers and then Personal Computers (Lee, Huynh, Chi-wai, & Pi, 2000). With reference to the market-standard measurements of Million Instructions Per Second (MIPS), the cost for 1 MIPS has fallen sharply from $1,000 in 1975 to $250 in 1980—a steep 75% drop. Consequently, the cost of maintaining in-house computing facilities became more financially feasible and, as a result, companies began to bring previously outsourced services in-house. Retaining services in-house continued in the mid-1980s on the grounds of the supposedly better internal control and reservations of “opening up” the company to outsiders. However, the large-scale outsourcing contract between Kodak Eastman and IBM in 1989 (Currie et al., 2003) sparked off a massive bandwagon effect (Lacity & Hirschheim, 1993). In retrospect, this trigger is possibly the ground-breaking deal that brought outsourcing into the limelight, and is often quoted as the first instance in which outsourcing was defined as a formal strategy.

The 1990s The early 1990s were characterized by renewed interest in outsourcing (Lee et al., 2000) and strategic use of outsourcing was the focus. Within this time period, outsourcing was utilized for two main purposes.

32

First, outsourcing was utilized to force downsizing within companies in order to keep them “lean and mean” for competitive advantage. Second, outsourcing was utilized to upgrade legacy systems operating on 3rd Generation Language (3GL) to 4th Generation Language (4GL). Due to limited in-house resources, companies often encountered challenges while attempting to upgrade the existing applications themselves. As such, many companies had to resort to outsourcing the upgrade to a third party, which was considered to be better equipped in terms of technical skill sets and human resources, in order to ensure a smooth transition. In 1999, there was an increased uptake of onsite facilities management and selective outsourcing, primarily in areas associated with the Y2K problem (i.e., millennium bug). This took form in the use of contracting staff and involved early applications of Offshore Outsourcing, primarily to India.

The 2000s Transformational use has been the main focus of outsourcing in recent years, particularly in the areas of Business Process Outsourcing and Offshore Outsourcing. Business Process Outsourcing has been utilized to redefine the company’s operating model and structure. Administrative, transactional and similar work have been shifted to third parties with the aim of reaping benefits such as cost savings, better access to emerging technology and the freeing of internal staff from administrative trivia to focus on strategic issues more vital to the company. It is now seen as a service where total, defined business processes are given to expert service providers who manage the process and ensure the total integration between outsourced business processes and in-house processes (Kruse & Berry, 2004). Globalization, driven by agreements such as the North American Free Trade Agreement

IT Outsourcing

(NAFTA) and the liberalization of economies like those of China and India, increased companies’ propensity to outsource overseas to low laborcost countries (Namasivayam, 2004). This form of outsourcing, known as Offshore Outsourcing, is increasingly popular with companies seeking the means to lower costs and maintain a roundthe-clock availability in their quest for higher efficiency. Predictions from Forrester Research Inc. (Engardio, Bernstein, & Kripalani, 2003) indicate that 1 million jobs in the United States (U.S.) will be moved offshore by 2010. Figure 1 illustrates the key locations being considered for Offshore Outsourcing and provides a quick summary of each country’s advantages and risks. India is currently one of the most popular locations for Offshore Outsourcing due to the strong government support for outsourcing and the abundance of low-cost English-speaking workers who are highly skilled. Additionally, the difference in time zone from Western markets makes it an ideal choice for providing roundthe-clock coverage. However, there are concerns about power failures, due to the lack of a reliable infrastructure, which are highly disruptive to computer-based operations. China is predicted by industry experts to be a close competitor to India in the near future (Furniss, 2003), largely due to the liberalization of laws and government policies brought on by its membership into the World Trade Organization. Its political leaders have taken note of the importance of the technical education in India and begun to invest heavily on academia to raise its level of technical competence. China is also regarded because of low labor costs due to its large untapped supply, making it a more favorable location in the future for companies seeking the lowest costs. However, government support for outsourcing is yet to be fully developed and language considerations are still a main concern for companies planning to outsource to China. Emergent markets that companies have begun to consider include Russia, South Africa and the

Philippines. Russia is noticed for its availability of joint-degree graduates with a strong delivery methodology approach; however, there are concerns regarding language skills and political stability. South Africa, which is indicated to be a niche provider of insurance policy administration, has the key advantages of having a good command of English and a time zone close to the UK, but is unable to compete with its Asian counterparts in terms of labor costs and communication costs at present. The Philippines is noted for its strong technical skills and mature infrastructure, along with its close cultural affinity to U.S. businesses and language, but there are security concerns due to the perceived terrorism threat in the region. Central Europe is beginning to catch up in Business Process Outsourcing, despite having entered the market later than India and China. Although it is less favorable in terms of labor costs, typically three to five times that of India and China, Central Europe has the advantages of a diverse language pool (French, Spanish, etc.) and cultural affinity to Western markets. As such, it is expected that outsourcing will be a growth industry for Central Europe, particularly new members of the European Union, such as Poland and Czech Republic.

Types of Outsourcing Willcocks, Feeny and Islei (1997) distinguished between four main types of outsourcing, namely Total Outsourcing, Total Insourcing, Selective Outsourcing and De Facto Outsourcing. Ho, Atkins, and Eardley (2004) extended the distinction to six types, with the inclusion of Offshore Outsourcing and Business Process Outsourcing. This has been further extended to nine types, taking into account Business Transformational Outsourcing, Retro-sourcing and Rural-sourcing from literature reviews, all of which are outlined as follows:

33

IT Outsourcing

•

•

•

•

•

•

•

34

Total Outsourcing refers to the decision to transfer the provision and management of at least 80% of services to the external service providers. Total Insourcing refers to the decision to retain the provision and management of at least 80% of services internally after a reasoned evaluation of the external service provider market. Selective Outsourcing refers to the decision to source selected services from external service providers while still providing between 20-80% (typically 24%) of services internally. De Facto Outsourcing (Insourcing) refers to the exclusive use of internal resources to provide services, which arises from historical precedent rather than a reasoned evaluation of the external service provider market. Offshore Outsourcing refers to the decision to transfer the provision and management of services to external service providers outside of the client organization’s home country and also on cruise ships off territorial waters. Business Process Outsourcing refers to the decision to transfer selected areas of the client organization’s repeated core and noncore business processes to external service providers; for example, financial statement analysis and statutory reporting. Business Transformational Outsourcing refers to a type of relationship that involves both Information Technology Outsourcing and Business Process Outsourcing. While traditional use of outsourcing is to offload non-core activities and leverage economies of scale, Business Transformational Outsourcing is instead utilized to gain strategic competitive advantage on an enterprise-wide basis and share risks in innovating to enhance business performance.

•

•

Retro-sourcing refers to a cyclic relationship where an offshore service provider outsources some degree of services back to the client organization’s home country, typically by the creation of a business division sometimes misclassified as “Insourcing.” Protagonists of Retro-sourcing claim that it is a positive trend that results in job creation, while antagonists claim that it is merely “outsourcing in sheep’s clothing” (Reisman, 2004). Rural-sourcing refers to an obscure form of Outsourcing in which the provision and management of services are transferred to rural regions of the client organization’s home country. The concept of retaining jobs onshore while benefiting rural communities in the process presents opportunities for companies to project a positive public image; hence, Rural-sourcing is expected to be an increasingly viable alternative to Offshore Outsourcing.

advantages of Outsourcing Cost Reduction Companies that maintain all services in-house may incur vastly higher research, development, making and deployment costs, which can severely reduce their overall competitive advantage. Outsourcing can be utilized to exploit the lower cost base of external service providers, which allows for reduction in operating costs (Namasivayam, 2004) and capitalization (Kruse & Berry, 2004), allowing additional finances to be freed for use in other areas of strategic importance. Typical cost reductions are in the region of 20% to 40% (Davison, 2004; Namasivayam, 2004), primarily by labor cost arbitrage, although some literature have indicated cost reductions of up to 70% (Synergy Infotech, 2004).

IT Outsourcing

Access to Specialist Resources World-class service providers amalgamate expertise by working with multiple clients facing similar challenges, and make extensive investments in both technological and human resources. Consequently, the careful selection of a service provider with cutting-edge technologies and skills can provide access to world-class capabilities and specialist resources (Kruse & Berry, 2004; Namasivayam, 2004), which can aid in areas such as reducing the risks of technology obsolescence and overtaking competitors on the technological front.

Improved Focus Outsourcing allows a company to focus on its core business by offloading operational aspects to service providers with expertise in their respective fields. The ability to “cherry-pick” a variety of services from leading service providers enables the company to optimize its value chain (Sloper, 2004), focus its resources on meeting client needs and improve contribution towards overall business objectives.

Subcontracting of Workload Each company has limits on the resources available to it; thus, outsourcing can be a particularly viable option in situations where a company’s internal human resources are stretched. By diverting certain components of the existing workload out to external service providers, internal resources can be allocated to business objectives of strategic importance with the aim of achieving higher efficiency and competitive advantage.

Better Risk Management Risks are inherent to almost any business decision (Aubert, Dussault, Patry, & Rivard, 1999) due to ever-changing market competition, gov-

ernment legislations, financial conditions and technologies. It can be both taxing and costly to be fully market-aware of all risk resulting from such economical, political, financial and technical issues. Outsourcing allows companies to exploit the resources and expertise of specialists, thus resulting in better risk management compared to internal handling.

risks of Outsourcing Loss of Organizational Competencies (Tacit Knowledge Loss) One commonly cited risk associated with the use of outsourcing is the loss of organizational competencies, which increases the level of dependence on external service providers. As outsourcing deals often involve transfer of human resources, the internal expertise available in a company may be significantly reduced, hence hampering its ability to maintain competitive advantage and to innovate (Earl, 1996). To reduce the loss of internal expertise, which in turn impacts organizational competencies, companies should conduct a thorough evaluation of all staff, prior to any transition, to identify those that need to be retained for required skill sets.

Reduction in Quality of Service (Service Debasement) Service debasement refers to any reduction in the quality of services received by a client (Aubert, Patry, & Rivard, 1998). Service quality may decline through the contract or may just fall below agreed-upon levels (Bahli & Rivard, 2003). This can be curtailed by the effective use of Service Level Agreements. For successful implementation, companies will need to have the ability to evaluate the performance of outsourced services, and hence, require some technical knowledge of the respective fields.

35

IT Outsourcing

Cost Escalation Cost escalation can sometimes occur from unforeseen expenses that result in an overrun of originally contracted estimates (Bahli & Rivard, 2003). This covers a broad range of costs, including the development and maintenance of an exchange relationship (i.e., outsourcing relationship), monitoring exchange behavior (i.e., service level monitoring) and guarding against opportunism (Williamson, 1985). This can be mitigated by a comprehensive financial analysis prior to outsourcing and the use of definitive Service Level Agreements that clearly indicate the financial basis and conditions of the outsourcing arrangement.

Lock-In Lock-in is a risk that often results as an extension of the loss of organizational competencies. A lock-in situation may occur in instances where a company has not retained sufficient in-house expertise or when there are relatively few service providers capable of offering the breadth and depth of services required (Bahli & Rivard, 2003). Contractual and practical safeguards are necessary to militate against lock-in (Sloper, 2004), which include strategic partnerships, based on risk sharing and mutual goals, and dual sourcing strategies involving the use of multiple service providers (Kern, Willcocks, & Van Heck, 2002). Some companies, such as British Aerospace, have deliberately maintained control of strategic IT functions to safeguard against the risk of lock-in.

sTraTEgic FramEwOrks The increasing complexity of outsourcing, as shown from a number of high-profile failures (Bagby, 2003; Cullen, 2003), highlights the need for strategic implications to be considered; consequently, tools to support this strategy have to be formulated and utilized. 36

Figure 2 illustrates the key reasons for outsourcing as identified by a study in 2004 conducted by PMP Research. The study surveyed 100 organizations, comprised of approximately 25% from the public sector and 75% from various elements of the private sector, regarding their view and opinions on the use of outsourcing (Mills, 2004). The two main reasons identified are to reduce operational costs and to improve service levels, both of which are tactical (i.e., short-term) in nature, which hints at the potential lack of strategic considerations in some instances of outsourcing decision-making. Although there are several advantages associated with outsourcing, like any other business move, there is a degree of risk involved; for example, loss of control and privacy issues in the case of Offshore Outsourcing. This underscores the need for a strategic perspective to outsourcing decision-making, rather than a tactical perspective that focuses primarily on short-term benefits.

generic Framework Figure 3 illustrates a generic framework for outsourcing decision-making, which allows for analysis of strategic value of the evaluated function against internal expertise (i.e., in-house) available in the company. The framework provides for classification into one of four possible quadrants, namely:

Best/Smart-Sourcing Candidates Functions classified under this quadrant are high in strategic value but low in internal expertise. These functions should be subject to a reasoned capability evaluation from both internal departments and external service providers to determine its viability for outsourcing. This selection process, which determines the “best” service provider, in terms of cost effectiveness and process efficiency, is known as “best/smart-sourcing.” Examples of such functions include technical help-desk

IT Outsourcing

(e.g., troubleshooting and end user support) and security management (e.g., anti-virus updates and network security).

ponent that should be retained in-house, hence contradicting the traditional concept of payroll as a strong candidate for outsourcing.

Strategic Retention Candidates

Change Candidates

Functions classified under this quadrant are high in both strategic value and internal expertise. These functions should be retained in-house, as it protects the company’s ability for rapid innovation along with its expertise in the domain. However, in some instances, companies are known to utilize consultants or expert advisors from external service providers to boost or enhance the existing internal capabilities. Examples of such functions are research and development fields, and applications that have been identified as Strategic Information Systems (SIS); that is, they are aligned with business objectives and have significant impact on organizational performance. Some of the classic examples could be American Airlines’ (AA) SABRE System, Baxter Healthcare International’s “stockless inventory” system, and Wal-Mart’s “continuous replenishment” Customer Relationship Management (CRM) system (Laudon & Laudon, 2000).

Functions classified under this quadrant are low in strategic value but high in internal expertise. In an ideal business setting, such functions are not supposed to exist, but they sometimes do exist in real-world business settings due to the isolation of IT functions from business functions that leads to separate agendas; that is, the lack of strategic alignment of IT with business objectives. These functions could be specialist-developed products looking for a business purpose or products that are well in advance of current business needs. These functions should be mitigated within the portfolio, either by elimination (possibly by means of outsourcing) or process re-engineering (possibly for development into strategic applications to be retained in-house). An example of such functions is predictive analysis tools, often developed by internal staff with high skill levels, which apply sophisticated analysis techniques to enterprise data. Although these tools are technically advanced, they produce predictive analysis models that have a low strategic value when utilized alone. However, when such predictive analysis models are combined with organizational business knowledge, they can provide insight into critical issues, such as fraud detection, customer retention and cross-selling strategies. In these instances, the predictive analysis tools are “change candidates” ideal for process re-engineering to develop them into “strategic retention candidates.”

Strong Outsourcing Candidates Functions classified under this quadrant are low in both strategic value and internal expertise. These functions are considered to contribute little value to the core business and are limited in terms of internal expertise, hence are strong potentials for outsourcing. Traditional examples of such functions are payroll systems and hardware maintenance. However, it is important to note the assessment of value contributed to core business may differ for individual companies; thus, each function should be examined in the appropriate business context instead of a generalization. For example, a security company may establish that their staff’s work attitude is linked to being paid efficiently, and thus view payroll as a vital com-

Other Frameworks In addition to the generic framework presented, Ho et al. (2004) identified a number of strategic frameworks for outsourcing decision-making, which are briefly outlined in Table 1.

37

IT Outsourcing

Analysis of the identified frameworks indicates that majority are based on the use of the Strategic Grid/Boston Matrix (SG/BM) positioning grid, which is a well-established technique (Earl, 1989; Ward & Peppard, 2002). There is clear consensus in literature of its use in generic business decision-making (Laudon & Laudon, 2000; Pearlson, 2001; Ward & Peppard, 2002) as SG/ BM-based frameworks are intuitive to use for business users. A review of the outsourcing literature emphasizes the need for strategic frameworks to incorporate quantitative measures to help practitioners set priorities and provide the most benefits from outsourcing (Yang & Huang, 2000). The failure to address this aspect is one of the main inadequacies of the majority of the frameworks reviewed, only three of which incorporate quantitative measures. The analysis highlights a lack of financial costing and benchmarking in most of the reviewed frameworks, which is contradictory, as cost savings and service level improvements are commonly identified as the top drivers behind the use of outsourcing. Financial costing is considered to be particularly important within a framework approach, as it facilitates the ability of the business to benchmark its cost position relative to external service providers and provides a comprehensive financial justification in the decision-making process.

Factors for successes and Failures

managEmEnT OF OuTsOurcing

•

Like all management operations, a consensus of advantages and associated risks of using third-party contractors (i.e., outsourcing service providers) has to be considered and evaluated. A summary of the factors in terms of outsourcing have been compiled and detailed in the following sections.

38

Although the business context in which outsourcing is utilized may vary widely, resulting in a vast combination of variables that influence outcomes, it has been noted that there are some common characteristics and traits in outsourcing moves that indicate its inclination towards success or failure. These commonalities, termed key factors, are briefly outlined as follows:

Factors for Successful Outsourcing •

•

•

•

•

Understanding of company goals and objectives: that is, there is a clear understanding of what the company hopes to achieve via the use of outsourcing; for example, access to advanced technology and specialist skills. Strategic vision and plan: that is, a defined roadmap details how outsourcing will aid the company in progressing towards its strategic objectives and long-term goals. Executive and management level buy-in: that is, there is senior executive support and involvement through the outsourcing lifecycle, from the decision process to the implementation process. Comprehensive financial justification in decision process: that is, the outsourcing decision is justified by a detailed financial analysis, which benchmarks the company’s internal cost position against that of external service providers. Use of external expertise in decision process: that is, lawyers, independent consultants and financial advisors are utilized to provide expert insight and advice on the legal, financial, economic, technological, political and organizational aspects. Open communication with affected individuals and groups: that is, employees and trade unions are informed and consulted about the potential outsourcing and its corresponding implications.

IT Outsourcing

•

•

•

Careful selection of right service provider: that is, there is an objective decision process in which the service provider with the best technical capabilities, financial feasibility and cultural fit is selected. Ongoing management of outsourcing relationship: that is, there is constant monitoring and management of various aspects of the outsourcing lifecycle, from the selection process to the implementation process. Quantifiable performance monitoring: that is, the company has established an objective and measurable method of ascertaining the compliance of performance standards in the service provision.

Factors for Unsuccessful Outsourcing •

•

•

•

•

Short-term benefits dominate as the motivation: that is, the outsourcing deal is handled as a purchasing decision rather than a strategic investment opportunity. Service providers are not “pre-qualified” on their total capabilities: that is, service providers are not short-listed by a comprehensive evaluation prior to selection. Service provider literature dominates the decision process: that is, case studies provided by the service provider, which are biased towards reporting only positive results, are used as the basis for deciding to outsource. Management team lacks decisional authority and experience: that is, the lack of experienced staff who have the incentives (personal, professional and economic) and authority to ensure the outsourcing deal succeeds. Lack of defined processes for incident resolution and change management: that is, the lack of defined processes for escalating problems, negotiating change requests and periodically reviewing the service provision contract.

selecting and managing service providers Prior to the selection of service providers, companies need to have identified two important aspects of information; namely, well-defined service expectations and an understanding of their internal cost metrics. Service expectations serve as a guide by which contractual needs can be assembled and then negotiated with potential service providers, while the internal cost metrics can be used to establish a “base case” for use in financial analysis. By using the “base case” as an estimate for current costs, a comprehensive financial analysis can then be conducted to benchmark the company’s cost position relative to that of external service providers. This would, in turn, provide for the financial justification on whether to retain the evaluated services in-house or to outsource them. Companies then need to articulate a clear mission statement for the type of outsourcing relationship to be established between themselves and their potential service providers. There needs to be well-defined objectives and performance metrics by which the services to be provided can be measured on a continuous basis, and companies should ensure that short-listed service providers already have an effective tracking and reporting system in place for that purpose. It is beneficial for companies to have direct access to the service providers’ tracking and reporting software for data capture about the performance of technology within the company, thus allowing technology use to be evaluated and areas for exploitation to be identified. Overall, an outsourcing relationship with the ideal service provider will involve committed and supportive management, which includes continuous service management and performance monitoring on an ongoing basis. In the selection of such service providers, companies have indicated the following to be the most important factors (Sparrow, 2005; 2004 Global IT Outsourcing Study, 2004):

39

IT Outsourcing

•

•

•

•

•

Reputation and proven track record: that is, the service provider has achieved results for similar companies that are willing to serve as references. Cultural fit: that is, senior executives and company staff are likely to be able to work well with that of the potential service provider, and are agreeable with its practices and processes. Financial stability: that is, the service provider is profitable, with good long-term growth potential and development prospects. Functional area expertise: that is, the depth and breadth of the service provider’s expertise adequately cater for the needs of the outsourced services. Vertical industry expertise: that is, the service provider has an understanding of the client company’s industry and, hence, is able to customize an outsourcing solution specific to the client’s organizational needs.

In addition to the above, other factors that should be considered include the flexibility of the contract terms, the scope of resources (both personnel and equipment) required for implementation and the service provider’s ability to value-add to the client’s internal capabilities. There needs to be due diligence in documentation procedures; that is, documents should be reviewed periodically and kept up-to-date. Present and proposed hardware/software configurations should be documented, along with the methods utilized to evaluate submitted bids. A summary checklist, which includes service provider name, contact person and bid submission date, should be also compiled for quick reference. In addition to facilitating objective decision-making based on accurate information, the documentation process can aid in the establishment of a formal method for the selection of service providers in future outsourcing processes.

40

Service Level Agreements (SLAs) are considered to be integral to the outsourcing process, particularly with regards to service management. SLAs are negotiated agreements of common understanding between clients and service providers that define the services provided along with their expected levels of performance, and corresponding penalties and consequences for non-compliance. They explicitly define the relationship between customers and service providers (Leff, Rayfield, & Dias, 2003) and can be used in the context of any industry (Verma, 2004). For effective and efficient implementation in an outsourcing relationship, companies will need to ensure that the SLAs encompass a good degree of legal adherence, quantitative metrics for performance monitoring and an established exit clause in the event that contract termination is deemed necessary.

stages in Outsourcing implementation Companies should utilize a systematic approach to outsourcing implementation in order to facilitate an objective perspective in the decision process. Figure 4 illustrates such an approach, involving six suggested stages, outlined as follows:

Stage 1: Prepare IT Strategy In the initial stage, companies should clearly articulate defined business objectives and develop an IT strategy that will enable them to progress and align with the business goals. Framework techniques, such as the generic framework or one of the other strategic frameworks earlier outlined, can be utilized to determine what aspects of the existing IT functions (e.g., partial or total) are outsourcing candidates. A thorough evaluation is needed to identify the mission-critical applications for strategic retention, and the level of internal expertise required to prevent loss of organizational competencies, and hence safeguard against lock-in

IT Outsourcing

risks. A rigorous review of legislative implications is also needed to determine the legal feasibility of outsourcing.

Stage 2: Resource Planning The next stage in the process is resource planning, in which the resources (both personnel and equipment) currently required for maintaining the functions in-house are identified. The identification facilitates the creation of a resource utilization table (e.g., breakdown into volume of data transmission, processor capacity required, etc.) in which the resource commitment for the various functions can be detailed, thus allowing resourceintensive functions to be flagged. Subsequently, these resource-intensive functions can then be evaluated for suitability for streamlining (e.g., Business Process Re-engineering) or elimination (e.g., outsourcing to external service providers). An understanding of the internal cost metrics is required, in order to establish a “base case,” commonly formulated via the Activity-Based Costing (ABC) method, by which submitted tenders can be evaluated against later (Massy, 1999). It is important to ensure that human resource issues are not overlooked at this stage, as outsourcing has a definite impact on staff morale; hence, companies may have to commit more resources (possibly financial) to make corresponding adjustments to restore internal work efficiency. In some instances, it may be appropriate to utilize consultants to help identify the company’s strategic intention at this stage.

the functions to be outsourced. The requirements analysis method will be specific to the context of individual companies; some may prefer the use of formal project methods, while others may prefer the use of informal brainstorming sessions as the basis. Typically, companies have found it helpful to utilize Service Level Specifications to set measurable requirements and performance criteria. Sometimes companies may inevitably omit the required clarity and details, which results in an ambiguous definition; hence, it is recommended that the completed requirements analysis be reviewed by a select management committee before progressing further.

Stage 4: Issue Invitation to Tender (ITT)/Request for Proposal (RFP) The ITT stage, also known as RFP stage, is a procurement procedure where clients invite service providers to tender for the functions to be outsourced. The key component of this stage is the ITT/RFP document, which should comprise the following sections: • •

•

Stage 3: Requirements Analysis Requirements definition is a vital part of the outsourcing implementation process, as inaccurate definition of requirements can result in implementation delays, resource waste and client dissatisfaction. The requirements analysis should begin with business requirements and translate those into performance requirements of

• •

Introduction: for example, industrial context, goals and objectives of the outsourcing move, and the procurement timetable. Background: for example, background information about the company, details of the technical environment and the current business systems in place. Scope and scale of functions: for example, detail and scope of the functions to be outsourced, such as number of users, number of transactions and data transmission volume. Key requirements: for example, the most important requirements, such as legal adherence to data protection legislations. General requirements: for example, a description of service provision and type of outsourcing relationship to be established, such as strategic partnership.

41

IT Outsourcing

• • •

•

• •

•

Detailed functional requirements: for example, a full description of what is specifically required from the service provider. Technical requirements: for example, details on technological direction, software and hardware. Cost information required: for example, details of costs for various activities, such as licensing, training, consultancy, development, customization and implementation. Service provider information required: for example, contact details, parent company name, financial backing details, company audits and evidence of ability to deliver. Implementation requirements: for example, timescales, preferred project methodology and resource utilization. Instructions to service provider: for example, format and content of tender responses, selection criteria and submission deadlines. Appendices: for example, organizational charts, glossary of terms and business process diagrams.

process, but it should be noted that a haphazard contract may lead to later complications, which can be costly in terms of both time and finance. In this stage, the service provision issues that should be discussed are performance standards, compliance monitoring, change management procedures, technological review periods and penalties for non-compliance. Typically, these issues are addressed by the establishment of Service Level Agreements. Companies should include acceptance testing into the contract as a means of ascertaining whether the client requirements have been adequately met. Ideally, various safeguards should be worked into the contract, such as the following: • • • • •

It is important to state that service providers must maintain the strict numbering used in the ITT/RFP document, which makes it easier to check whether the service provider has replied to each defined requirement. Companies often also opt to include a compliance grid that service providers have to complete and which facilitates a quick review of requirements fulfilled. It is also important to emphasize the clear cut-off date for tender submission and clarify that tenders delivered after that date will be rejected outright.

Stage 5: Contract Negotiation The contract negotiation stage involves negotiating with the selected service provider to reach a suitable contractual agreement. There is a natural tendency for companies to desire a speedy negotiation after a potentially time-consuming selection

42

•

Non-disclosure clause for information identified as confidential or company secret. Unambiguous definition of Intellectual Property (IP) rights. Requirement for implementing a recognized code of practice on information security. Ability to veto the use of sub-contractors (i.e., further outsourcing of functions). Exit clause in the event contract termination is deemed necessary. Procedures to account for business changes where both parties share any potential savings from new technology or process streamlining (i.e., mutual goal sharing).

There should be a clear escalation hierarchy and dispute resolution procedures in terms of problem resolution. In instances where traditional pricing arrangements are deemed inadequate, companies can opt to utilize escrow arrangements, where a third-party intermediary acts as a security buffer between the client and service provider. During this stage, contract negotiation should be built on trust and not developed in an adversarial way. Overall, companies should have a good understanding of the market, and thus have a grasp of their bargaining power in the contract negotiation with service providers.

IT Outsourcing

Stage 6: Implementation

sourcing strategies

The implementation stage involves the establishment of monitoring procedures and ascertaining the compliance of performance standards in the service provision. For the client-provider relationship to be truly effective, constant communication is a vital key, and thus it is important that communication channels and feedback procedures are established to facilitate constant and open communication. It is also important that formal procedures are developed to resolve issues in a convivial rather than an adversarial way. As outsourcing is a potentially long-term commitment, companies need to build up a working strategic client-provider relationship based on trust, and work towards designing contracts that account for the speed of business changes. It is recommended that companies establish a feedback loop by means of review sessions, typically carried out 4 to 6 weeks after implementation, to identify any best practices and isolate problem areas. This is important, as it provides review information that can be utilized in future implementations to preempt potential problems and can facilitate knowledge transfer, through documented practices, from experienced staff to those in training. Companies should note that the implementation of outsourcing requires considerable time commitment, as illustrated in Figure 5, and hence should be integrated into the organizational strategy. Noticeably, as companies extend the practice of best/smart-sourcing, they accrue knowledge from experience, and the resultant conversance with the process aids in reducing the time cycles of outsourcing implementation.

Some companies are acquiring services from bestof-breed service providers located anywhere in the world, thus potentially involving a combination of on-shore, near-shore and off-shore work. This outsourcing strategy, which is sometimes known as “Best-sourcing” or “Right-shoring,” has been spurred on by the recent globalization effects produced by three forces (Friedman, 2004). First, increased bandwidth, reduced telecommunication costs due to deregulation and dramatic improvements in undersea fiber-optic technology (Namasivayam, 2004) have made it economically possible to globally transmit and store huge amounts of data. Second, the diffusion of computers around the world has proliferated access to computing capabilities; and finally, the increased availability of groupware and collaboration tools have empowered virtual teamwork. The combination of these forces has facilitated the creation of workflow platforms, which can divide almost any service job (e.g., radiology scan analysis and accounting) into various functions. Exploiting this with digitization technology (e.g., conversion of data by high-resolution scanning system) has allowed each function to be outsourced to best-skilled knowledge workers around the world, beyond geographical and physical boundaries. Figure 6 illustrates this concept with the outsourcing of Computerized Axial Tomography (CAT) scan analysis. While the CAT scans are taken on-site within a hospital in the U.S., the analysis and subsequent recommendation on whether to operate can be made by a remote doctor overseas, such as in Israel. Information can be reviewed quickly because of the difference in time zones, thus allowing the CAT scans to be analyzed overnight (working day in Israel). This setup also provides coverage for the US hospital to deal with emergency cases arriving at night that require urgent attention. Due to the seamless integration of information interchange,

EmErgEnT TrEnds To maintain competitive advantage from outsourcing, companies need to identify emergent trends and understand their corresponding implications, a selection of which is outlined as follows:

43

IT Outsourcing

boundaries between the US-based components and Israeli-based components are indistinct, and hence, patients are often unaware that the hospital is essentially a virtual organization. Global sourcing strategies have been recently expanded to include an obscure form of outsourcing, known as Rural-Sourcing, in which the provision and management of services are transferred to rural regions of the client organization’s home country (e.g., Arkansas in the U.S.). It has been indicated that Rural-Sourcing has the potential to deliver up to 40% cost savings, which is close to being on par with an offshore offering (Frauenheim, 2004). Furthermore, the concept of retaining jobs onshore and benefiting rural communities in the process presents an opportunity for companies to project a positive public image. As such, Rural-Sourcing is expected to be an increasingly viable alternative to Offshore Outsourcing, which has generated considerable negative publicity due to the controversial connotation of job losses to the client country and the potential of long-term adverse effects to its economy.

regulatory requirements related to Outsourcing There has been an increase in the number of regulatory requirements that must be satisfied to implement an outsourcing deal. Care will need to be taken to ensure that the unique constraints enforced by national legislations are understood and followed for success in global outsourcing operations. The key national legislations that must be taken into account are outlined as follows: •

44

The U.S. Sarbanes-Oxley Act (2002) introduced following various corporate financial scandals, such as Enron and WorldCom, requires CEO/CFO certification of financial statements, potentially including those of outsourced activities (penalties of $1 million in fines and up to 10 years of jail time if wrong certification was knowingly submitted).

•

•

•

•

The U.K. Transfer of Undertakings (Protection of Employment) Regulations (1981), recently expanded to include outsourcing, advocates that employees involved in a transfer will automatically continue in their jobs with their existing terms and conditions (for 2 years), and requires that recognized trade unions and elected employee representatives be informed and consulted about the potential transfer along with its corresponding implications. The U.K. Data Protection Act (1998) imposes a duty for “data controllers” to comply with a set of eight data protection principles, and the eighth principle has particular implications to Offshore Outsourcing to regions outside of the European Economic Area (EEA). The Basel II Capital Accord (2004) is a complex new standard for measuring credit risks, market risks and operational risks in financial services organizations, which has implications towards risk management strategies with regard to outsourcing operations. The UK Financial Services Authority Handbook (2005) has developed an outsourcing policy as a statement of good practice for operational risk management, which advocates that a company’s management is accountable for the adequacy of systems and controls for the outsourced activities, and requires advance notification to the Financial Services Authority in the event that an outsourcing decision has been made.

These legal developments present implications and opportunities for both clients and service providers of outsourcing. In the short term, such legislations complicate the outsourcing scenario and require clients to assess the service providers’ capabilities to meet the requirements imposed on the operational components they are managing or

IT Outsourcing

will manage. On the part of service providers, the legislations will prove to be a challenge as they progress towards understanding and addressing of such requirements, and to prove to potential clients that they have the capabilities to do so. In the long term, it will drive outsourcing opportunities, as service providers gain opportunities and competitive differentiation by cost-effectively and efficiently supporting client needs to meet the complex requirements imposed by the legislations. The legislations are inclined towards requirements of a financial nature; hence, it is expected that service providers with stronger business process and financial services knowledge will fare better against more IT-centric or technically-focused service providers, particularly those located offshore. It is also anticipated that risk assessment, particularly financial-related, will increasingly be of concern to companies in the evaluation of potential outsourcing operations.

business application grids The term “the Grid” was coined in the 1990s to denote a proposed distributed computing infrastructure for advanced science and technology (Foster & Kesselman, 1998). Since then, considerable progress has been made on the construction of such an infrastructure (Foster, 2001); hence grid-based computing is emerging as a viable technology. Grid-based computing can be defined as a network of computation, involving tools and protocols for coordinated resource sharing (e.g., processor execution time and system memory) and problem solving among pooled assets, which are known as virtual organizations (Myer, 2003). It is a form of distributed computing in which a wide-ranging network connects multiple heterogeneous computers into a pool of potential labor, as illustrated in Figure 7, allowing resources to be shared by all end-users. One application of grid-based computing to business enterprises is the Business Application Grid (BAG). As

computing capabilities within companies are typically under-utilized, with desktop machines using 5%-10% of their capability and most servers peaking out at 20% usage (Myer, 2003), the BAG is particularly attractive to companies seeking to harness the full processing capabilities of their computing facilities. This was highlighted by the Charles Schwab insourcing deal managed by IBM, involving the application of a BAG on financial services, which has reduced the internal processing time on an existing wealth management application from more than 4 minutes to 15 seconds (Shread, 2003). The advent of grid-based computing and other distributed on-demand computing technologies present a new service model for outsourcing service providers, known as Services Computing, which will enable companies to purchase processing capabilities as required (Zhang, Li, & Lam, 2004) in a manner akin to IBM’s concept of “On-Demand Business.” This allows leverage of grid-based computing technologies to take advantage of under-utilized computing capability for business applications, thus enabling companies to work towards gaining strategic competitive advantage on an enterprise-wide basis.

cOnclusiOn Outsourcing is now a mainstream strategy in a myriad of industries, and the magnitude of its impact and its potential as an enabling tool is something that few companies can ill afford to ignore. The creation of workflow platforms coupled with digitization technology (e.g., conversion of data by high-resolution scanning system) has allowed business functions to be outsourced around the world, giving round-the-clock coverage. However, even as Offshore Outsourcing becomes an increasingly mature and commonplace process, companies need to carefully evaluate the advantages and risks involved in each location choice and ideally adopt the strategy of “Right-Shoring.”

45

IT Outsourcing

With the advent of increasingly changing market dynamics and the complex nature of outsourcingrelated legislations, it is vital that companies handle outsourcing as a strategic investment opportunity rather than a simple purchasing decision. Companies should continuously evaluate existing outsourcing arrangements, and country of operations, to ensure competitive pricing from service providers and prevent over-dependency. To best exploit the recent developments in outsourcing to maintain the strategic edge, companies should consider the following points:

For Clients (and Potential Clients) of Outsourcing •

•

•

•

•

•

•

46

Utilize strategic frameworks in the decision process for analysis to identify potential candidates for outsourcing and corresponding concerns. Conduct a comprehensive financial analysis, via costing methods such as ABC, to benchmark the internal cost position against that of external service providers to determine fiscal feasibility of outsourcing. Maintain awareness of new outsourcingrelated legislations and their corresponding impact to determine the need for outsourcing to ensure compliance. Explore the use of BAGs as a means to harness under-utilized computing capability within the organization. Consider the financial viability of RuralSourcing for potential to project a positive image by retaining jobs onshore and benefiting rural communities in the process. Exploit the concept of virtual organizations; for example, in applications such as remote medical diagnosis of CAT scans and providing inter-hospital consultative support using digital images in complex medical procedures. Avoid the use of outsourcing as a means to “dump” problematic internal functions— outsourcing is not a panacea.

For Service Providers of Outsourcing •

•

•

•

•

Cultivate a proactive, effective and efficient approach to service management, focused on user satisfaction, which encourages current clients to act as references. Provide proof of ability to address new legislations to capture a share of the expanding market of outsourcing for legal compliance. Maintain awareness of emergent service provision models (e.g., Services Computing) to synchronize the portfolio of services offered with market demand. Consider the viability of partnerships and joint ventures to establish a multi-national presence to target the potential market from increased adoption of “Right-Shoring.” Develop innovative outsourcing solutions that focus on gaining strategic advantage on an enterprise-wide basis to attract companies moving beyond the traditional objectives of operational cost reduction and service level improvements.

rEFErEncEs 2004 Global IT Outsourcing Study. (2004). Retrieved May 08, 2005, from www.diamondcluster. com/Ideas/Viewpoint/PDF/2004%20Global%20 IT%20 Outsourcing%20Study_single.pdf Andersen, D. (2004). Proactive planning: A prerequisite for successful sourcing. Retrieved November 19, 2004, from www.metagroup.com/ us/displayArticle.do ?oid=49284 Aubert, A.B., Dussault, S., Patry, M., & Rivard, S. (1999). Managing the risk of IT outsourcing. Proceedings of the 32nd Hawaii International Conference on Systems Sciences, Big Island (Vol. 7, pp. 685-693).

IT Outsourcing

Aubert, A.B., Patry, M., & Rivard, S. (1998). Assessing the risk of IT outsourcing. Proceedings of the 31st Hawaii International Conference on Systems Sciences, Maui. CD-ROM Proceedings. Bagby, R. (2003). Data: Navigating the rough waters of offshore data security. Retrieved November 18, 2004, from www.outsourcing-requests.com/ center/jsp/requests/print/ story.jsp?id=4153 Bahli, B., & Rivard, S. (2003). The information technology outsourcing risk: A transaction cost and agency theory-based perspective. Journal of Information Technology, 18, 211-221. Bank bins £700m IBM deal. (2002). Retrieved November 28, 2003, from www.computerweekly. com/articles/article.asp?liArticleID =115273&li ArticleTypeID=1&liCategoryID=2&liChannelI D=16 &liFlavourID= 1&sSearch=&nPage=1 Basel II Capital Accord. (2004). International convergence of capital measurement and capital standards: A revised framework, G10. Cap Gemini Ernst & Young. (2003). The outsourcing report: Making choices - insight into successful outsourcing. Retrieved January 05, 2004, from www.cgey.com/outsourcing/media/ MakingChoices.pdf Coase, R. (1937). The nature of a firm. Economica, 4, 386-405. Cox, A.W. (1996). Relational competence and strategic procurement management: Towards an entrepreneurial and contractual theory of the firm. European Journal of Purchasing and Supply Management, 2(1), 57-70. Cullen, D. (2003). Inland revenue sacks EDS. Retrieved January 17, 2003, from www.theregister. co.uk/content/archive/34454.html Currie, W.L. (1995). Management strategy for IT: An international perspective. London: Pitman Publishing.

Currie, W.L., Desai, B., Khan, N., Wang X., & Weerakkody, V. (2003). Vendor strategies for business process and applications outsourcing: Recent findings from field research. Proceedings of the 36th Hawaii International Conference on Systems Sciences, Big Island. CD-ROM Proceedings. Data Protection Act. (1998). Chapter 29, United Kingdom. Davison, D. (2004). Top 10 risks of offshore outsourcing. Retrieved November 29, 2004, from http://searchcio.techtarget.com/ originalContent/0,289142,sid19_ gci950602,00. html De Looff, L.A. (1995). Information systems outsourcing decision making: A framework, organisational theories and case studies. Journal of Information Technology, 10, 281-297. Earl, M.J. (1989). Management strategies for information technology. NJ: Prentice-Hall. Earl, M.J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. Engardio, P., Bernstein, A., & Kripalani, M. (2003, February 03). The new global job shift: The next round of globalisation is sending upscale jobs offshore. They include basic research, chip design, engineering—even financial analysis. Can America lose these jobs and still prosper? Who wins? Who loses? BusinessWeek, 50. Financial Services Authority. (2005). UK. Foster, I. (2001). The anatomy of the grid: Enabling scalable virtual organisations. Proceedings of the 1st International Symposium on Cluster Computing and the Grid (CCGRID) 2001 (pp. 6-7). Foster, I., & Kesselman, C. (1998). Computational grids. In I. Foster & C. Kesselman (Eds.), The grid: Blueprint for a new computing infrastructure (pp. 15-52). San Francisco: Morgan Kaufmann.

47

IT Outsourcing

Frauenheim, E. (2004). Outsourcing to Arkansas. Retrieved November 12, 2004, from htt p://news.com.com /2061-1022-5449083. html?tag=rsspr.5449099

Kishore, R., Rao, H.R., Nam, K., Rajagopalan, S., & Chaudbury, A. (2003). A relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 87-92.

Friedman, T. (2004, March 04). Smaller and smaller. New York Times, 29.

Klepper, R., & Jones, W. (1998). Outsourcing information technology, systems and services. NJ: Prentice-Hall.

Furniss, T. (2003). China: The next big wave in offshore outsourcing. Retrieved November 22, 2004, from www.bpo-outsourcing-journal.com/ dec2003-china.html

Kruse, G., & Berry, C. (2004). Outsourcing: The “how-to” guide. IEE Manufacturing Engineer, Aug/Sep, 36-39.

Griffiths, D. (2001). The theory and practice of outsourcing. Retrieved May 15, 2004, from www. outsourcing-research.com/kud-002.html

Lacity, M.C., & Hirschheim, R. (1993). Information systems outsourcing: Myths, metaphors and realities. Chichester, UK: John Wiley & Sons.

Hamel, G., & Prahalad, C.K. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-90.

Laudon, K.C., & Laudon, J.P. (2000). Management information systems (6th edition). NJ: PrenticeHall.

HM Treasury. (1991). Competing for quality: Buying better public services. Cm 1730, HMSO.

Lee, J., Huynh, M.Q., Chi-wai, K.R., & Pi, S. (2000). The evolution of outsourcing research: What is the next issue? Proceedings of the 33rd Hawaii International Conference on Systems Sciences, Maui (pp. 7070-7080).

Ho, L. (2004). Strategic frameworks for outsourcing decision-making. Retrieved November 30, 2004, from www.soc.staffs.ac.uk/zlh1/LukeHoMRes.pdf Ho, L., Atkins, A., & Eardley A. (2004). The growth of outsourcing and application of strategic framework techniques. In Z. Irani, S. Alshawi & O.D. Sarikas (Eds.), CD-ROM Proceedings of the European and Mediterranean Conference on Information Systems (EMCIS) 2004. Tunis, Tunisia. Kelly, T. (2004). A brief history of outsourcing. Retrieved May 18, 2005, from www.globalenvision.org/library/3/702/ Kelter, K., & Walstrom J. (1993). The outsourcing decision. International Journal of Information Management, 13(6), 449-459. Kern, T., Willcocks, L., & Van Heck, E. (2002). The winner’s curse in IT outsourcing: Strategies for avoiding relational trauma. California Management Review, 44(2), 47-69.

48

Leff, A., Rayfield, J.T., & Dias, D.M. (2003). Service-level agreements and commercial grids. Internet Computing, 7(4), 44-50. Lonsdale, C., & Cox, A. (2000). The historical development of outsourcing: The latest fad? Industrial Management and Data Systems, 100(9), 444-450. Massy, W.F. (1999). The ABCs of course-level costing. Retrieved May 08, 2005, from www. nwmissouri.edu/sloan/CostBook/CourseLevelCosting.html McIvor, R. (2000). A practical framework for understanding the outsourcing process. Supply Chain Management: An International Journal, 5(1), 22-36. Mills, C. (2004). Outsourcing - The latest research from the public and private sectors. Retrieved

IT Outsourcing

November 18, 2004, from www.conferencepage. com/outsourcing4/downloads/CliffMills.pdf Myer, T. (2003). Grid computing: Conceptual flyover for developers. Retrieved November 18, 2004, from www6.software.ibm.com/software/ developer/library/gr-fly.pdf Namasivayam, S. (2004). Profiting from business process outsourcing. IT Professional, 6(1), 12-18. Nash, E. (2003). India to handle half of UK rail calls. Retrieved February 18, 2004, from www. computing.co.uk/news/1152708 Pearlson, K. (2001). Managing and using information systems: A strategic approach. New York: John Wiley & Sons. Perry, L.T., Stott, R.C., & Smallwood, W. (1993). Real time strategy: Improvising team based planning for a fast-changing world. New York: John Wiley & Sons. Reisman, S. (2004). Expecting success against all odds. IT Professional, 6(3), 8-9. Sarbanes-Oxley Act. (2002). United States Shread, P. (2003). Schwab gets boost from IBM grid. Retrieved May 08, 2005, from www.gridcomputingplanet.com/news/article. php/11171_1575761 Sloper, A. (2004). Meeting the challenge of outsourcing. IEE Engineering Management, Jun/ Jul, 34-37. Software History Center. (2002). The software industry in the 1960s. Retrieved December 18, 2003, from www.softwarehistory.org/history/ d_60s.html

Sparrow, E.A. (2005). A guide to global sourcing: Offshore outsourcing and other global delivery models. Sindon, UK: British Computer Society. Synergy Infotech. (2004). Outsourcing India: Engagement model. Retrieved December 29, 2004, from www.synergy-infotech.com/engagement_model.htm Teng, J.T.C., Cheong, M.J., & Grover, V. (1995). Decisions to outsource information systems functions: Testing a strategy-theoretic discrepancy model. Decision Sciences, 26(1), 75-103. Transfer of Undertakings (Protection of Employment) Regulations. (1981). United Kingdom. Verma, D.C. (2004). Service level agreements on IP networks. Proceedings of the IEEE, 92(9), 1382-1388. Ward, J., & Peppard, J. (2002). Strategic planning for information systems (3rd edition). New York: John Wiley & Sons. Willcocks, L., Feeny, D., & Islei, G. (1997). Managing IT as a strategic resource. Berkshire: McGraw-Hill Book Company. Williamson, O.E. (1985). The economic institutions of capitalism. New York: The Free Press. Yang, C., & Huang, J. (2000). A decision model for IS outsourcing. International Journal of Information Management, 20, 225-239. Zhang, L., Li, H., & Lam, H. (2004). Services computing: Grid applications for today. IT Professional, 6(3), 5-7.

This work was previously published in IT-Enabled Strategic Management: Increasing Returns for the Organization, edited by B. Walters and Z. Tang, pp. 244-274, copyright 2006 by IGI Publishing (an imprint of IGI Global).

49

50

Chapter 1.4

Information Technology/ Systems Offshore Outsourcing: Key Risks and Success Factors Mahesh S. Raisinghani Texas Woman’s University, USA Brandi Starr Texas Woman’s University, USA Blake Hickerson Texas Woman’s University, USA Marshelle Morrison Texas Woman’s University, USA Michael Howard Texas Woman’s University, USA

absTracT The offshore outsourcing of information technology and information systems (IT/IS) is being increasingly practiced among firms that are focusing on core competencies and cost-effectiveness. With the increase in offshore IT/IS operations, a growing number of companies are encountering negative experiences and unpredicted results. The analysis performed in this chapter reveals the possible risks and perceived success factors of

companies outsourcing IT/IS operations offshore. The major points of interest are operational and strategic risks; legal contracts; cultural, security, and financial issues; and noted success factors by companies that participate in offshore outsourcing. The research indicates the importance of risk identification and the formulation of strategic plans that include preventive, detective, and corrective control methods of implementation and evaluation. Effective methods and metrics for measuring the success or failure of IT/IS offshore

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Information Technology/Systems Offshore Outsourcing

outsourcing operations is expected to be a continuing development with the increasing growth of this phenomenon. It is not the strongest of the species that survives, or the most intelligent, but the one most responsive to change. —Charles Darwin

inTrOducTiOn Offshore outsourcing with respect to information technology and information systems (IT/IS) or business processes is a key commercial phenomenon. IT/IS offshore outsourcing is the focus of this chapter and is defined as a process undertaken by an organization to subcontract or to sell the organization’s IT/IS assets, staff, and/or activities to a foreign supplier, rather than develop IT/IS resources internally. The contractual relationship requires the vendor to assume responsibility for the client firm’s IT/IS requirements. IT/IS services include software development and maintenance; network and computer operations; and research and development (see Table 3.1) (Dolan, 2006). An extensive report by the National Academy of Public Administration prepared for the United States Congress and the Bureau of Economic Analysis defines offshoring as follows: “United States’ firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates” (Norwood et al., 2006). In offshore outsourcing work is outsourced to foreign countries that have cost advantages in various tasks such as application development, product manufacturing, and/or call center and back office operations. It involves complexity and risk not found in typical domestic outsourcing due to factors such as cost (i.e., labor, infrastructure, real estate, and corporate taxes); availability of highly skilled workers; market potential; country risk profile (i.e., disruptive events, security, regulatory

risk, macroeconomic risk such as cost inflation, currency fluctuation, and capital freedom), and intellectual property risk; environment (i.e., government support, business and living environment, accessibility of location such as travel time, flight frequency, and time difference); quality of infrastructure (i.e., telecom and IT, real estate, transportation, and reliability of power supply); improved customer service by way of 24X7 call centers and/or fewer environmental regulations (Farrell, 2005, 2006; Kraemer & Dedrick, 2004). Table 3.1 lists the common IT/IS outsourced services.

industry analysis IT/IS offshore outsourcing is one of the fastest growing businesses in the world due to technological advances including the Internet and mobile services. The advances have changed markets by decreasing communication costs and increasing specialization of service production. Given that the Indian software services account for about $9.9 billion, this does not seem like a huge market share until one looks at the exponential growth rate of this sector. This sector managed to grow by 26% in 2005 and Michael Corbett of the International Outsourcing Professionals postulates a 40% compounded annual growth rate over the next decade (Barrett, 2006). Pressures from dynamic market conditions and market uncertainty have caused business organizations to focus on core competencies and outsource functions in which they that lack expertise in order to show profitability maintain effective cost structures and improve the bottom line. There are increased pressures on management to remain cost effective by accomplishing more with fewer resources at a faster pace. Outsourcing goals and objectives include competitiveness, time to market, round the clock customer service, agility, and access to world class technology. As illustrated in Figure 1, countries and regions with the most outsourced IT professionals are India,

51

Information Technology/Systems Offshore Outsourcing

Table 3.1. IT/IS common outsourced services IT/IS Service

Function

Access Controls

Help organization establish and provision authentication needs

IDS Monitoring

Monitor intrusion detection systems on a 24/7 basis

Contingency Planning

Help facilitate crisis plans and responses, that is, disaster recovery sites

Firewall Management

Assist in configuration of software and monitor logs

Antivirus services

Monitor and act upon malicious attacks

Website Blocking

Filter services

Network Scanning

Identify network vulnerability

Remote Management

Monitor network

Encryption Services

Manage PKI

Software Development

Develop software application/s

Business Process Reengineering/ Outsourcing

Reengineer and/or outsource business process to evaluate and eliminate non-value-added activities

Canada, Ireland, China, Philippines, Israel, Eastern Europe, Russia, Mexico, and South Africa (Kripalani, Foust, Holmes, & Enga, 2006). A recent study measured employee cost; quality; English proficiency; infrastructure; and political and economic risk of countries that have outsourced IT/IS professionals. As illustrated in Figure 3.2, according to a recent study, the best countries and regions for the United States to outsource in are India, Philippines, Canada, Ireland, South Africa, Eastern Europe, Russia, Israel, Mexico, and China (Seewald, 2005). Despite the short-term successes, IT/IS offshore outsourcing has several risks and challenges that increase the possibility of long-term adverse effects on the client company. Studies show that negative effects and consequences of offshore

52

outsourcing such as hidden costs, vendor complacency, lack of vendor flexibility, high employee turnover, and lack of expertise are increasing among major corporations subcontracting IT/IS services (see Figure 3.3) (Dolan, 2006). A recent survey of 25 Fortune 500 corporations indicated that 70% of outsourced operations resulted in numerous negative experiences. Fifty-two percent of the companies surveyed experienced negative experiences and problems three times in two months (Accenture, 2004). The long-term effects of these negative experiences are difficult to measure because the value of IT/IS is intangible, hidden, and long term (Arbore & Ordanini, 2006; Greaver & Kipers, 2005; Hatch 2005). This obstacle raises the following questions:

Information Technology/Systems Offshore Outsourcing

Figure 3.1. Countries and their outsourced IT professionals (Source: “Countries receiving the Most Outsourcing, 2004.” Wired, February, p 101. Business Rankings Annual 2005) countries with the most Outsourced iT professionals 160000 140000 120000 100000 80000 60000 40000 20000 0

ia ind

da na ca

d lan ire

ina ch

es pin ilip h p

l ae

isr

rn ste Ea

pe ro Eu

a o ric xic af me th u so

ia ss ru

Figure 3.2. Best countries and regions for U.S. outsourcing (Source: Seewald, S. (2005). “Best Countries for U.S. Outsourcing, 2005.” Wired, February, Business Rankings Annual 2005, p. 101)

na Ch i

o ex ic M

Is ra el

a Ru ss i

Eu ro pe

ca Af ri

Ea st er n

So ut h

Ca na da

In di a Ph ilip pi ne s

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

What hazards contribute to encountering negative results and how are thriving companies achieving success? What topics and areas are researched the most often in the IS outsourcing field? Risks and success factors seem to be the common threads for the most frequent topics in IS outsourcing. It is also worth mentioning the increase in the number of articles focusing on offshore/global outsourcing. The use of cheaper communications technology, the Internet, economic globalization, and easy

access to IT professionals with lower salaries are some of the reasons for this phenomenon. Among the many articles dealing with the economics of outsourcing, involve agency theory, transaction cost theory, game theory, resource-based theory, and resource-dependence theory (Dibbern et al., 2004; Gonzalez, Gasco, & Llopis, 2006; Iyengar & Rolf, 2007; Nyrhinen & Dahlberg, 2007). In order to evaluate possible causes for adverse long-term affects, a risk identification and suc-

53

Information Technology/Systems Offshore Outsourcing

Figure 3.3. Negative effects and consequences of offshore outsourcing (Source: Deloitte Consulting Outsourcing Study, October—December 2004) negative Experiences by client Firms Employee Turnover rate vendor complacency lack of Flexibility hidden costs lack of knowledge limited Transparency Quality/delivery issues management change complex government 0%

cess factor analysis have been developed to gain further understanding.

Risk Identification Several risks such as cultural, political, financial, technological, commercial, and legal have been linked to the failure of IT/IS offshore collaborations. Adverse risk is heightened because of the geographical distance between the client firm and the vendor firm (Beiling, 2006). Geographical distance, costs, time, and resources prevent the client firm from exercising appropriate control over the vendor. Common risks include operational, strategic, cultural, and financial risks.

Operational Risk Operational risk is identified as the increased chance of poor quality and output due to limitations of the communications and transmission systems, complexity of operations, and geographic

54

10%

20%

30%

40%

50%

60%

separation between the two firms (Patterson, 2006). Loss of control is a significant threat to the ongoing operations because it decreases the manageability and power of value chains and inhibits client firms to give accurate performance evaluation. Performance evaluation and monitoring is often overlooked due to increased pressures of keeping costs down. An agent’s lack of experience for a specific activity also increases the risk of poor quality of services, and the client’s inability to measure the performance causes the client firm to become vulnerable to the agent’s results and services.

Strategic Risk Strategic risks result from opportunistic behavior of the vendor client. Shirking is an example of strategic risk. Shirking is defined as deliberate underperformance while claiming full payment (Patterson, 2006). As globalization changes the basis of competition, strategic sourcing is moving from the periphery of corporate functions to the

Information Technology/Systems Offshore Outsourcing

core, and research indicates that service providers are tempted to fail to perform their best work when they know the performance is difficult for their client to measure (Gottfredson, Puryear, & Phillips, 2005; Willcocks & Feeny, 2006). Performance pressures cause a number of offshore companies to cut corners to make certain the product is delivered despite product reliability or product completion (Beiling, 2006). Software development integrity is often violated as a result of the competitive position of providing ISs at the lowest possible cost for the highest achievable quality at the quickest time (Gottschalk, 2006). Opportunistic recognition is another form of strategic risk. It derives from one party changing the terms of a contract after its inception. Opportunistic recognition occurs when the client discovers that it has no alternative source of support, goods, or services and, as result, must pay the supplier whatever price the supplier demands in the future (Arbore & Ordanini, 2006; Willcocks & Feeny, 2006).

Security Risks Offshore outsourcing increases the risks on intellectual property violation and loss of confidentiality because it allows vendors access to private business information (Patterson, 2006). In many countries there is a lack of adherence to security and quality standards. Integrity is often violated because of the pressures of performance standards. Many vendor companies have multiple clients and there is no guarantee that a contracting organization’s data, programs, and applications will not be duplicated for other clients (Arbore & Ordanini, 2006). Intellectual property theft is steadily increasing, and protecting rights in foreign countries can be difficult. Countries like China have copyright laws but they tend to favor Chinese companies. Privacy campaigners argue that the processing of sensitive financial and data records in foreign countries do not meet the high privacy standards

of the United States (Chan, 2005; Lyons, 2006). Their argument is supported by a particular instance when a woman from Pakistan threatened to post sensitive United States medical records on the Internet (McLean, 2006). As a result, other medical organizations have returned their data processing back to the United States. Other financial companies that offshore ISs are worried they will be open to lawsuits if they can not guarantee acceptable standards of privacy. In a recent study by Booz Allen Hamilton, information security has become a top concern among companies evaluating offshore outsourcing (Dunlop & Smith, 2005). The respondents also felt there was a significantly higher security risk in working with offshore providers over those in the United States, due to a lack of trust in legal and regulatory environments in developing countries. Protection of corporate and personal data in any offshore outsourcing venture is critical in order to protect the business from cyber crime and theft of customer data. Information security ranked as one of the top three factors when selecting an outsourcing partner. It was rated ahead of financial strength, business stability, and reputation. At the February 20, 2006 Outsourcing World Summit, the International Association of Outsourcing Professionals announced an increasing concern over data security while considering offshore outsourcing (Hunt, 2006). More than 90% of the respondents stated that data security breaches would be “catastrophic “to their business. A key factor is not being able to verify vendor’s claims of security capabilities. More companies are concerned with theft or misuse of outsourced data than they are about the threat of terrorism.

Cultural Challenges Culture is the “totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought” (dictionary.com, n.d.). Cultural differences and communication difficulties have numerous effects

55

Information Technology/Systems Offshore Outsourcing

on business operations including no information sharing, poor communications of decisions, and no interaction between team members. Breakdown in communication often results in inadequate task priority and lack of overall business comprehension. Differences in culture often lead to miscommunication, which can result in considerable chaff. Memories of war and religious animosities make it difficult to build and maintain trust. Another concern is the simulation of a nonforeign facade to the clients who call these centers. Studies show that employees feel alienated from their own culture because of the shrinkage of local traditions to meet client expectations (Beiling, 2006). Workers become exhausted from working in a foreign language and tend to have growing resentments for the American people because of the decreased identity and cultural differences (Willcocks &Feeny, 2006). Although these overseas positions train the employees on the specifics of job expectations, there is little transferable job experience and no preparation for future career growth (Seabrook, 2004).

Financial Risks As illustrated in Figure 3.4, despite increased cash flow and cost effectiveness, there are many hidden costs associated with IT/IS offshore outsourcing. Tailored contracts, lack of transparency, and

bundling of services result in costly unexpected spending. There can be extensive, unpredictable costs due to a lack of due diligence. Vendor firms’ unclear pricing and cost structure make it very difficult to understand cost savings. Bundling or grouping of services is a frequent dilemma and causes confusion in unit costs (Dolan, 2006). Hidden costs are most likely the result of broad and ambiguous contracts that fail to define present and future IT requirements (McLean, 2006). Hidden costs can derive from dismissing or transferring staff, transfer of licenses by software vendors, travel costs, investigation costs, and the cost of developing infrastructure to support off-site operations.

Offshore Outsourcing’s success Factor analysis Global giant, Dupont, has developed a framework for its ISs offshore outsourcing operations. The company’s IS frame consist of nine core capabilities including: (1) leadership, (2) business systems thinking, (3) relationship building, (4) architecture planning, (5) making technology work, (6) informed buying, (7) contrast facilitation, (8) contract monitoring, and (9) vendor development (Willcocks & Feeny, 2006; Willcocks, Feeny, & Olson, 2006). IBM has been noted for its exceptional global

Figure 3.4. Financial risks (Sources: Forrester Research, McKinsey & Co, http://pollingreport.com)

cost-related risks

Hidden Costs/Transparency

24%

42%

Vendor Management Vendor Selection

17% 17%

56

Quality trade off and Vendor Profit Margins

Information Technology/Systems Offshore Outsourcing

offshore outsourcing and credits its success to their IBM Relationship Alignment Process (Petershack, 2005). Their model is centered on relationship determinants including: commitment, predisposition, mutual benefits, linkage, unique resources, and shared knowledge. Success factors of IT/IS offshore outsourcing consists of precise risk analysis; detailed cost benefit analysis; relationship management and cultural understanding; understanding legal issues and contracts; and implementing risk controls.

application server outsourcing is right for them. Cost benefit analysis indicates whether offshore outsourcing is financially sound for companies. As illustrated in Table 3.2, when determining IT/ IS offshore outsourcing, a cost benefit analysis should include a review of potential gains, costs, and possible risk(s) of each alternative; appropriate contract period; intangibles and hidden costs; contracting and legal costs; vendor’s fee; conversion costs; IS salaries and severance payments; cash; contract cancellations; staff morale; and share price.

Risk Analysis Risk analysis enables client firms to determine the financial consequences of risk. As illustrated in Figure 3.5, a risk breakdown structure in risk analysis involves discovering and prioritizing of important risks that need protection and analyzing threats to assets to estimate potential losses. Successful companies determine the relative importance of each risk and then verify the level of impact it will have on their company in terms of costs, schedule, and quality. Successful firms identify the priority of each risk and determine the goals of the project accordingly (Bardhan, Whitaker, & Mithas, 2006; Patterson, 2006).

Cost Benefit Analysis Potential customers need to do a cost-benefit analysis to determine whether database or

Relationship Management and Cultural Understanding Research indicates that the level of partnership between a client firm and a vendor firm will increase when high levels of cultural similarity exist between them as evidenced by the insurance company USAA (Arbore & Ordanini, 2006; Chakrabarty, Gandhi, & Kaka, 2006). Identification-based trust is associated with successful offshore outsourcing because a mutual understanding allows for both parties to recognize and appreciate the other’s wants. Identificationbased trust has been linked to information sharing behavior and the overall quality of communication between the two firms (Bardhan et al., 2006). The parties involved in an offshore outsourcing relationship belong to distinct cultures and it is vital that these differences are accepted. A recent

Figure 3.5. Risk breakdown structure Risk Analysis

Operational Risks

Loss of Control

Lack of. Monitoring

Financial Risks

Hidden Costs

Service Bundling

Strategic Risks

Shirking

Opportunistic Recognition

57

Information Technology/Systems Offshore Outsourcing

Table 3.2. Cost analysis Costs

Factors

Intangibles and Hidden Costs

Administering the outsourcing contract and coordination efforts between internal users and outsourcing company upgrades

Contracting Costs

Legal costs including monetary and opportunity costs involved in contracting, renegotiating, and vendor disputes

Vendor Fees and Prices

Potential increase in costs if initial vendor low-balling of fees/ rough-order-of-magnitude price estimates lead to higher vendor fees and prices after the initial contract

Conversion Costs

Costs associated with transfer of software licenses

IS Salaries and Severance Pay

Staff retained, terminated, and possible legal costs from disgruntled employees

Contract Cancellation Costs

Cost of new negotiation, training of staff, hardware or software replacement

Share Price

Will announcement of outsourcing hurt or help stock prices?

study by Gartner (Heib, 2006) pointed to culture as a key differentiator to IT success and discussed the need for the IT organization to establish trust, commitment, two-way communication, clarity of purpose, and agility as vital components of the IT organization. Healthy communication is a crucial element to a working relationship. The effectiveness of the relationship between management personnel of both teams is dependent on the understanding and strong working relationships among the firms. Studies of offshore outsourcing success stories have demonstrated that working chemistry in management and peer friendships among employees have proved to be important determinants in forming long-term relationships that yield real value (Patterson, 2006). Industrial relatedness has also been a significant indication of successful offshore outsourcing. IT/IS offshore outsourcing between firms in related industries outperformed firms in unrelated industries (Kripalani et al., 2006). Firms from different industries have more difficulties understanding and collaborating with each other. Firms in related industries communicate their needs

58

more effectively because they share a common language, socialization, institutional history, and organizational practices. Flexibility, modularity, and process knowledge are important business culture elements to study when determining a vendor firm. The client firm needs to determine the adaptability of the vendor to adjust to the changing demands of business and IT environment. The client firm must also know the vendor’s ability or willingness to add, delete, or modify services. Lastly, the vendor firm must know enough about the client firm’s industry to successfully deliver needed services.

Understanding Legal Issues and Contracts Legal issues regarding offshore outsourcing of IT/IS functions into emerging economies can be broken down into two parts: (1) the need for laws to govern international business operations, and (2) the ability to enforce international laws. Hall and Liedtka (2007) discussed the implications of the Sarbanes Oxley Act for large-scale IT outsourcing. First, companies and nations realize

Information Technology/Systems Offshore Outsourcing

that international laws and agreements are needed in order to ensure that physical and intellectual properties are protected. Second, countries have different laws and policies regarding ownership and control of physical and intellectual properties, and the ability to enforce the international laws and agreements that have been established is critical. In 1883, the Paris Convention for the Protection of Industrial Property was established (WIPO Treaties, 2006). This became the first international treaty to help people of one country obtain protection in other countries for intellectual properties in the form of industrial property rights (inventions, patents, trademarks, and industrial designs). As the volume and different types of intellectual property grew, there grew new requirements to protect intellectual property. In 1970, the World Intellectual Property Organization (WIPO) came into existence (WIPO Treaties, 2006). The WIPO was established to promote the protection of intellectual property throughout the world through cooperation between nations and, where appropriate, in collaboration with any other international organization. In 1974, the WIPO became a specialized agency of the United Nations system of organizations. At present the organization has 181 member nations and the need to expand the scope of laws to protect intellectual property continues to grow as global business grows. The World Trade Organization (WTO) plays in important part in the establishment of intellectual property rules. The WTO’s Agreement on trade-related aspects of intellectual property rights (TRIPS), negotiated in the 1986-1994 Uruguay Round, (Understanding the WTO, n.d.) introduced intellectual property rules into the global trading market for the first time. The agreement is supposed to narrow the gaps in how these rights are protected and bring common international rules into play. Although there has been extensive cooperation between many of the nations of the world, there still exist many nations that do not

adhere to the international laws that have been established to provide protection to companies. As we look at emerging nations the risk of doing business with these nations increases depending on their acceptance and enforcement of established international laws. The majority of subjects who participated in the Booz Allen survey felt that the regulatory and legal infrastructure in Asia and South America is not adequate (Dunlop & Smith, 2005). The survey revealed that only 5% of companies surveyed believed that China has a strong and legal infrastructure, South America was 5%, and Southeast Asia was 11%. The 27% of the respondents indicated that India, which is a major country for offshore outsourcing, had a good legal infrastructure. There is a feeling that there is a high potential risk for loss of customer or corporate data in these countries. Companies have to weigh the savings of lower costs that could be realized by offshore outsourcing in these countries to the potential impact to their companies from data loss. International laws continue to change as outsourcing companies and potential countries to outsource realize the importance of having legally binding contracts. Many countries have worked to improve their legal systems to work with the companies that want to outsource to their country. Russia, for example, has established laws to offer some protection to offshore outsourcing companies (, 2005). Companies must still do due diligence in advance of any potential outsourcing contract. What can companies do to protect themselves in emerging countries? First, it is critical to understand the laws and legal infrastructure of the country that the potential vendor is located. Does the company belong to trade groups or industry associations that have established standards for security of company and customer data? A company should have legal counsel that is experienced in the laws of the offshore country and may want to hire local counsel in the country to

59

Information Technology/Systems Offshore Outsourcing

assist in legal matters. Companies must invest the time to research trade laws of the countries they are looking to outsource in. In addition, a company should research the legal performance history of potential vendors. The company may want to have a third party security audit or an independent security evaluation be completed before any agreements are formalized. The terms of the contract is an important part of any potential offshore outsourcing agreement. Time should be taken to agree in detail exactly what each party is responsible for. This will lessen the potential of trying to identify which party is to blame when things are not done correctly or on time. The initial development of detailed requirements will make the working relationship operate smoother. If your requirements are not clearly documented in the contract, a company will find it very difficult for any international legal system to rule in their favor. Another area that needs to be agreed upon is the metrics that will be used to measure progress and success or failure. Service level agreements are necessary and can be an outstanding tool to have if legal issues should arise regarding performance at a future date. The service level agreements should be agreed to and fully understood by both organizations prior to implementing any offshore outsourcing relationship.

Risk Controls Best practices indicate performing risk controls decrease chances of offshore outsourcing risks (Willcocks & Feeny, 2006). Preventive, detective, and corrective controls are common tools that are implemented for risk reduction. Preventive controls lessen the impact of risk or prevent it before having an impact. Preventive controls include clarifying assumptions, involvement planning, establishment of standards, and hiring translators. Detective controls reveal the existence of a risk and expose future impact under similar conditions. Detective controls include collecting metrics on project performance and conducting frequent audits of offshore vendor sites. Corrective controls involve determining the impact of risk and require establishing measures to prohibit future impacts. Examples of corrective controls are rescheduling of tasks on a critical path, alternate offshore vendor sites, and hiring more translators (Ramanujan & Jane, 2006; Sakthivel, 2007).

discussiOn and Final analysis Due to the complexity of IT/IS projects and metrics, evaluating the long-term value and effectiveness of offshore outsourcing has been very difficult. Figure 3.6 illustrates that 30% of all these ventures fail to provide the desired

Figure 3.6. Cost effectiveness of IS/IT outsourcing

pErcEnTagEs

hOw wEll is iT wOrking 35% 30%

Increase in Cost No Savings

25% 20% 15% 10%

0 - 20% Savings 21 - 40% Savings 41 - 60% Savings

5% 0%

61+ % Sa vings 1 rEasOns

60

Information Technology/Systems Offshore Outsourcing

outcome and 25% of these partnerships create no cost savings to the firm investing in them. Due diligence and strategic planning are key elements to achieve excellence in an effort to improve productivity. Dun and Bradstreet’s Barometer of Global Outsourcing study indicates that as many as 25% of all outsourcing relationships fail because the client does not clearly communicate its needs, costs exceed expectations, and quality of service is poor (Nair, 2002). As illustrated in Figure 3.7, poor client preparation and joint clientvendor planning accounted for 49% of root failure causes (Telecoms & Technology, 2005). Despite increased risks and negative statistics, IT/ IS offshore outsourcing can still be cost effective and successful if the right combination of due diligence and strategic planning is in place. The most cited problem that leads to failure results from ambiguous contracts. Elements of the contract are often overlooked and left out. Many companies have paid a significant amount of money in hidden costs due to vague contract agreements and ambiguous requirements (Kripalani et al., 2006). In order to decrease risks, companies must first identify those risks and verify the costs of each possibility. A cost analysis is also essential in the

planning process. Cost analysis foresees possible cost associated with the production of the desired product. Building and maintaining relationships with the vendor company is an essential success factor that many companies overlook. Statistics show that companies that have healthy working relationships are less likely to have intellectual property laws violated and duplication of applications (Tucci, 2005). IT/IS offshore outsourcing can lead to a long relationship that should be nourished and monitored (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Next we discuss the eservices capability model (eSCM) and the capability maturity model integration (CMMI) framework that help enhance the success factors and minimize negative risk in a offshore outsourcing project. The eSCM best practices framework provides direction on measuring and improving the value of outsourcing relationships by way of enhanced productivity, reduced cycle time, decreased transaction costs and improved time to market. It was developed at Carnegie Mellon University (CMU) to guide organizations doing process outsourcing, especially IT enabled process out sourcing, to form, manage and expand outsourcing relationships. Adopting the eSCM framework (illustrated in

Figure 3.7. Root case analysis of failures in offshore outsourcing projects (Source: Telecoms & Technology Forecast Americas; June 2005, pp. 10-16) rOOT FailurE causEs

Client Preparation & Execution Joint Client-Vendor Planning

3%

15%

28%

9%

Wrong Answer Client Team Morale & Support Miscommunication & Culture

10% 14%

21%

Vendor Team Performance Other

61

Information Technology/Systems Offshore Outsourcing

Figure 3.8. Overview of eSCM elements, phases and capability levels (Source: Adapted from Hyder, Kumar, Mahendra, Siegel, Heston, Gupta, Mahaboob, & Subramanian, 2002 and Nair, 2002)

Figure 3.8) enables a service provider to implement organization-wide practices required for succeeding in a process-outsourcing situation. Organizations can consider the eSCM as a holistic reference framework for implementing processes within their organization around critical elements of offshore out sourcing (organizational management, people, business operations, technology and knowledge management) and the different phases in an outsourcing relationship (precontract, contract execution, and post contract). The eSCM offers client organizations a means to select capable providers who are committed to delivering consistently high quality services and

62

developing continually improving relationships. Also, we expect this model to provide guidance to service providers so they can more effectively manage IT-enabled outsourcing relationships (CMU, 2001; Nair, 2002;). The capability maturity model integration (CMMI) developed by the Software Engineering Institute (SEI) at Carnegie Mellon University is used to improve processes for organizations to guide projects, divisions, or entire organizations. Improving processes increases product and service quality when organizations apply them to their business objectives (CMMI, 2005). The success factors have been incorporated into the

Information Technology/Systems Offshore Outsourcing

CMMI model to demonstrate how companies can integrate these factors into their goals and plans (see Figure 3.9). For example, India has far more SEI CMM Level 5 (representing the best software

development practices) than any other country in the world. It had 42 companies at SEI CMM Level 5 assessment and the quality maturity of the Indian software industry can be measured from

Figure 3.9. IT/IS offshore outsourcing success factors applied to the CMMI model Process Area 1

Process Area 2: Goals and Practices

Specific Goals Due Diligence

Culture Expertise

Develop Transparent Contract

Generic Goals Risk Analysis

Achieve Specific Goals

Understand laws and legal infrastructure

Third party security audit or an independent security evaluation Research trade laws

Obtain Legal Council Identify Service level Agreement

Develop Optimizing Process

Generic Practices Intangibles and Hidden Costs

Research the legal performance history of potential vendors

Document Detailed Requirements

Develop Managed Process

Cost Benefit Analysis

Specific Practices

Clarify Terms

Process Area n

Education of Company Hire a Translator

Perform Base Practices

Contracting Preventive Controls Vendor’s Fee Conversion Costs

Plan Process Corrective Controls Provide Resources

IS Salaries and Severance Pay Train People

Identify Culture Similarities Identify Differences Organize Social Events

Assign Responsibility

Detective Controls

Determine financial consequences of risk

Prioritize of important risks

Verify the level of impact on costs, schedule, and quality

63

Information Technology/Systems Offshore Outsourcing

the fact that already 316 Indian software companies have acquired quality certifications (e.g., ISO 9000) and more companies in India, China, and the Philippines are in the pipeline to do so (www.nasscom.com; Barrett, 2006; Palvia, 2006). Companies can use the CMMI model and become successful in combining their management and engineering processes as well as ensuring that their products or services meet their customers’ expectations. Companies can incorporate lessons that they have learned and address additional organizational functions that are essential to their services and products (CMMI, 2005). Companies have also aligned their internal practices with the People CMM framework and by use of Six Sigma methodology for reducing variation and assuring “end-to-end” quality in all company operations (Palvia, 2006). It is important for the organization to apply the appropriate options such as in-house, outsourced, or hybrid options (e.g., build-operate-transfer or equity investments) to the CMMI model carefully, extend an IT service and measurement culture into business processes; map the offshore location to the organization’s global presence; identify appropriate projects for global sourcing; define and measure business process performance and progress from a focus on cost to a focus on value;

and focus on measuring business value after IT projects end. Firms expect to benefit from globally recognized quality processes and will outsource offshore to get quality service which would otherwise take the in-house operation several years to achieve. To conquer the culture dilemma, IT organizations cannot simply try harder or place more pressure on their offshore vendor to deliver. Rather, they must address the issue at the source, within their own organization. Process and project management are the solutions many companies are turning toward. A sign of this trend is found with the 182% increase in companies completing the CMMI assessment from 2005 and 2006 (sei. cmu.edu, 2007). Table 3.3 illustrates the comparison of the benefits and challenges of CMMI when determining if this model would best fit within the target organization.

implications for management The market is changing as user requirements shift from supporting customized, internally focused IT environments to shared infrastructure, applications, and processes that are based on open standards. Incremental efficiencies are not enough

Table 3.3. Benefits and challenges of CMMI level 2 process adoption

64

Benefits

Challenges

Level 2 processes increase project oversight by establishing project management processes

Requires up to 100% more formal project manager roles than previously existed

Level 2 processes enforce establishing proper project risk monitoring through status and risk reports

Requires organizations understand how to apply resource management and project management simultaneously

Change control is formalized and documented once the project scope is agreed upon

Can be viewed by the internal and external customers as bureaucracy

Establishes processes required to measure work performed for time, quality, and commitments

Requires tools to manage scheduling and project plans

Minimizes the number of different processes used by different groups to accomplish the same thing

May be taken too far, meaning processes become rigid and restricting rather than facilitating

Can create more efficiency by reducing duplicated processes and steps

Similar gains in efficiency, quality, and commitments can be achieved without CMMI; commonly consultant companies are used to recommend process lightening and improvements.

Information Technology/Systems Offshore Outsourcing

in the age of outsourcing and offshoring; managers need to shift their emphasis to breakthrough innovation in processes that increase revenue (Koch, 2007). Managing successful IT/IS offshore outsourcing requires the intense strategic planning and full comprehension of the vendor firm culture. Important success factors include tactical entry strategies and planned control strategies. Due diligence and appropriate forecasting of costs and risks are essential for all projects. Appendix A lists the risk assessment factors and their implications for global/offshore outsourcing. In order for offshore projects to reach full potential, there must be a full identification and respect of cultural differences and similarities. Identification of the culture provides a foundation for a stronger relationship and increased job focus. As a result of deficient metrics in the evaluation of IT/ IS offshore outsourcing operations, ongoing tests and vendor monitoring can increase the possibility of discovering potential dilemmas as root causes of the problem. Organizations must understand the strategic business value of offshore outsourcing that is instrumental in enhancing growth, cost, speed, and agility. Success will be undermined if the organization focuses solely on cost reduction or tactical problems. To prepare for the future, organizations must assess their sourcing competencies and evaluate their sourcing execution and strategy capabilities.

implications for research Due to the lack of metrics in association with the evaluation of IT/IS offshore outsourcing projects, there is very little research available on the effects of offshore outsourcing on host companies and how these companies are adapting to these changes and challenges. Directions for future research include a survey methodology for crosssectional or longitudinal data collection using the CMMI framework illustrated in Figure 3.9 and inquiries concerning the client company size and financial stability, countries of vendor firms with

increasing negative results, and employee overall satisfaction of offshore outsourcing change. Future researchers may find it interesting to determine if there is a causal relationship between the degree of hierarchy within the organization, formality of relationships, and the success of the offshore outsourcing contracts. Future research could address what developing countries are doing to increase the availability and caliber of project management professionals; the real cost associated with implementing a CMMI process framework and the process level that has the greatest return on investment; and efficiency improvements in offshore outsourcing projects. IT and corporate executives would benefit from understanding the percentage of onshore versus offshore project success after factoring in the various dimensions of risk.

cOnclusiOn This chapter has explored the risks of offshore outsourcing and integrated the success factors into the CMMI model to demonstrate how companies can integrate these success factors into their goals and plans. It is perceived that offshore outsourcing of IT/IS services allows companies to become more cost effective and focus on core competencies and competitive edge. Despite a growing movement of this offshore development, an alarming number of companies are experiencing negative results while outsourcing. The lack of metrics in this domain has made it very difficult to evaluate appropriate levels of satisfaction. As a result, companies should identify technical and business risks and formulate a strategic plan that includes preventive, detective, and corrective methods of implementation and evaluation. Cultural relationships should also be emphasized in order to develop a dedicated operations focus. To ensure success, firms involved in offshore outsourcing need to make use of more advanced and complex means of communication and

65

Information Technology/Systems Offshore Outsourcing

coordination in order to overcome issues such as geographical distance and cultural differences; demand economic transparency and a strong business case; adopt flexible contracts; tightly manage service level agreements; keep and build the right skills; and build accountability at all levels. Methods of measuring IT/IS operations is expected to be a key development in years to come with the increased growth of computer technology, and more quantitative measurements and evaluations will provide companies with more precise performance evaluations in the future. Most critically, the significance of achieving winwin relationships by balancing customer savings objectives with vendor margin and overhead goals will help organizations transform competitive advantage into measurable success.

rEFErEncEs Accenture. (2004). Driving high-performance outsourcing: Best practices from the masters. Executive survey results. Retrieved March 26, 2006, from http://www.accenture.com/xdoc/en/ services/outsourcing/ps/global/landing_ps.pdf Arbore, A., & Ordanini, A. (2006). Broadband divide among SMEs: The role of size, location and outsourcing strategies. International Small Business Journal, 24(1), 83-90. Bardhan, I., Whitaker, J., & Mithas, S. (2006). Information technology, production process outsourcing, and manufacturing plant performance. Journal of Management Information Systems, 23(2), 13-25. Barrett, D. R. (2006). Offshore outsourcing: Key commercial and legal issues. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48). Beiling, Y. (2006). Demand for skills in Canada: The role of foreign outsourcing and informationcommunication technology. The Canadian Journal of Economics, 39(1), 53-60.

66

Capability Maturity Model Integration (CMMI) Overview. (2005). Retrieved May 7, 2006, from http://www.sei.cmu.edu/cmmi/general/general. html accessed 5/8/06 Carnegie Mellon University. (2001, October 4). Determining capabilities of IT-enabled outsourcing service providers: A capability model and methods. Retrieved May 25, 2007, from http://www.globaletp.com/images/clientExecSum_1.0_100401 Chakrabarty, S. K., Gandhi, P., & Kaka, N. (2006). The untapped market for offshore services. The McKinsey Quarterly, 16-22. Chan, S. S. (2005). IT outsourcing in China: How China’s five emerging drivers are changing the technology landscape and its industry. Retrieved April 9, 2006, from http://www.outsourcing, com/ china_trends/index.html Dhar, S. (2008). Global IS outsourcing: Current trends, risks, and cultural issues. In M. S. Raisinghani (Ed.), Global information technology management in the digital economy. Hershey, PA: IGI Global. Dolan, K. A. (2006). Offshoring the offshorers. Forbes, 177(8), 1-12. Dunlop, A., & Smith, C. (2005). Outsourcing: Know your legal position. Retrieved April 2, 2006, from http://www.computing.co.uk//computing/features/2072392/outsourcing-know-legalposition Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies, 42(3), 675-683. Farrell, D., Dibbern, J., Goles, T., Hirschheim, Rudy & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102.

Information Technology/Systems Offshore Outsourcing

Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834. Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing: From periphery to the core. Harvard Business Review, 132-139. Gottschalk, P. (2006). Research propositions for

IT outsourcing destination: Russia. (2005). Retrieved April 16, 2006, from http://www. sourcingmag.com/outsource_by_region/russia_central_eastern_europe.html Iyengar, P., & Rolf, J. (2007). Factors to weigh before going offshore. Retrieved April 30, 2007, from http://outsourcing.weblog.gartner.com/weblog/index.php?blogid=9

knowledge management systems supporting IT outsourcing relationships. The Journal of Computer Information Systems, 46(3), 110-116.

Koch, C. (2007, February 1). IT builds a better. CIO, 34-40.

Greaver, M., & Kipers, K. (2005). Outsourcing. Retrieved on March 26, 2006, from http://www. valuecreationgroup.com/outsourcing_advantages.html

Kraemer, K., & Dedrick, D. (2004). Offshoring in Orange County: Leader, follower, or mirror of international trends? University of California Irvine, Personal Computing Industry Center, Graduate School of Management.

Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. (An updated version of this paper is reproduced as Chapter 1 of this book). Hall, J. A., & Liedtka, S. L. (2007). The Sarbanes-Oxley Act: Implications for large-scale IT outsourcing. Communications of the ACM, 50(3), 12-20. Hatch, P. J. (2005). Offshore 2005 research preliminary findings and conclusions. Retrieved on March 26, 2006, from http://www.ventoro.com/ Offshore2005ResearchFindings.pdf Heib, B. R. (2006, May). Characteristics of successful care delivery: Organization IT cultures (pp. 2-3). Gartner Industry Research. Hunt, T. (2006, March 7). Concern over data security on the rise in outsourcing industry. Retrieved April 30, 2006, from http://www.marketwire.com/ mw/release-html Hyder, E. B., Kumar, B., Mahendra, V., Siegel, J., Heston, K. M., Gupta, R., et al. (2002, October 21). eSourcing capability model for IT-enabled service providers v. 1.1. Retrieved May 25, 2007, from http://reports-archive.adm.cs.cmu.edu/ anon/2002/CMU-CS-02-155.pdf

Kripalani, M., Foust, D., Holmes, S., & Enga, P. (2006). Five offshore practices that pay off. Business Week, 30(3969), 60. McLean, J. (2006). Slaves to technology? The British Journal of Administrative Management, 16. Nair, N. T. (2002). eServices capability model (eSCM)—A new quality standard for outsourcing activities. Retrieved May 23, 2007, from http:// ewh.ieee.org/r10/kerala/April_June_2002.htm Norwood, J., Carson, C., Deese, Ms., Johnson, N. J., Reeder F. S., Rolph J. E., et al. (2006, January). Offshoring: An elusive phenomenon. A Report of the Panel of the National Academy of Public Administration for the U.S. Congress and the Bureau of Economic Analysis. Nyrhinen, M., & Dahlberg, T. (2007, January). Is transaction cost economics theory able to explain contracts used for and success of firm-wide IT-infrastructure outsourcing? In 40th Annual Hawaii International Conference on System Sciences (HICSS). Palvia, S. (2006). A model for choosing a destination country for outsourcing of IT and IT enabled services. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48).

67

Information Technology/Systems Offshore Outsourcing

Patterson, D. A. (2006). Offshoring; Finally facts vs. folklore. Communications of the ACM, 49(2), 41-49. Petershack, R. (2005, July 18). Consider the legal issues before outsourcing offshore. Retrieved April 9, 2006, from http://www.wistechnology. com/article.php? Id=2007 Ramanujan, S., & Jane, S. (2006). A legal perspective on outsourcing and offshoring. Journal of American Academy of Business, 8(2), 51-58. Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50(4), 69-75. Seabrook, J. (2004, October 30). Offshore outsourcing. Retrieved March 30, 2006, from http:// www.countercurrents.org/glo-seabrook301003. html Seewald. (2005, February 2004). Best countries for U.S. outsourcing, 2004. Wired,101. Smarter offshoring. (2006). Harvard Business Review, 85-92. Telecoms & Technology Forecast Americas. (2005, June). Forecast on the telecommunications and technology sector (pp. 10-16).

68

Tucci, L. (2005, April 5). Outsourcing needs strong RX. Retrieved April 9, 2006, from http://searchcio. techtarget.com/originalContent/0,289142,sid19_ gcil075783, 00.html Understanding the WTO—Intellectual property: Protection and enforcement. (n.d.). Retrieved April 9, 2006, from http://www.wto.org/english/ theWTO_e/whatis_e/tif_e/agrm7_e.htm Willcocks, L., Feeny, D., & Olson, N. (2006). Implementing core IS capabilities: Feeny-Willcocks IT governance and management framework revisited. European Management Journal, 24(1), 28-37. Willcocks, L. P., & Feeny, D. (2006). IT outsourcing and core IS Capabilities: Challenges and lessons at Dupont. Information Systems Management, 23(1), 49-57. WIPO-administered treaties, WIPO treaties, treaties and contracting parties: General information. (n.d.). Retrieved April 9, 2006, from http://www. wipo.int/treaties/en/

Information Technology/Systems Offshore Outsourcing

appEndix Table A.1. Risk assessment factors and their implications for global/offshore outsourcing Risk assessment factor

Description

Implications for Global /Offshore Outsourcing

People

The people risk emerges from the experience level, training, and human resource deployment policies of the vendor. In addition, redeployment of existing IT staff of the customer is also a risk assessment factor.

Globally distributed teams with different skills and experience contribute to risk

Knowledge (Functional, Technological, Managerial)

Functional knowledge is the expertise, understanding, and experiences in the given functional area of the activity. Technological knowledge is associated with the expertise in the areas technology selection, analysis, architecture, design, development, integration, and maintenance support. Managerial knowledge is associated with the project management, risk management, resource management, developing and administrating management processes to carry out the activities.

The level of functional, technological, and managerial knowledge contributes to risk in offshore outsourcing. Managerial knowledge is extremely important in a global context.

Cultural

Cultural risks arise from the dominant culture prevalent with the vendor. The attitudes, communication skills, language, selection policies, performance motivation, team spirit, level of cohesiveness, autonomy, participatory decision making, work ethics, management style, customer-orientation, and related organizational behavioral factors that shape the culture.

Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.

Political

Political risks arise out of trading restrictions imposed by the sovereign, permissible ownership rights, nationalistic aspirations, type of government, and political and economical stability.

Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effect on outsourcing.

Financial

Financial risks arise out of project accounting standards, cash flow, asset base, and currency stability.

Accounting standards and variation in currency exchange rate contribute to risk.

Quality Standards

Software Capability Maturity Model (CMM) and ISO 9000 compliance are hallmarks of the quality standards. The ability to prepare test plans, and performance standards is seen favorably while assessing the risks due to quality standards.

Quality standards vary from one country to another and contribute to risk.

Measurement

Performance measurement standards, benchmarking, and assurance of the performance are key elements in evaluating measurement risks.

Performance measurement standards vary from country to country which contributes to risk.

Scope, Cost, and Time Estimates

Ability to formulate the scope of the project, accurate cost and time estimation poses the risk.

It is quite difficult to accurately determine scope, cost, and time estimates in global outsourcing. This contributes to risk.

Company Specific Risks

Company specific risks are largely due to outsourcer’s financial strength, area of core competence, management, relationships and alliances with other major organizations, and (potential) acquisitions and mergers activities.

Different companies in foreign countries have different management and core competencies. Those contribute to risk.

Legal Contracts and Intellectual Property

Intellectual property rights and their legal status in the country, brand protection, contractual bindings, and arbitration policies of the outsourcer constitute the risk.

IP standards and law vary from one country to another and contribute to risk.

continued on following page

69

Information Technology/Systems Offshore Outsourcing

Table A.1. continued Security

Access control, authentication, usage of secure protocols, encryption, and security policies adopted by the outsourcer constitute the risk.

Security is a major concern in global outsourcing as protection and control of data pose a problem.

Disaster Recovery

Ability to protect software code, and related data, level of replication, redundancy, and back-up and recovery policies are the main factors in deciding the risks due to disasters.

Loss of control over disaster recovery contribute to risk.

Contract Management

Contract management involves formulating contracts, schedule planning, activity planning, sending and accepting deliveries, dispute resolution, and signing off. Inability to properly formulate or execute the contracts constitutes the risk.

Contract management in global outsourcing is a risky business as monitoring the project activities become a challenge.

Relationships & Alliances

Ability to formulate customer-vendor interface at executive and working levels, customer relationship management, and developing long-term alliances offers synergy at organizational level.

Inability to manage relationships and alliances constitutes the risk in global outsourcing.

Geographic Location

The country, province, and city may be in different time zones, which require working at odd hours for the customer or outsourcer. The communication infrastructure, distance, industrial peace and stability in the region, availability of supporting infrastructure, social-economical-political stability constitutes the risk.

Vendor’s geographic location poses some risks. Communication infrastructure failure in offshore projects incurs significant loss.

Multi-vendor Arrangements

Synchronization of development efforts, data format exchange standardizations, complexities due to multi-layer architecture dependencies or non-contagious independent parts constitute the risk with ability to work with multi-vendor arrangements.

In global outsourcing with multi-vendor arrangements, coordination has to be efficient. Otherwise execution becomes a problem and contributes to risk.

Source: Dhar S. (2008). Global IS Outsourcing: Current Trends, Risks, and Cultural Issues, in Global Information Technology Management in the Digital Economy, Mahesh S.Raisinghani (Ed.), Idea Group Inc.

This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 1, edited by M. Khosrow-Pour, pp. 72-92, copyright 2008 by IGI Publishing (an imprint of IGI Global).

70

71

Chapter 1.5

Information Technology as a Service Robin G. Qiu The Pennsylvania State University, USA

absTracT In this information era, both business and living communities are truly IT driven and service oriented. As the globalization of the world economy accelerates with the fast advance of networking and computing technologies, IT plays a more and more critical role in assuring real-time collaborations for delivering needs across the world. Nowadays, world-class enterprises are eagerly embracing service-led business models aimed at creating highly profitable service-oriented businesses. They take advantage of their own years of experience and unique marketing, engineering, and application expertise and shift gears toward creating superior outcomes to best meet their customers’ needs in order to stay competitive. IT has been considered as one of the high-value services areas. In this chapter, the discussion will focus on IT as a service. We present IT development, research, and outsourcing as a knowledge service;

on the other hand, we argue that IT as a service helps enterprises align their business operations, workforce, and technologies to maximize their profits by continuously improving their performance. Numerous research and development aspects of service-enterprise engineering from a business perspective will be briefly explored, and then computing methodologies and technologies to enable adaptive enterprise service computing in support of service-enterprise engineering will be simply studied and analyzed. Finally, future development and research avenues in this emerging interdisciplinary field will also be highlighted.

inTrOducTiOn With the significant advances in networks, telecommunication, and computing technologies, people, organizations, systems, and heterogeneous information sources now can be linked together

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Information Technology as a Service

more efficiently and cost effectively than ever before. The quick advances of IT in general significantly transform not only science and engineering research, but also expectations of how people live, learn, and work as we witnessed during the last decade or so. Life at home, work, and leisure gets easier, better, and more enjoyable. In the business world, because of rich information linkages, the right data and information in the right context can be delivered to the right user (e.g., people, machines, devices, software components, etc.) in the right place and at the right time, resulting in the substantial increase of the degree of business-process automation, the continual increment of production productivity and services quality, the reduction of service lead time, and the improvement of end users’ satisfaction. As a variety of devices, hardware, and software become network aware, almost everything is capable of being handled over a network. Many tasks can be done on site or remotely, and in the same manner, so are a variety of services provided or even self-performed over the Internet. At the end of day, end users or consumers do not care about how and where the product was made, by whom, and how it was delivered; what the end users or consumers essentially care about is that their needs are met in a satisfactory manner. In manufacturing, the deployment of integrated information systems is accelerating (Qiu, 2004). A typical IT-driven manufacturing business can be created by deploying enterprise-wide information systems managing the life cycle of both the business and its electronic aspects; that is, an order is taken over the Internet, and the products are made and delivered as promised. For instance, customers submit their orders via Internet browsers directly through a sales-force automation center, which automatically triggers the generation of the appropriate material releases and production requirements. It also informs all the other relevant planning systems, such as those for advance production schedule, finance, supply chain, logistics, and customer-relationship man-

72

agement, of the new order entry. The scheduler then assigns or configures an on-site or remote production line through the production control in the most efficient way possible, taking into account raw material, procurement, and production capacity. A shop-floor production-execution schedule is then generated, in which problems are anticipated and appropriate adjustments are made accordingly in a corresponding manufacturing execution system. In the designated facility, the scheduled work is accomplished automatically through a computer-controlled production line in an efficient and cost-effective manner. As soon as the work is completed, the ordered product gets automatically warehoused and/or distributed. Ultimately, the customers should be provided the least cost and best quality goods, as well as the most satisfactory services (Qiu, Wysk, & Xu, 2003). No matter what is made and how services are delivered, in reality, high living standards with a better quality of life are what we are pursuing as human beings. When the communities we are living in are deeply studied, we understand that our communities are truly IT driven and service oriented in the information era. Here are a few daily noticeable, inescapable, and more contemporary service examples that could be on demand at any time and place (Dong & Qiu, 2004; Qiu, 2005). •

A passenger traveling in a rural and unfamiliar area suddenly has to go to a hospital due to sickness, so local hospital information is immediately required at the point of need. The passenger and his or her companions wish to get local hospital information through their cellular phones. Generally speaking, when travelers are in an unfamiliar region for tourism or business, handy and accurate information on routes and traffic, weather, restaurants, hotels, hospitals, and attractions and entertainment in the destination region will be very helpful.

Information Technology as a Service

•

•

•

A truck fully loaded with hazardous chemical materials is overturned on a suburban highway. Since the chemicals could be poisonous, people on site need critical knowledge (i.e., intelligent assistance) to quickly perform life-saving and other critical tasks after one calls 911 (in the United States). However, people on site most likely cannot perform the tasks effectively due to limited knowledge and resources. Situations could be worse if tasks are not done appropriately, which could lead to an irreversible and horrible result. Intelligent assistant services are necessary at the point of need. Obviously, the situation demands a quick response from the governmental IT-driven emergency response systems. Transportation plays a critical role in warranting the quality service and effectiveness of a supply chain. When a truck is fully loaded with certain goods, certain attention might be required from the driver from time to time, for instance, to the air, temperature, and/or humidity requirements. Only when the requirements are met on the road can the goods in transit be maintained with good quality. Otherwise, the provided transportation service will not be satisfactory. Due to the existence of a variety of goods, it is impossible for drivers to master all the knowledge on how the goods can be best monitored and accordingly protected on the highway as many uncertain events might occur during the transportation of the goods. On-demand services to assure warranty are the key for an enterprise to lead competitors. As manufacturing and services become global, more challenges are added into this traditional service. The growing elderly population draws much attention throughout the world, resulting in issues on the shortage of laborers and more importantly the lack of effective health-care delivery. Studies show that elderly patients

(65 or older) are twice as likely to be harmed by a medication error because they often receive complex drug regimens and suffer from more serious ailments that make them particularly vulnerable to harmful drug mistakes. Outpatient prescription-drug-related injuries are common in elderly patients, but many could be prevented. For instance, about 58% adverse drug events could be prevented if continuity-of-care record plans and related health-care information systems are adopted for providing prompt assistant services; over 20% of drug-related injuries could be prevented if the given medication instructions are provided at the point of need so the instructions are adhered to by the patients. Apparently, the real-time flow of information and quick delivery of relevant information and knowledge at the point of need from an information-service provider or system is essential for providing quality services to meet the on-demand needs descried in all the above scenarios. In a broader view, the service-oriented society is clearly evidenced by the largest labor migration in history around the world. According to Rangaswamy and Pal (2005), total-solution services (enabled performances for the customer’s benefit rather than a physical good) constitute the prime marketplace battlefield of the day. For instance, in the U.S. economy, over 70% of the 2005 gross domestic product was generated from services businesses. Similar numbers dominate many other developed economies worldwide. Even in some developing countries like China and India, 35% of labor is service oriented, and the number continues to climb every year. The world-developed economy is clearly heading to one that is IT driven, technology based, and services led. Because of the fast development of IT, the globalization of the world economy is accelerating. Under the umbrella of global virtual enterprises through collaborative partnerships, enterprises

73

Information Technology as a Service

can provide best-of-breed goods and services at a more competitive price while meeting the changing needs of today’s on-demand business environment. As competition in the globalizing economy unceasingly intensifies, it becomes essential for enterprises to rethink their operational and organizational structures to meet the consumers’ fluctuating demand for innovation, flexibility, and shorter lead times for their provided goods and services. For example, for farsighted manufacturers in the developed economy, as their product technologies might quickly lose their competitiveness, they recognize that only their services components would distinguish themselves from their competitors. Therefore, enterprises are keen on building highly profitable service-oriented businesses by taking advantage of their own unique engineering and application expertise, aimed at shifting gears toward creating superior outcomes to best meet their customers’ needs in order to stay competitive (Rangaswamy & Pal, 2005). The value of provided goods or delivered services lies in their ability to satisfy an end user’s need, which is not simply and strictly seen in the physical attributes of the provided product or the technical characteristics of the delivered service. For today’s competitive enterprise, a superior outcome provided to its customer inevitably constitutes services contributing to the entire customer solution through the well-established and highly collaborated value net, including the support of solution engineering, the sale of a physical product, product sustaining, personnel training, and/or a knowledge-transformation service in a satisfactory manner. This new and emerging field is truly interdisciplinary in nature and explores new frontiers of research, attempting to build a true science and engineering base and establish the foundation for understanding future competitiveness (IBM, 2004; Rangaswamy & Pal, 2005). As discussed above, IT plays a critical role in facilitating today’s geographically dispersed

74

manufacturing and services delivery. It is IT that enables real-time information flow. When enterprise-wide information systems are fully integrated throughout the whole customer order fulfillment process, all of the order information, lot travelers, material consumptions, customer services, and accounting ledgers can be continuously updated. Therefore, top management can keep abreast of how efficiently the enterprises are running and thus make the optimal decisions possible with real-time information on sales, finances, resources, and capacity utilizations. As a result, enterprises are staying due to better competitive advantages as customers are totally satisfied with their on-demand needs. Total satisfaction typically drives further sales. As the economy shifts from being manufacturing based to information-services based, better understanding of services marketing, innovation, design, engineering, operations, and management will be essential. Evidently, IT is a service from an end user’s perspective. By aggregating the concepts and research from the latest literature, this chapter presents the author’s point of view on this emerging interdisciplinary field, focusing on how enterprise service computing might be evolving from the current research and development. In the remainder of the chapter, numerous research and development aspects of service-enterprise engineering from the business perspective will be first discussed, and then some technologies to enable adaptive enterprise service computing in support of future service-enterprise engineering will be briefly introduced and analyzed.

aspEcTs OF sErvicEs-EnTErprisE EnginEEring With the push of the ongoing industrialization of information technologies, enterprises must aggregate products and services into total solutions by implementing an integrated and complete

Information Technology as a Service

value net over all of their geographically dispersed collaborative partners to deliver services-led solutions in order to stay competitive (Figure 1). The essential goal of applying total solutions to value networks is to enable the discovery, design, deployment, execution, operation, monitoring, optimization, analysis, transformation, and creation of coordinated business processes across the value chain: a collaborating ecosystem. Ultimately, the profit across the whole value network can be maximized as it becomes the top business objective in today’s global business environment (Karmarkar, 2004). The shift from a manufacturing base to a services base makes enterprises rethink their business strategies and revamp their operational and organizational structures to meet the customers’ fluctuating demands for services delivered in a satisfactory fashion. Enterprises across the board in general are eager to seek new business opportunities by streamlining their business processes; building complex, integrated, and more efficient IT-driven systems; and embracing the worldwide Internet-based marketplace. It is well recognized that business-process automation, outsourcing, customization, offshore sourcing, businessprocess transformation, and self-services became another business wave in today’s evolving global services-led economy. Services sectors nowadays cover commercial transportation, logistics and distribution, healthcare delivery, financial engineering, e-commerce, retailing, hospitality and entertainment, issuance,

supply chains, knowledge transformation and delivery, and consulting. In the developed countries, services enterprises are the new industrial base of the economy. For instance, almost four out of five jobs are currently offered by these services sectors in the United States. On the other hand, in the developing countries, more traditional labor-intensive manufacturing and services are still the core businesses. However, the developing countries actively participate in the global economy, mainly providing the physical attributes of goods and services through the manufacturing and delivering of labor-intensive services and business functions. The global economy in the 21st century requiring a business ecosystem for better effectiveness, efficiency, and manageability thus involves all the collaborated business-function organisms with their operational settings. The global ecosystem indeed includes participants from both the developed and developing countries. Although this new wave seems to be repeating the trends that afflicted U.S. manufacturing in the 1970s, it gets more complicated in demanding higher efficiency and better cost effectiveness across the geographically dispersed value chains. Moreover, compared to industry’s knowledge of mature manufacturing business practices, services-enterprise engineering is still substantially uncharted territory (Rangaswamy & Pal, 2005). According to IBM (2004): Services sciences, Management and Engineering [as an emerging interdisciplinary field] hopes to

Figure 1. Service-oriented business value net Customer satisfaction

Value Net (Product Design, Production, Delivery, and Services)

Enterprise 1 (supplier)

Enterprise 2 (manufacturer)

Enterprise n-1 Enterprise n (distributor) (services provider)

75

Information Technology as a Service

bring together ongoing work in computer science, operations research, industrial engineering, business strategy, management sciences, social and cognitive sciences, and legal sciences to develop the skills [and knowledge] required in a servicesled economy. Only recently have there been some international initiatives to promote research and education in this emerging field in a comprehensive manner. Research and education in services-enterprise engineering to cultivate and empower the ecosystem driven by services, technology, and management have been lagging behind when compared to many other areas as many scholars from leading universities and professionals from industrial bellwethers have only recently started to pay more attention to services-enterprise-engineering research. More importantly, the services and services-enterprise-engineering scope have evolved and expanded enormously as the world economy accelerates the pace of globalization due to the tremendous advances in IT (including computing, networks, software, and management science). Consequently, little is really known about how services sciences, management, and engineering can be systematically applied for the delivery of a services-led value chain from end to end. As mentioned earlier, today’s services concept evolves beyond the traditional nonagricultural and/or nonmanufacturing performance for the consumer’s benefit. For example, many new and emerging high-value areas, such as IT outsourcing, postsales training, and on-demand innovations consulting (including any work helping customers improve their products, business processes, goods and services delivery, and supportive IT systems), are well recognized as services, drawing substantial attention from many industrial bellwethers (Fitzgerald, 2005; Rosmarin, 2006). On one hand, unique and satisfactory services differentiate an enterprise from its competitors; on the other hand, highly satisfactory services

76

delivery frequently drives more product sales. As the shift from a manufacturing base to a services base becomes inescapable for both the developed countries and the developing countries, enterprises are gradually embracing defining and selling anything as a service (Rosmarin). To ensure the prompt and cost-effective delivery of innovative and satisfactory services for customers throughout the geographically dispersed value net, enterprises nowadays have to rethink their operational and organizational structures by overcoming a variety of social and cultural barriers. Challenges appear in many aspects from business strategy, marketing, modeling, innovations, design, and engineering to operations and management. Since the general services topic is too broad and vague, the following discussions mainly focus on the needs for research and education in IT services, aimed at providing some fundamental understanding for business executives, managers, knowledge workers, and professionals in the relevant business sectors and research fields.

business strategy As an enterprise is diving into building a highly profitable service-oriented business by taking advantage of its own unique engineering expertise and services knowledge, aimed at shifting gears toward creating superior outcomes to best meet customer needs, an adequate business-service strategy will be vital for the enterprise’s growth in the long run. As discussed earlier, it is the mainstream for enterprises to collaborate with their worldwide partners to deliver best-of-breed services to their customers. Despite the recognition of the importance of service-enterprise-engineering research, the shift to focus on services in the information era has created a research gap due to the overwhelming complexity of interdisciplinary issues across service-business modeling, information technologies, and workforce management. Filling the gap is essential. According to Rust (2004, p. 211):

Information Technology as a Service

We can move the field forward not only by understanding and serving the customer but by designing efficient systems of service delivery; training and motivating service providers; using new service technologies; and understanding how service affects the marketplace, the economy, and government policy.

•

• The development of a business strategy meeting the long-term growth of a services enterprise should ensure that the defined business road map organically integrates corporate strategy and culture with organizational structure and functional strategy, and allows managing the interface of strategy and technology in a flexible and costeffective fashion. In general, the development of business strategy for enterprises adaptable to a new business environment requires great understanding of incorporations of solutions to addressing at least the following challenges in the services-led economy (Cherbakov, Galambos, Harishankar, Kalyana, & Rackham, 2005; Wright, Filatotchev, Hoskisson, & Peng, 2005). •

•

Maximizing the total value across the value chain: The outcome of the value chain nowadays is clearly manifested by customer satisfaction, which is mainly dependent upon the capability of providing on-demand, customizable, and innovative services across the value net. The international transferability of staying competitive: Enterprises reconstruct themselves by taking advantage of globalization in improving their profit margins, resulting in the fact that subcontracting and specialization prevail. Radically relying on efficient and cost-effective collaborations, a services provider essentially becomes a global ecosystem in which international transferability plays a critical role. International transferability could cover a variety of aspects from human capital, worldwide

•

trade and finance, social structures, and natural resources to cultures and customs. Organizational learning as competitive advantage: The globalization of the services workforce creates new and complex issues due to the differences in cultures, time, and skills. Coping with the complexities, uncertainties, and changes: Change is the only certain thing today and tomorrow. As the complexities, uncertainties, and changes are reconfiguring the business world, an enterprise should be able to quickly adapt to the change. Aligning business goals and technologies to execute world-class best practices: Business componentization cultivates value nets embracing best-of-breed components throughout collaborative partnerships. The value nets essentially are social-technical systems and operate in a network characterized by more dynamic interactions, real-time information flows, and integrated IT systems. Apparently, aligning business goals and IT is indispensable to the successful execution of applied world-class best practices in services enterprises.

services marketing “[Today’s] business reality is that goods are commodities; the service sells the product,” says Roland Rust (2004, p. 211), a leading professor and the David Bruce Smith chair in marketing at the Robert H. Smith School of Business at the University of Maryland. It is not a secret that quality services essentially lead to high customer satisfaction. Satisfaction characterized as a superior outcome then further drives customer decisions. The services-led total solution measured by performance for the customer’s final benefit rather than the functionality of physical goods become the prime competition in the global services-led marketplaces.

77

Information Technology as a Service

There are many new business opportunities in numerous newly expanded areas under the new concept of services, for example, e-commence, e-services, auctions, and IT consulting (Menor, Tatikonda, & Sampson, 2002). Although these emerging services have gained much popularity with consumers, many new issues solicit more exploration for a better understanding of marketing to ensure that business goals can be met in the long run. Rust and Lemon (2001) discuss that Internet-based e-services can better serve consumers and exceed their expectations through real-time interactive, customizable, and personalized services. Effective e-service strategy and marketing play a significant role in growing the overall value of the services provider. A set of research questions in many customer-centric areas is proposed, aimed at leading to a stronger understanding of e-service and consumer behavior. Cao, Gruca, and Klenz (2003) model the relationships between e-retailer pricing, price satisfaction, and customer satisfaction so a more competitive business can be operated. According to Rangaswamy and Pal (2005), service marketing as a fundamental servicevalue driver is much less understood compared to product marketing. Typically, a service outcome is freshly “manufactured” or “remanufactured” at the customer’s site when it is delivered; it depends heavily on a well-defined and consistent process applied by trained personnel time after time, and leads to winning future competition through future innovations. It is hardly an easy transition from traditional business or consumer-product marketing techniques.

services design and Engineering There have been many publications in the literature illustrating a variety of approaches to services design and engineering across industries. Although some of them present their scientific methodologies to realize the targeted goals specified by customers, the majority of them simply

78

show their empirical and heuristic methods to deliver services design and engineering processes. In the emerging high-value IT-services area, there is a great need for methodologies for the design and engineering of long-term, high-quality, and sustaining services in order to meet the defined business strategy of a services provider. Zhang and Prybutok (2005) study the design and engineering factors impacting service quality in the e-commerce services sector. Introducing new products and services indeed would certainly help new revenue generation. However, retaining customers’ high satisfaction and alluring them for purchasing further products and services are highly dependent upon other numerous critical factors, for instance, system reliability, ease of use, localization and cultural affinity, personalization, and security. As the levels of price satisfaction might not be increased simply by lowering prices, competing on price hence is not a viable long-term strategy for online retailers. Cao et al. (2003) model the relationships between e-retailer pricing, price satisfaction, and customer satisfaction through analyzing the whole services process. They find that the design and engineering of a satisfactory ordering process generates higher overall ratings for fulfillment satisfaction, which better retains loyal customers and accordingly helps a services provider to stay competitive. As discussed earlier, services sectors cover both traditional services (e.g., commercial transportation, logistics and distribution, health-care delivery, retailing, hospitality and entertainment, issuance, and product after-sale services) and contemporary services (e.g., supply chains, knowledge transformation and delivery, financial engineering, e-commerce, and consulting). The competitiveness of today’s services substantially depends on efficient and effective services delivery networks that are constructed using talent and comprehensive knowledge with a combination of business, management, and technology. The services processes should be flexibly engineered by effectively bridging the science of modeling and

Information Technology as a Service

algorithms on one hand, and business processes, people skills, and cultures on the other hand.

prise should be clearly described using a service innovation framework (Figure 2):

services modeling and innovation Framework

The framework can guide the creation of customer value and demand, and the processes and organizations that deliver services successfully—all of it catalyzed by emerging technologies.

Services innovations are the key to stay a step or two ahead of competitors. James Spohrer, director of IBM Services Research, has an insightful view of the need for the investigation of service innovations and modeling. He states: Increasingly over the past ten years, the new frontier of service research and teaching has shifted more and more towards business-to-business process transformation models. Process reengineering, IT productivity paradox, and other case studies highlight the need to constantly redesign work to improve productivity through multiple types of innovation in demand, business value, process, and organization. A well-defined services model and innovation framework will effectively guide services enterprises to best design, develop, and execute their well-defined strategic plan for long-term growth. New service-delivery models are essentially derived by working closely with customers to cocreate innovative and unique solutions best meeting customers’ inevitably changing needs. According to Rangaswamy and Pal (2005), a competitive service business model for an enter-

Although detailed panel views of customer value, demand, process, and organization have been given in the white paper by Rangaswamy and Pal (2005), there is still the lack of a systematic approach to address how such a model and innovation framework can be enabled in practice. Given the tremendous complexity and variance from service to service, vertical service-domain knowledge of modeling and frameworks should be first investigated. Only when a better understanding of a variety of services domains is accomplished can an integrated and comprehensive methodology to address the services model and innovation framework across industries be explored and acquired.

services Operations and management Operations research and management with focus on business-internal efficiency has made significant progress and developed a huge body of knowledge during the last 65 years or so. The relevant research and algorithm development has been mainly conducted in the areas of optimiza-

Figure 2. Services innovations framework and modeling

Vision/ Value Governance Technology Road Map Execution Technology Deployment

Customer Value

Cocreation + Q uality

Demand

Relationship + Preference

Process

Augmentation + Automation

Organization

People + Culture + Metrics

Services Driver

Services Enabler

79

Information Technology as a Service

tion, statistics, stochastic processes, and queuing theory. Current applications cover areas from vehicle routing and staffing, supply-chain modeling and optimization, transportation modeling, revenue management, risk management, servicesindustry resource planning and scheduling to airline optimization and forecasting. In general, operations research has unceasingly improved living standards as it has been widely applied in practice for the improvement of production management and applications productivity. Operations research and management originated from practice and has been growing as a more quantitative, mathematical, and technical field. Larson (2005) argues that practice makes perfect operations research. As new problems are identified and framed, formulated, and solved by applying operations-research approaches, tremendous impact will be provided and accordingly a new theory might be created. Sociotechnical services systems show a more practical nature and are extremely complex, and they are typically modeled and formulated using qualitative approaches. An understanding of such a complex problem involves deep and thoughtful discussion and analysis using common sense, basic principles, and modeling. Through new initiatives, the operations-research body of knowledge can be perfectly applied to these practical problems. Services operations and management are essentially operations research and management applied to services settings. As discussed earlier, on one hand, the research and development of IT is a service. On the other hand, when IT helps enterprises streamline their business processes to deliver quality and competitive goods and services, it essentially functions as a knowledge service. However, efficient IT-service delivery to meet the needs of adaptive enterprises requires talent and comprehensive knowledge with a combination of business, management, and IT. Therefore, service-based operations research and management is in demand as it matches the

80

emerging realization of the importance of the customer and a more customer-oriented view of operations. Services operations and management fits well with the growing economic trend of globalization, which requires operations research in services practice. According to Bell (2005), operations research applied to services has much to offer that could improve the lives of everyone. He presents seven useful operations research frameworks that can be effectively used in addressing practical and complex problems like services delivery networks. Moreover, services operations are closely synchronized with the business operations of other collaborative partners as well as customers, aimed at cocreating value for customers in a satisfactory manner while meeting the business objectives across the value net. Given the industrialization of services and the economy of globalization, reorganizing, realigning, redesigning, and restructuring enterprises’ strategies, processes, IT systems, and people for the challenges ahead are essential for ensuring that services providers are agile and adaptive, and stay competitive (Karmarkar, 2004). In summary, given the increasing complexity of building sociotechnical services systems for improving living standards by applying operation research and management science in practice, services operations and management should cover more initiatives for the rooted practical aspects of research, linking operational performance to business drivers, performance measurement and operations improvement, service design, service technology, human capital, the design of internal networks, and the management of service capacity (Johnston, 1999). The study should also take into consideration high performance, distributed computing, humans’ and systems’ behavioral and cognitive aspects (which emerges as the new look of the interface to systems engineering), and highly collaborative interaction natures.

Information Technology as a Service

adapTivE EnTErprisE sErvicE cOmpuTing Enterprises are eagerly embracing building highly profitable service-oriented businesses through properly aligning business and technology and cost effectively collaborating with their worldwide partners so that the best-of-breed services will be generated to meet the changing needs of customers. To be competitive in the long run, it is critical for enterprises to be adaptive given the extreme dynamics and complexity of conducting businesses in today’s global economy. In an adaptive enterprise, people, processes, and technology should be organically integrated across the enterprise in an agile, flexible, and responsive fashion. As such, the enterprise can quickly turn changes and challenges into new opportunities in this on-demand business environment. IT service is a high-value services area that plays a pivotal role in support of business operations, logistics, health-care delivery, and so forth. IT service in general requires people who are knowledgeable about the business, IT, and organization structures, as well as human behavior and cognition that go deep into successful services operations (IBM, 2004). For IT systems to better serve the service-oriented enterprise, service-oriented business components based on business-domain functions are necessary (Cherbakov et al., 2005). The question is what systematic approach and adequate computing technologies will be suitable for IT development leading to the success of building an adaptive enterprise. Computing technologies (e.g., software development) unceasingly increase in their complexities and dependencies. Aiming to find a better approach to managing complexities and dependencies within a software system, the practice of software development has gone through several methods (e.g., conventional structural programming, object-oriented methods, interface-based models, and component-based constructs). The emergence of developing coarse-grained granu-

larity constructs as a computing service allows components to be defined at a more abstract and business-semantic level. That is, a group of lower level and finer grained object functions, information, and implementation software objects and components can be choreographically composed as coarse-grained computing components, supporting and aligning business services. The componentization of the business is the key to the construction of best-of-breed components for delivering superior services to the customers. Successful operations of a componentized business require seamless enterprise integration. Thus, service-oriented IT systems should be able to deal with more amounts of interaction among heterogeneous and interconnected components, and be more flexible and adaptive. Obviously, adaptive and semantic computing services representing business functions meet the needs of the service-oriented IT systems. When computing components manifest business services at the semantics level, an IT system is a component network, fundamentally illustrating a logic assembly of interconnecting computing components: The need for flexibility across the value net requires that the component network be flexible; that is, the enterprise can “in-source” an outsourced component and vice versa; replace, on demand, a current partner with a different partner; change the terms of the contract between the two components, and so on. (Cherbakov et al., 2005) A generic service-oriented IT computing architecture for the development of a component network is illustrated in Figure 3. The top two layers represent services operations from the business-process perspective while the bottom three layers show the value-adding services processes from the computing perspective. Apparently, how to optimally align enterprise-level business strategies with value-adding operations and activities is the key to the success of the deployment of an agile enterprise service-oriented IT system (Qiu, in press). 81

Information Technology as a Service

Figure 3. Service-oriented component-network architectural model

Integration Framework

Enterprise Business Application

Plant Front-End Applications (e.g., ERP, SCM , and CRM )

Service-Oriented Business Processes

Business-Process M anagement System

Service-Oriented Integration Generic (Adaptive) Serv ice (Standard Connectivity)

Interoperable Services M odules (Semantic Services, M essages,…)

Process Services (Services and Service Co mpositions)

Aggregated Business Services (Web Services, etc.)

Ru les and Logics (Co mputing Operat ions)

Business Logics, Algorithms, Domain M odules/Applications

(a) The enterprise service computing architectural model

However, the exploitation, establishment, control, and management of dynamic, interenterprise, and cross-enterprise resource-sharing relationships and the realization of agility in a serviceoriented IT system require new methodologies and technologies. The remaining discussions focus on the following four emerging synergic IT research and development areas aimed at providing some basic understanding of the emerging methodologies and technologies in support of the future deployment of IT services that enable adaptive enterprise service computing. •

•

•

82

Integration Backbone

Service-oriented architecture (SOA): SOA is considered the design principle and mechanism for defining business services and computing models, thus effectively aligning business and IT. Component-process model (CPM): A component business-process model facilitates the construction of the business of an enterprise as an organized collection of business components (Cherbakov et al., 2005). Business-process management (BPM): BPM essentially provides mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes, aimed at effectively facilitating the conduct of ITsystem integration at the semantics level (Smith & Fingar, 2003).

•

(b) An implementation

Web services: Web services are simply a suite of software-development technologies based on Internet protocols, which provide the best interoperability between IT systems over the network.

service-Oriented architecture According to Datz (2004), “SOA is higher level of [computing] application development (also referred to as coarse granularity) that, by focusing on business processes and using standard interfaces, helps mask the underlying complexity of the IT environment.” Simply put, SOA is considered the design principle and mechanism for defining business services and computing models, thus effectively aligning business and IT (Figure 4; Newcomer & Lomow, 2005). Based on the concept of SOA, a deployed service-oriented IT system can provide a common way of cost effectively and efficiently managing and executing distributed heterogeneous services across enterprises. To properly implement serviceoriented IT systems complying with SOA, three major levels of abstraction throughout collaborated IT systems are necessary (Zimmermann, Krogdahl, & Gee, 2004). •

Business processes: A business process typically consists of a set of actions or activities executed with specifically defined

Information Technology as a Service

Figure 4. Aligning business and information technology Service-Oriented B usiness • Delivering services to customers, clients, citizens, and partners

Staff

Human-Mediated Services

Custome rs

Self-Services

Partners

System-to-System Services Delivery

Aligns Business & Technology Service-Oriented Architecture • A blueprint that governs creating, deploying, executing, and managing reusable business services • Services/operations can be enabled using Web services

•

•

Serv ice-Oriented Architecture ( SOA)

ERP/SCM Info

long-term business goals. A business process usually requires multiple computing services. Service invocations frequently involve business components across the network. Examples of business processes are the initiation of a new employee, the selling of products or services, a project’s status, and order-fulfillment information. Services: A service represents a logical group of low-level computing operations. For example, if customer profiling is defined as a service, then looking up customers from data sources by telephone number, listing customers by name and postal code on the Web, and updating data for new requests represent the associated operations. Operations: A computing operation represents a single logical unit of computation. In general, the execution of an operation will cause one or more data sets to be read, written, or modified. In a well-defined SOA implementation, operations have a specific, structured interface and return structured responses. An SOA operation can also be composed of other SOA operations for better structures and maintainability.

SOA as a design principle essentially is concerned with designing and developing integrated systems using heterogeneous network-addressable and standard interface-based computing ser-

Account Info

Customer Support

vices. Over the last few years, SOA and service computing technology have gained tremendous momentum with the introduction of Web services (a series of standard languages and tools for the implementation, registration, and invocation of services). Enterprise-wide integrated IT systems based on SOA ensure the interconnections among integrated applications in a loosely coupled, asynchronous, and interoperable fashion. It is believed that BPM (as transformation technologies) and SOA enable the best platform for integrating existing assets and future deployments (Bieberstein, Bose, Walker, & Lynch, 2005).

component-process model Given the increasing complexity and dynamics of the global business environment, the success of a business highly relies on its underlying ITsupportive systems to support the changing best practices. In adaptive enterprise service computing, the appropriate design of IT-driven business operations mainly depends on well-defined constructs of business processes, services, and operations. Hence, to make this promising SOA-based component-network architectural model able to be implemented, it is essential to have a well-defined, process-driven analytical and computing model that can help analysts and engineers understand and optimally construct the business model of an enterprise for IT implementation.

83

Information Technology as a Service

A business process typically consists of a series of services. As a business process acts in response to business events, the process should be dynamically supported by a group of services invoked in a legitimate sequence. To ascertain the dynamic and optimal behavior of a process, the group of underlying computing services should be selected, sequenced, and executed in a choreographed rather than predefined manner according to a set of business rules. A service is made of an ordered sequence of operations. CPM basically is a design and analytical method and platform to ensure that well-designed operation, service, and process abstractions can be characterized and constructed systematically for adaptive enterprise service computing (Cherbakov et al., 2005; Kano, Koide, Liu, & Ramachandran, 2005; Zimmermann et al., 2004). CPM essentially provides a framework for organizing and grouping business functions as a collection of business components in a wellstructured manner so that the components based on business processes can be modeled as logical business-service building blocks representing corresponding business functions. Figure 5 schematically illustrates a simplified components-process model for a service provider (Cherbakov et al., 2005). Just like many business-analysis diagrams, CPM can also be refined into a hierarchy. In other

words, a process can be composed of a number of refined processes in a recursive fashion. As CPM can accurately model business operations using well-defined services in SOA terms, CPM helps analyze a business and develop its componentized view of the business. Furthermore, the developed model for the business will define components concentrating on the interfaces and service-level agreements between the services. As a result, each business component will be supported by a set of IT-enabled services, while meeting the requirements of the deployment of adaptive enterprise service computing. Most importantly, as the business evolves, CPM can help analyze the hot spot of the business operations. When business-performance transformation is required as the business settings change, CPM and the underlying IT systems can be quickly transformed to meet the needs of on-demand businesses (Cherbakov et al., 2005).

business-process management BPM emerges as a promising guiding principle and technology for integrating existing assets and future deployments. BPM is new in the sense that it describes existing disparate and heterogeneous systems as business-process services when conducting IT-system integration for better

Figure 5. Component business-process schematic view Accountability

Business Administration

Servicing & Sales

Vision

Business Strategy

Services & Sales Strategy

Control

Business Tracking

Sales & Service Management

Workforce Learning

Sales Campaign

Execution

Workforce Administration Production Administration

Sales-Force Automation

Competency

84

Information Technology as a Service

time data flows, BPM provides the capability of addressing a range of choreographic business challenges and improving business operations in nearly real time. BPML is defined for modeling complex business processes. Using the BPML specification to describe the business model of an enterprise provides the abstract model of the enterprise. The abstracted model is programmatically structured and represented using extensible markup language (XML) syntax to express the defined executable business processes and supporting entities for the enterprise. BPMN provides the capability of defining and understanding internal and external business operations for the enterprise through a business-process diagram. Through visualization, it gives the enterprise the ability to communicate these modeling and development procedures in a standard manner. BPEL for Web services then defines a standard way of representing executable flow models, which essentially extends the reach of business-process models from analysis to implementation through leveraging the power of Web-service technologies. The emergence of BPM introduces an innovative platform for conducting IT-system integration. BPM enables service-oriented IT systems over the network to be able to dynamically and promptly coordinate the behaviors of disparate

business agility rather than simply integrating those systems using EAIs (enterprise application integrations), APIs (application programming interfaces), Web-services orchestration, and the like. By providing mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes, BPM essentially aims at enabling a platform to effectively facilitate the conduct of IT-system integration at the semantics level (Smith & Fingar, 2003). Since an SOA computing service at the system level essentially is the business function provided by a group of components that are network addressable and interoperable, and might be dynamically discovered and used, BPM and SOA computing services can be organically while flexibly and choreographically integrated, which is schematically illustrated in Figure 6 (Newcomer & Lomow, 2005). In essence, BPM takes a holistic approach to enterprise service computing from the businessprocess execution perspective, substantially leveraging the power of standardization, virtualization, and management. BPM initiatives include a suite of protocols and specifications, including the business process modeling language (BPML), business process modeling notation (BPMN), and business process execution language (BPEL). By treating the business-process executions as real-

Figure 6. BPM merging with SOA services BPM

B us iness-Process Laye r: B PML/B PM N Se rv ices Laye r:

B PEL

(We b) Se rv ices

Web-Services Platform SOAP, WSDL, UUDI …

PeopleSoft

SAP

Custom/ Legacy

Office/ Exchange

SAS

Applicatio n Laye r

Java/ J2EE DBMS

C++ /Unix MQ

.NET/ Windows LDAP

Mobile

PKI

CICS/ OS/390 Te chno log y Laye r

Modeling, Execution, Monitoring, Optimization (Life-Cycle Management, Cross-Function, End-to-End Business Processes)

85

Information Technology as a Service

and heterogeneous computing services across enterprises. It is through BPM that business agility is retained while the return of IT investment is maximized.

Web services represent the evolution of Web technology to support high performance, scalability, reliability, interoperability, and availability of distributed service-oriented IT systems across enterprises around the whole world.

web services Apart from traditional software technologies, Web technology in general is nonproprietary and platform independent. Using standard Internet protocols, a Web service is a self-contained, selfdescribing, and network computing component. A Web service can be conveniently deployed, published, located, and invoked across the network. As Web services can be assembled and reassembled as needed across the network, the needs of adaptive enterprise computing of a business can be cost effectively supported. Web-services technology essentially consists of a stack of protocols and specifications for defining, creating, deploying, publishing, locating, and invoking black network components. The stack mainly includes the simple object access protocol (SOAP), XML and XML namespaces, Web service description language (WSDL), and universal description, discovery, and integration (UDDI). A computing service deployed as a Web service has to strictly comply with the stack of protocols and specifications. SOAP is the underlying communication protocol between the service provider and consumer, and explicitly defines how the service provider and consumer interact and what the enabled computation results in. WSDL is the language for defining the computing service, and basically specifies the location of the computing service and the operations the service exposes. UDDI then provides the formal interface contract and the global base for the registration and discovery of the deployed computing service. Web services are standard run-time technologies over the Internet, providing best-ever mechanisms for addressing heterogeneous computing issues. By converging SOA and Web technology,

86

cOnclusiOn This chapter aimed at providing a basic understanding of the IT-driven, service-led economy. By discussing the challenges of services marketing, innovations, design, engineering, operations, and management from an IT perspective, this chapter gave the author’s point of view on how service-enterprise engineering should be evolving from the current research and development. For an enterprise to be adaptive and able to quickly turn changes and challenges into opportunities so that the needs of the on-demand business can be optimally met, the workforce, processes, and technologies have to be organically aligned and integrated across the enterprise in an agile, flexible, and responsive fashion. The following four design and computing methodologies and technologies are currently proposed as the necessities of enabling adaptive enterprise service computing. SOA is the design methodology to ensure the best aligning of the business and IT-driven system. CPM is a structured view of a business, which helps analysts and designers to optimally construct the long-term architectural and functional models for IT implementation. BPM is a rigorous method to embody the design and development of CPM, which essentially provides mechanisms to transform the behaviors of disparate and heterogeneous systems into standard and interoperable business processes so that the conduct of IT-system integration can be accomplished at the semantics level. BPEL and Web services are the run-time technologies suited for this need of BPM materialization. Grid computing is emerging as a new and powerful computing technology to enable re-

Information Technology as a Service

source sharing for complex problem solving across businesses, institutions, research labs, and universities. Well-informed operational, tactical, and strategic decisions can only be made when nearly perfect and real-time visibility of the fulfillment of products and services can be provided in the on-demand e-business environments. It is envisioned that grid computing will join services science, management, and engineering in support of IT-driven system deployment for enabling real-time adaptive enterprise service computing in the near future.

rEFErEncEs Bell, P. (2005). Operations research for everyone (including poets). OR/MS Today, 32(4), 22-27. Bieberstein, N., Bose, S., Walker, L., & Lynch, A. (2005). Impact of service-oriented architecture on enterprise systems, organizational structures, and individuals. IBM Systems Journal, 44(4), 691-708. Cao, Y., Gruca, T., & Klemz, B. (2003). Internet pricing, price satisfaction, and customer satisfaction. International Journal of Electronic Commerce, 8(2), 31-50. Cherbakov, L., Galambos, G., Harishankar, R., Kalyana, S., & Rackham, G. (2005). Impact of service orientation at the business level. IBM Systems Journal, 44(4), 653-668. Datz, T. (2004). What you need to know about service-oriented architecture. CIO Magazine, 78-85. Dong, M., & Qiu, R. (2004). An approach to the design and development of an intelligent highway point-of-need service system. The 7th International IEEE Conference on Intelligent Transport Systems, 673-678.

2006, from http://www.technologyreview.com/ articles/05/05/issue/brief_ibm.asp IBM. (2004). Service science: A new academic discipline? Retrieved February 4, 2006, from http://www.research.ibm.com/ssme Johnston, R. (1999). Service operations management: Return to roots. International Journal of Operations & Production Management, 19(2), 104-124. Kano, M., Koide, A., Liu, T., & Ramachandran, B. (2005). Analysis and simulation of business solutions in a service-oriented architecture. IBM Systems Journal, 44(4), 669-690. Karmarkar, U. (2004). Will you survive the services revolution? Harvard Business Review, 82(6), 100-107. Larson, R. (2005). Practice makes perfect O.R. OR/MS Today, 32(2), 6-7. Menor, L., Tatikonda, M., & Sampson, S. (2002). New service development: Areas for exploitation and exploration. Journal of Operations Management, 20(2), 135-157. Newcomer, E., & Lomow, G. (2005). Understanding SOA with Web services. Addison-Wesley Professional. Qiu, R. (2004). Manufacturing grid: A next generation manufacturing model. 2004 IEEE International Conference on Systems, Man and Cybernetics, 4667-4672. Qiu, R. (2005). An Internet computing model for ensuring continuity of healthcare. 2005 IEEE International Conference on Systems, Man and Cybernetics, 2813-2818. Qiu, R. (in press). A service-oriented integration framework for semiconductor manufacturing systems. International Journal of Manufacturing Technology and Management.

Fitzgerald, M. (2005). Research in development. MIT Technology Review. Retrieved February 4,

87

Information Technology as a Service

Qiu, R., Wysk, R., & Xu, Q. (2003). An extended structured adaptive supervisory control model of shop floor controls for an e-manufacturing system. International Journal of Production Research, 41(8), 1605-1620. Rangaswamy, A., & Pal, N. (2005). Service innovation and new service business models: Harnessing e-technology for value co-creation (eBRC white paper). 2005 Workshop on Service Innovation and New Service Business Models. Retrieved September 10, 2005, from http://www. smeal.psu.edu/ebrc/ Rosmarin, R. (2006). Sun’s serviceman. Retrieved February 6, 2006, from http://www.forbes. com/2006/01/13/sun-microsystems-berg_cx_ rr_0113sunqa_print.html Rust, R. (2004). A call for a wider range of service research. Journal of Service Research, 6, 211.

Services Science Global (SSG). (2006). Services Science Global: A non-profit research consortium. Retrieved February 6, 2006, from http://www. ssglobal.org Smith, H., & Fingar, P. (2003). Business process management: The third wave. Tampa, FL: Meghan-Kiffer Press. Wright, M., Filatotchev, I., Hoskisson, R., & Peng, M. (2005). Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42(1), 1-33. Zhang, X., & Prybutok, V. (2005). A consumer perspective of e-service quality. IEEE Transactions on Engineering Management, 52(4), 461-477. Zimmermann, O., Krogdahl, O., & Gee, C. (2004). Elements of service-oriented analysis and design. Retrieved February 5, 2006, from http://www-128. ibm.com/developerworks/library/ws-soad1/

Rust, R., & Lemon, K. (2001). E-service and the consumer. International Journal of Electronic Commerce, 5(3), 85-101.

This work was previously published in Enterprise Service Computing: From Concept to Deployment, edited by R. Qiu, pp. 1-24, copyright 2007 by Information Science Publishing (an imprint of IGI Global).

88

89

Chapter 1.6

Offshoring:

Evolution or Revolution? Nicholas Beaumont Monash University, Australia

absTracT This chapter describes the emergence of offshoring. It defines relevant concepts, and documents its rapid growth. The factors differentiating offshoring from outsourcing are discussed, especially access to markedly lower costs, extra risks, and cultural differences. A methodology for deciding what processes to offshore, and establishing, maintaining, and renewing offshoring projects is proposed. Offshoring is no longer the preserve of organizations; individuals can obtain an increasing variety of services from overseas. Offshoring is contentious because it threatens to replace high-paid jobs in First World countries with less well-paid Third World jobs. Most outsourcing depends on organizations’ ability to transfer data instantly, accurately, and at nearly zero marginal cost. This chapter suggests that the ramifications for individuals, organizations, and societies of this technical advance are underestimated. Further

research, especially on the ramifications, is suggested. The difficulty of researching offshoring, a sensitive topic for many organizations, is noted.

inTrOducTiOn Outsourcing of business processes has become popular among management, management consultants, and governments, although it has been used for centuries. Its recent prominence is attributable to changes in technology— exemplified by the World Wide Web (WWW)—that have made it easy for organizations to share large amounts of data almost instantly, with high fidelity, and at almost zero marginal cost. Outsourcing is perhaps the latest managerial fad (Shapiro, 1995), but has more substance than predecessors such as total quality management, business process re-engineering, and empowerment. The latest manifestation of outsourcing is “offshoring;” or-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Offshoring

ganizations have discovered that some costs can be substantially reduced by locating operations in Third World countries. Customers’ expectations of constantly improving value for money and competitive pressure will force firms to adopt outsourcing and especially offshoring. Now that techniques such as total quality management and business process re-engineering have been fully exploited, offshoring is the cost reduction method with greatest short-term potential. This chapter defines relevant terms; describes contemporary offshoring’s historical precedents; describes the costs and benefits of outsourcing and offshoring; evidences the growth of offshoring; proposes a methodology for establishing and running offshoring projects, outlines the risks inherent in offshoring; notes the emergence of personal offshoring; and discusses offshoring’s social and political implications. Conclusions and suggestions for future research are given.

supplying primary produce (first wool, then meat) to England and Europe, Australia had intrinsic advantages of cheap labor and land. Technical advances (especially to transport) such as railways, refrigeration, and the “stump-jump” plough and cheaper inputs (e.g., of fencing wire) reduced the cost, improved the quality, and increased the scope of Australian products, with disastrous effects on British farmers but beneficial effects for British consumers and downstream industries.

Manufacturing

Modern offshoring is the last of three waves, reminiscent of Krondatief cycles, each driven by access to lower costs and radical technical changes yielding reduced costs, product or service improvement, and/or increases in scope. Increasing scope means operating in more geographic areas; selling to more kinds of customers; and/or selling products and services fulfilling more functions. Offshoring is an aspect of globalization (Business Council of Australia, 2004) that has progressively expanded by including trade in agriculture, manufactures, and services. Globalization’s progress has been lubricated by reductions in protection and regulation, and advances in technology exemplified by the World Wide Web.

In the 1970s and 1980s, manufacturing’s migration to the Third World caused much First World angst. This migration was caused by improvements in communication (exemplified by the fax machine, cheaper and more reliable international phone calls, and cheaper and better travel), lower wage costs, and lower transport costs (exemplified by the container). Better control systems exemplified by information technology, total quality management, and just-in-time made it easier to specify and monitor manufacturing processes. Increased Third World literacy was perhaps a contributing factor. Bronfenbrenner and Luce (2004) and Bardhan and Kroll (2003) report on the transfer of manufacturing from the United States to countries such as Mexico, China, and India; the rate of transfer increased between 2001 and 2004, and the lower cost of manufacturing in Third World countries offset the extra costs of transport and managing at a distance (Bronfenbrenner & Luce, 2004). Conventional wisdom is that more skilled aspects of manufacturing such as product design and market analysis could be retained in America, but Bardhan and Kroll (2003) note that foreign manufacturers’ skills constantly improve.

Agriculture

services

Agricultural products and minerals have long been obtained by First World countries from overseas. Blainey (1966) points out that, when

A wide variety of services is being, or could be, sourced more cheaply from low-wage countries, exemplified by India, than from the First World.

a historical perspective

90

Offshoring

Some services commonly offshored are: call centers, software development, product development, and back-office functions such as entering transaction data. The contribution of Indian programmers toY2K may have been an icebreaker to treating offshoring as a standard business procedure. As shown below, the offshoring market’s rapid growth is explained by its benefits to business.

rEasOns FOr using OuTsOurcing Outsourcing is defined as “having work that was formerly done inside the organization performed by an external organization” (Beaumont & Sohal, 2004, p. 689) or “the act of transferring some of a company’s recurring internal activities and decision rights to outside providers as set forth in a contract” (Greaver, 1999, p. 3). Perhaps illogically, the term is usually applied to services, not manufacture of components, and to continuing business functions, not projects. Lonsdale and Cox (2000, pp. 445-449) summarize the history of outsourcing, noting that it has supplanted once fashionable enthusiasms for conglomeration, horizontal integration, and vertical integration. Offshoring is having business processes performed overseas, primarily to exploit low labor costs; it conventionally includes wholly-owned overseas subsidiaries. The terms client and vendor are the firms respectively obtaining and supplying services through an outsourcing agreement. In this chapter, the archetypal client and vendor are American and Indian firms respectively (for brevity, the term “firm” encompasses all organizations, profit and non-profit). The client’s customers may be affected by offshoring. Coase (1937) asked why, given that the market allocates resources efficiently, do firms exist? There are several answers: Some assets (such as a large oil refinery) are immobile, have high fixed costs and low variable costs, have a narrow

range of applications, and have few or no external potential buyers or sellers of inputs and outputs. Such assets are inoperable without a cluster of peripheral assets and high levels of skill and knowledge in the firm and its suppliers. There is no perfect market for such assets; investment in them is only practical in a planned environment that provides a guaranteed market for a high volume of very specific outputs and guaranteed supply of specific components. Information technology has weakened some of these reasons (applicable mostly to physical processes). In particular, immediate, accurate, and convenient transfer of data among organizations at nearly zero marginal cost enables data and information processes (interpreted broadly) to be performed out-of-house. A related question is: “Why do firms choose to outsource some activities and retain others?” There are myriad reasons (see Table 1 and Table 2), but outsourcing is fundamentally a compromise between vertical integration (associated with cumbersome hierarchies and bureaucratic procedures) and reliance on market mechanisms. The latter entails administrative costs (identifying appropriate vendors and verifying their competence, communicating changing requirements to them, providing feedback, and monitoring their performances), communication costs (transferring data and information between vendor and client), and risks (of vendors failing or being unable to meet specifications, or clients failing to pay). Deciding whether to outsource depends on comparisons of the long-term costs, benefits, and risks of different modes of supply. A long-term outsourcing relationship with a trusted vendor may be preferable to securing supply by backward integration, or developing or retaining an in-house capacity. An organization will always outsource some activities (the supply of water and electricity), but in-source others such as employee assessment or strategic planning.

91

Offshoring

Table 1. Reasons for adopting outsourcing Reason

Comment

Reduce processing costs

By accessing lower input costs, economies of scale, or expertise

Focus

Outsource non-core activities and concentrate on areas of competence. Identifying core activities may not be straightforward (Quinn & Hilmer, 1994).

Access expertise

On taking responsibility for a client’s human resource management, a human resource executive consultant opined that she expected to cut costs by between 20% and 50% by using proven systems and applying experience without lessening service quality (personal communication, March 2004). Vendors are advantaged by knowing about their industry’s costs and service quality standards. Client function managers may not know that their costs exceed the industry average.

Avoid internal cultural differences

The IT department having anomalous working conditions and compensation (attributable to the need to retain competent staff) may cause resentment among other employees.

Financial and cost restructuring

Outsourcing can be used to manipulate cost structures and cash flows. Instead of purchasing delivery vehicles (a capital cost), outsourcing can be used to re-express deliveries as an ongoing expense.

Benchmark internal operations

It is very difficult for top management to determine whether the firm’s IT department is as efficient as those of their competitors. Outsourcing some IT functions may give some insight.

Eliminate an unsatisfactory department

Top management may be dissatisfied with the IT department and/or feel unable to control it. Relations between IT and other departments may be so strained that the best course is to close down the department and rely on vendors. The mere threat of outsourcing may improve performance.

Uneven resource requirement

It may be economic to meet base load for call center services or delivery from the firm’s own resources and use outsourcing to meet peak or unanticipated demand.

Fractional resource requirement

A small firm without enough demand to employ a lawyer full-time will outsource its legal requirements.

Risk avoidance

Firms can avoid financial uncertainty by using a fixed cost per transaction. If a new computer system is proposed, management may prefer to eliminate risk by accepting an outsider’s quote than have the work done in-house and risk time and cost overruns.

Careers

A firm with a small IT department will not be able to offer careers in IT, and may therefore be unable to retain competent IT staff. It may be difficult for managers to assess the performance of the IT department.

Avoid legal constraints

Offshoring, especially to Third World countries, may make it possible to avoid the costs of First World legislation pertaining to pollution, unionization, discrimination, or work practices. This is best exemplified by the U.S.’s rendition of prisoners.

Ideology and fashion

The current Australian government has an ideological commitment to outsourcing, opining that the private sector is intrinsically more efficient than the public sector. Offshoring may be the “flavor of the month” among executives.

Tangible Costs and Benefits of Offshoring The prime motivation for offshoring is lower labor costs. India has a huge pool of graduates, especially IT graduates, for whom a job as a call center operator or programmer compares well with other opportunities. The consensus is that Indian labor costs about 15% of U.S. labor (see Table 3). There is some indication that Third World workers are more motivated, harder working, and more

92

productive than their First World counterparts (Dutta, Lanvin, & Paua, 2003). Costs in India especially may increase in response to demand and because of increased congestion and operating costs, for example, in Bangalore. McKinsey’s (2003) analysis of the effect of offshoring on cost components is summarized in Table 4 and discussed as follows. Although labor savings dominate, offshoring changes other costs.

Offshoring

Table 2. Reasons for not adopting outsourcing Reason

Comment

Dependence

Outsourcing a critical business function may make the client uncomfortably dependent on the vendor. The client should ensure that, in extremis, a critical process could be resumed in-house.

Confidentiality

Keep confidential data in-house. The dangers of misuse are multiplied if data is available to two organizations.

Intellectual property

It may be strategically disadvantageous to give other firms access to intellectual property or learning opportunities. An American automotive firm engaged a Japanese firm to manufacture carburetors. The arrangement was satisfactory in the short-run. However, the Japanese firm used this opportunity to develop design and manufacturing expertise, eventually becoming a formidable competitor.

Loss of distinctive competencies

Outsourcing may atrophy in-house skills. A firm that outsources stimulating legal work or systems development may not be able to attract or retain creative staff.

Loss of flexibility

A three-year outsourcing contract may reduce the ability to adjust to changes in the client’s environment or to exploit new technology.

Personnel and change problems

Staff made redundant by outsourcing may have to be dismissed or redeployed. This may create anxiety among remaining staff.

Information asymmetry

A practiced vendor has the experience to accurately assess the cost of performing an outsourced business process and estimate how technology will affect that cost over time. A less well-informed client may be disadvantaged in negotiation.

Project management risk

Poor methodology (especially in specifying requirements and failure to detect that the proposed vendor is incompetent or unscrupulous), negotiation, or monitoring may result in project failure.

Cultural differences

May create misunderstandings and communication failures

Negotiation difficulties

The operation is so complex that it is impossible to agree on and codify performance criteria.

Complexity

A computer application may be so interwoven with other applications that it cannot be separated out and handed to a vendor.

Table 3. Comparative costs of different skills ($U.S.) Reference (McKinsey & Company, 2003)

Skill or task

Relative costs ($U.S.)

Software development

“$60/hour in the U.S ... $6/hour in India” (p.1)

Data entry

$20/hour in U.S., $2/hour in India

(Field, 2002)

Programmer

Salaries $63,000 US, India $5,850.

(Overby, 2006)

Programmer

The average salaries of programmers in 26 countries from Asia and the Far East, Europe and Africa, and the Americas are given. Some Asian and ex-communist countries have very low programmer salaries.

(Neelakantan, 2003)

Medical procedures

“Open heart surgery ... (could cost up to) $150,000 in the USA; in India’s best hospitals, it could cost between $3,000 and $10,000”, “Dental, high and cosmetic surgeries in Western countries cost three to four times as much as in India.” (p.54) Citizens can avoid lengthy delays by having procedures performed in India.

(Cronin, Catchpowle, & Hall, 2004, p. 18)

Not specified

“ ... low cost labour offshore, typically 20% of UK levels.”

93

Offshoring

Table 4. Offshoring’s effect on costs Component

Increase (+) or reduction (-) in costs

Labor

-60 to 65%

Additional communication

+5 to 10%

Additional management

•

•

•

94

+5%

Consolidations and standardization

-6 to 10%

Skills and training

-2 to 3%

Task re-engineering

-5 to 7%

Economies of scale

-3 to 5%

Process re-engineering

-15%

Net effect of offshoring

-65 to 70%

Greater communication and management costs: Communication costs are dropping precipitously (Edwards, 2004), since optical fiber’s enormous capacity and nearly zero intrinsic marginal costs are independent of distance. Telecommunications costs are likely to become negligible within 10 years. Offshoring entails executive travel and accommodation, executives distracted from other duties, and an increased likelihood of illness. When establishing an offshore outsourcing arrangement, the search and transition costs are higher than for onshore outsourcing. However, once a relationship is established with a reputable Indian vendor, the cost of managing and monitoring the relationship may be less than anticipated. Large Indian vendors such as Infosys, Wipro, and Tata are practiced and competent. Consolidation and standardization: Large organizations, especially those growing through takeovers, often inherit a variety of administrative systems. Different locations and departments tend to resist central office’s attempts to impose uniformity. Offshoring a business process may reduce costs by forcing standardization. Training and enhanced skills: Consolidation and more employees make improved methods of employee selection and monitoring, and specialized training more economi-

•

•

cal. The outsourcing contract may specify employee selection criteria and skills to be taught. Changes in scope: Lower processing costs may allow changes in the tasks and the scope of tasks undertaken. For example, it may now be economic to accept orders that were unprofitable when administrative costs were higher, or to pursue small debts formerly written off. A greater range of language skills may allow a call center to service more countries. Process reengineering: The different costs of labor and different skills available in First and Third World countries may allow different parts of a process to be located in different places so as to exploit cheaper labor or available skills. Lower labor costs may imply less capital-intensive technology. Digital x-ray images taken in First World countries may be transmitted electronically to Third World countries where the analysis is done and recorded, with the reports then being returned electronically to the originating doctor for discussion with the patient. Eyeglasses prescribed in New York may be manufactured in Mexico. Loan applications and insurance claims originating in New York may be assessed in New Delhi, with reports being returned to consultants for discussion with clients. Architectural concepts

Offshoring

•

•

developed in Australia were translated into blueprints by Indonesian draftspeople (personal communication, September 2004). Economies of scale: Offshoring often results in the establishment of large operations in Third World countries. Most business operations, exemplified by the call center, have fixed (communications, selection, and training procedures, design of dialogues, and software) and variable cost components. A 1,000-seat call center is not twice as expensive as a 500-seat center. External: There are other tangible costs and benefits relevant to offshoring. There may be a difference between the First and Third World in the cost of land, equipment, and premises. Taxes (on property values, labor costs, inputs, and profits), the cost of inputs and services such as electricity, water, and insurance may vary among countries and regions. Some governments may offer

inducements such as tax relief to attract foreign business.

growth of Offshoring The fundamental reasons for the explosive increase in offshoring are that technology makes India’s lower costs accessible from the First World and has removed the barriers that protected internal departments from external competition. For example, payroll data can be transferred to a vendor instantly, accurately, and at a nearly zero marginal cost that is independent of distance. Some evidence for the growth of offshoring is given in Table 5.

an Offshoring methodology There are several interrelated decisions that have to be made when deciding to offshore the whole or part of a business process. A fundamental

Table 5. Evidence of the growth of offshoring (McKinsey & Company, 2003, p. 5)

“Offshoring is expected to grow at ... 30 to 40% per year over the next five years.” “Forrester ... the number of U.S. jobs offshored will grow from 400,000 to 3.3 million by 2015.”

(National Computing Center, 2004, p. 3)

“Growth in offshoring has been in the region of 30% in monetary terms ... ”

(Dieffenbach, 2003)

“A recent report by TowerGroup… forecasts a 46% annual growth rate in U.S. financial companies’ use of offshore outsourcing ... ”

EBS (www.ebstrategy.com/outsourcing/trends/ statistics.htm) contains quotes from many sources, some of which are repeated here.

“International data Corporation (IDC) has predicted that the global IT-enabled services market will account for revenues of $1.2 trillion by 2006.” “Meta group predicts that offshore outsourcing will grow by more than 20% annually ... from $7B in 2003 to $10B in 2005.” “McKinsey and others forecast that the Information Technology and Enterprise Solutions (ITES) market in India will reach $142B by 2009 and that it would cost $532B to provide those services in the USA.” “According to WR Hambrecht, the offshore PPO market is expected to grow at a CAGR of 79% through 2008. The offshore IT service market is expected to grow at a CAGR of 43%.”

(Information Technology Association of America, 2004, p. 1)

“Spending for global sourcing of computer software and services is expected to grow at a compound rate of almost 26% p.a. ... ”

95

Offshoring

question is what functions should be offshored. Subsequent but related decisions depend on the organization’s strategy and objectives (broadly classifiable as lower costs, superior service, or flexibility); the attitude to risk and public criticism; its relationship with its workforce; and the intensity of competition. Intense competition may force the organization to use offshoring to reduce costs regardless of other considerations. We summarize the methodology and describe the steps in detail only where offshoring (as opposed to on-shoring) raises additional issues. Many writers have proposed overviews, methodologies, checklists, and lists of critical success factors. Some of these are Ho, Torres, and Vu (2004); Keane, Inc. (2004); Ker, Murphy, and Valle (2000); and National Computing Center (2004). Cronin, Catchepowle, and Hall (2004) compare the costs, benefits, and risks of implementing and using offshoring and outsourcing arrangements. Moore (2002) discusses the risks, costs, and rewards of offshoring. Several writers, for example, Overby (2003a) and Ho, Torres, and Vu present successful or unsuccessful examples of offshoring.

The Outsourcing cycle The term “outsourcing cycle”, mentioned by Beaumont and Sohal (2004) and perhaps implicit in some texts, for example, Sturm, Morris, and Jander (2000), denotes a sequence of stages into which an outsourcing project can be broken; analogous approaches are espoused by Franceschini, Galetto, Pignatelli, and Varetto (2003) and Momme (2002). The concept is often used in industry. In common with other methodologies recommended for change projects (commonly pertaining to quality improvement), and software development projects; outsourcing methodologies tend to emphasize the broader business aspects such as ascertaining business requirements, motivating staff, and monitoring the anticipated performance improvements. Cyclicity is often

96

emphasized: Once a project is completed, other change opportunities should be sought. The outsourcing cycle presented here is derived primarily from project management methodologies and comprises the following steps: • • • • • • • •

Identify a process that might be advantageously offshored. Define objectives. Choose a vendor. Negotiate a service level agreement (SLA). Implement the agreement, that is, transfer the process to the vendor. Monitor vendor performance. Incrementally modify the agreement. Renew/cancel the arrangement.

Identify a Process That Might be Advantageously Offshored Only some kinds of work can be taken offshore but the scope is increasing, especially as overseas workers acquire new skills, communication costs decline, and new technology is deployed. Customer relationship management, telephone selling, and medical tourism (see below) exemplify emerging applications. Several writers give selection criteria, identify suitable processes suitable for offshoring, and give examples of offshoring (McKinsey & Company, 2003; National Computing Center, 2004; Robinson & Kalakota, 2004). Classic applications are: call centers and help desks; back-office operations that have not been wholly automated (these include processing applications for loans, mortgages, and insurance claims; debt collection, processing employee expenses (Edwards, 2004); data entry, analysis of x-ray images; creating databases of, for example, newspaper articles); architectural or engineering design; and computer programming. It may be appropriate to offshore running legacy IT systems, releasing domestic staff for work on new systems (National Computing Center, 2004).

Offshoring

Edwards (2004) identifies three layers of services. The top layer, comprising services tailored to individual businesses, is unlikely to be outsourced. The bottom layer, comprising processes common to all business, is very likely to be outsourced. The thick middle layer comprises services that are capable of being standardized, then outsourced. Enterprise resource planning (ERP) packages such as SAP, are accelerating standardization and the potential for outsourcing. That standardizing internal processes may facilitate accessing lower costs through offshoring is itself a force for standardization (Gere, 2003). Karmarkar (2004) notes the huge size, increasing automation of, increasing self-service in, and growth of the global services market, and suggests that certain categories of services can be offshored. A complex service can be expressed as a sequence of services, some of which require face-to-face contact (e.g., doctor and patient), but some of which might be automatable and executable offshore. The potential is enormous; an authority estimates that the world’s companies spend about $U.S. 19 trillion on expenses, of which only $U.S. 1.4 trillion is outsourced (Edwards, 2004). ADP (a firm providing payroll services) paying one in six private sector American workers is a harbinger. There are a number of constraints on what processes should be offshored. Processes such as sales calls or medical consultations that ostensibly require face-to-face contact cannot be offshored. However, many of the back-office processes (such as identifying potential clients or analyzing x-ray images) preceding or following a consultation can be advantageously offshored. Some transactions that used to require face-to-face contact can now be mediated by computers; many sales transactions are consummated on the Web. It is possible for an Indian salesperson to present to an American customer by video link. Quinn and Hilmer (1994) suggest that noncore processes and common business processes should be outsourced, and that processes giving

strategic advantage be retained and improved, although identifying core processes may not be straightforward. Mechanical aspects of business processes can be outsourced provided the client precisely defines the work which vendors do and monitors vendors’ performances. Customer relationship management manifest in call center services can be outsourced provided that the client precisely defines and controls the selection criteria and training used and the dialogues that call center staff are to use on its behalf. Organizations might be reluctant to outsource, let alone offshore, some business processes. Obstacles include concerns about the reduced flexibility inherent in a three-year agreement, and creating dependence on a supplier. Mechanizing processing of individuals’ tax returns might conceal opportunities for better service that would be revealed by expertise or first-hand knowledge of a customer’s circumstances. A more practical concern is that a large organization’s systems might have so many interfaces and entanglements with each other that it is not safe to run one of these systems independent of the others (see Table 2).

Define Objectives The objectives of an offshoring project should be clarified. The prime objective will probably be to reduce costs; direct and indirect, tangible and intangible costs should all be considered. Offshoring is probably a good way of reducing direct costs, but there may be long-term advantages in using offshoring to access expertise, improve quality, or strip out routine activities, thereby allowing management to concentrate on and exploit expertise (see Table 1).

Choose a Vendor Robinson and Kalakota (2004) cover this issue thoroughly. The time taken to select and become comfortable with an overseas vendor is longer and

97

Offshoring

more costly than for an onshore vendor. Large Indian vendors have front offices in the USA which may contribute to confidence. Field (2002) describes the pros and cons of using brokers to choose foreign vendors. Overby (2006) compares 26 countries offering offshoring services, noting each country’s overall rating, its geopolitical risk, English proficiency, and average programmer salary. Selection processes may be less thorough for “tactical” (mostly short-term) than “strategic” (mostly long-term) relationships (National Computing Center, 2004). Executives selecting an onshore vendor would probably have access to informal information gleaned from colleagues, the media, and acquaintances. That network will not help when selecting an offshore vendor. The possible delays and misunderstandings caused by differences in culture, time zones, and language mean that an offshore project requires more careful planning than an onshore project.

be provided, prices, performance criteria, penalties, and scope precisely defined. Negotiations between parties from different cultures (see The Effect of Cultural Differences) and countries can be impeded by: •

•

Negotiate a Service Level Agreement (SLA) A service level agreement (SLA) is a contract precisely defining the services to be provided by a vendor, and minimum acceptable levels of service; procedures for measuring performance; payments and penalties for underperformance; and procedures for resolving differences and renegotiating the agreement itself. SLAs are “formally negotiated agreements that enable IT organizations (and vendors of other services) and their customers to collaboratively identify, discuss, and manage ... service expectations” (Karten, 1998, p. 1.7). The contents and negotiation of an SLA are discussed in Beaumont (2006) and elsewhere (Anonymous, 2004; Davies, 2004; Karten, 1998; Kobitzsch, Rombach, & Feldmann, 2001; McLaughlin, 2003; Robinson & Kalakota, 2004; Sturm et al., 2000). Negotiating an SLA is vital and difficult. Only in the SLA are the services to

98

•

Language differences: The parties may have different masteries of English and different understandings of important words and technical terms; an oral “yes” may be interpreted as agreement, but intended as an acknowledgment. Ironical or facetious comments may be interpreted literally. English is becoming the universal business language, and non-English-speaking countries may have fewer offshoring opportunities (Karmarkar, 2004; McKinsey & Company, 2003). Misinterpreted body language: Asians consider Americans staring at a speaker to be rude and aggressive. Indians’ body language may wrongly suggest to an American that an audience is uninterested. A nod may be interpreted as agreement whereas “please continue” is intended. Modalities and signals may be misunderstood or misinterpreted: The other negotiating team may not comprise decision-makers but minions who take instruction from decision makers between sessions. The negotiation process may be an entertainment for one party, much more interesting than routine work. Handshakes may signify agreement and commitment in one culture, mere polite acknowledgment in another. Signing a document may signify commitment in one culture, a form of noting progress in another. Americans may be baffled by making no progress for several weeks, then experiencing a sudden breakthrough when an Asian team reaches consensus. Americans may be frustrated by Asians (perhaps prudently) insisting on a perfect document rather than agreeing on

Offshoring

broad principles and letting subordinates and lawyers fill in the gaps. Asians may resist American “man-to-man” approaches, hiding behind formal manners, and attempts to resolve issues behind the scenes.

Modifying, Canceling or Renewing the Agreement The associated negations may be impeded by distance and the cultural differences affecting negotiation.

Transfer the Process to the Vendor The differences between offshoring and onshoring are not marked, except that the number of employees displaced by offshoring back-office processes or call centers may be larger than usual with less opportunity to move to the vendor’s employ or be transferred to other of the client’s functions. Gere (2003) cogently notes that effective exploitation of an offshoring relationship may entail changes to the client’s structure, strategy, systems, culture, and staffing. The vendor may require the client to use the vendor’s forms, software, and procedures. Outsourcing requires managers to get results through negotiation and co-operation with partners instead of instructing subordinates. New internal skills will be required, for example, in writing and negotiating service level agreements with vendors. If the IT function is outsourced, a small IT group must be retained to monitor and liaise with the vendor, monitor advances in technology, anticipate future IT needs, and negotiate the contract’s renewal or the reabsorbing of outsourced processes.

intangible costs and risks of Offshoring Some hidden costs and risks of offshoring, noted by Pinto (2005) and Overby (2003b) are:

Geopolitical The previously hospitable host country government could be overthrown, introduce hampering legislation, restrict repatriation of profits, or yield to xenophobia directed at foreigners or their “lackeys.” Terrorism and crime may be less well controlled and protection money may be extorted. The infrastructure, especially water, electricity, or telecommunications system, may be unreliable, and travel and accommodation may be below Western standards. The social environment may make it difficult to find First World employees willing to stay on-site for long periods. Currency fluctuations may make the whole operation more expensive or cheaper than planned.

The Effect of Cultural Differences Monitor Vendor Performance There should be no difference between offshoring and onshoring so far as tangible performance measures are concerned. Because the operation is distant, it may be slightly more difficult to monitor intangible measures such as the recruitment and training processes used that may have a long-term effect on service quality. Different cultures may have very different understandings of, for example, the term “empathy” and how much empathy help call center operators should display.

Cultural differences that might impede efficiency and the client’s knowledge have often been noted. We list some often cited cultural differences, the effects they may have, and measures that can be taken to minimize their effects. Many Asian organizations are as conscious of cultural differences as their Western counterparts and take their own steps to lessen their effects. Davies (2004) and Kobayashi-Hillary (2005) each devote chapters to Indian culture and living and traveling in India. Brett and Gelfand (2005) illustrate the fruitfulness of culturally-sensitive action. Cultural differences

99

Offshoring

can be discussed using five dimensions identified by Hofstede and Bond (1988): •

•

•

•

100

Power distance measures the degree of inequality between people in the country’s society. High Power Distance may imply reluctance to openly disagree with superiors. If disputing a superior’s statements is considered rude, progress and status reports may be distorted. Programmers who regard systems analysts as hierarchically superior may be reluctant to dispute or discuss program specifications handed down. Individualism reflects the balance between individuals’ rights and responsibilities (America) and respect for groups (Asia). Asians usually have a greater regard for group processes. It is asserted that a group of Asian workers will not accept a change until it has been accepted by the whole group. Implementation of the change will then proceed rapidly. North Americans, used to allocating responsibility to individual project leaders, may be frustrated with Asian concern for group processes and the apparent lack of progress. Masculinity is high if the society reinforces traditional models of male achievement, control, and power. Interactions between men and women, especially of men with women in authority, or members of different races, castes, or religions may be especially fraught if masculinity is high. North Americans are conditioned, perhaps even compelled, to frame issues in terms of tangible criteria, especially cash flow. Other cultures may frustrate Americans by treating the wellbeing and morale of employees and their families as equally important. Uncertainty avoidance reflects the level of tolerance for uncertainty, risk-taking, and ambiguity.

•

Long or short-term orientation reflects the degree to which the society habitually uses long or short-term time horizons.

Other cultural differences may arise when socializing with foreigners. Westerners may be unused to blatant corruption or the influence of patriarchs in small organizations.

Security and Confidentiality The standards pertaining to securing company assets and customer confidentiality, implemented and monitored at home, may not apply or be as well policed in other countries. Even if the procedures are as good as those prevailing in the First World, it takes an effort to verify this. Dieffenbach (2003) notes that potential security, disaster recovery, and privacy risks are greater for offshoring than onshoring.

Information Asymmetry American clients may be disadvantaged when negotiating with an Indian vendor. The vendor has knowledge of local conditions such as input prices, possible changes in government policies, and infrastructure that the client cannot readily obtain. This may result in the vendor retaining a disproportionate share of cost savings. The client may find monitoring service levels provided to its customers (e.g., by a call center) difficult. The vendor may save money by employing people with less competence than was contracted or compromise the client’s data by subcontracting some aspect of the client’s task to an unreliable organization. In 2003, a medical transcriber in Pakistan threatened to post patients’ records online unless the University of California San Francisco (UCSF) Medical Center paid the wages owed to her by the U.S. subcontractor that had sent the work to her. Most importantly, the client, not plugged into the local network, may not be

Offshoring

forewarned by rumor that the vendor is about to go bankrupt.

Intangibles and Offshoring Some other intangible costs and benefits of offshoring should be noted: •

• •

•

•

The need to retain some backup of data and skills at home: If the offshoring deal comes unstuck, could the client resume the in-house operation, or have the necessary skills eroded? Offshoring may expose corporations to two sets of laws. Major customers may be concerned to find that their sensitive data are stored offshore. The cost of dealing with displaced employees (transferred to other departments or dismissed?). Unpopularity caused by the client “exporting jobs” and possible domestic boycotts.

mOdEs OF OFFshOring Deciding whether and how to offshore a business process entails making several interrelated decisions. Assuming that a business process is being considered for offshoring, decisions have to be made on what mode of offshoring should be used. The three dimensions are: • • •

Location: Farshore, nearshore, onshore, or in-house Ownership: In-house, insource, outsource, or joint venture The degree of control granted to the vendor

Location and ownership decisions are independent, low labor costs can be exploited by establishing a wholly-owned operation in a foreign country,

and a vendor could use the client’s premises and/or equipment. We simplify discussion by assuming that the process is currently located in the USA and owned and operated by the client.

location Location is the physical location of the operation. Farshore signifies a location (classically India) with markedly lower labor costs but potential difficulties exemplified by differences in language, culture, and infrastructure. Nearshore means a location exemplified by Canada or Australia with lower labor costs but a similar business culture and language. Onshore means that the operation is performed in the home country, obviating cultural and language difficulties. An in-house operation is conducted on the client’s premises; possibly by a vendor. Onshore is obviously necessary for processes entailing face-to-face contact with customers and some services such as delivery or physical security. The National Computing Center (2004) defines offshoring and several terms used in this context. Cronin, Catchpowle, and Hall (2004) suggest a typology and enumerate the differential costs and benefits of onshoring and offshoring. Kennedy and Kolding (2003) discuss the pros and cons of local, farshore, and nearshore sourcing. They usefully distinguish between short-term arrangements (e.g., creating a computer system) and long-term engagements (running a business process). The Business Council of Australia (2004) gives several examples of nearshoring to Australia.

Ownership Regardless of location, the process may be retained in-house, in-sourced, outsourced, or run as a joint venture. Gere (2003) details different possible commercial arrangements relating the vendor and client and location, and proposes a framework for identifying processes that should be offshored.

101

Offshoring

General Electric established its own call center in India, subsequently deciding to sell it. By establishing its own software house in China, Microsoft exploited lower labor costs, choosing not to use a vendor with local knowledge as its intermediary. The British companies, Standard Chartered Bank and Prudential, successfully established their own processing centers in India, enjoying control of critical processes, access to abundant skilled labor, and significant cost savings (Preston, 2004). Preston argues that the benefits of “do-it-yourself” are underestimated and that it is unnecessary to share profits with a vendor. Insourcing is the formalization of a pseudocommercial supply relationship between two departments of the same organization. The supplying department commits to agreed performance criteria. Payments and penalties are expressed in internal currency and may affect executives’ remuneration. In some cases, a joint venture between the client and vendor is appropriate. The design and installation of a major new computer system may require intense day-to-day cooperation between both parties. It may be impossible to specify the system requirements in advance; they emerge from the vendor’s investigation of the client’s systems and requirements, and on the client learning from the vendor the potential of new computer systems. Especially if the vendor will gain valuable experience and an enhanced reputation from a new and challenging project, it may be appropriate for the parties to share risks and rewards by creating a joint venture in which they have (usually) equal shares. Industry members might decide to set up their own subsidiary offering common services, most frequently lobbying and defining industry standards.

degree of control Outsourcing comes in a variety of flavors that in part reflect the day-to-day control the vendor retains and the degree of cooperation required.

102

Strassmann (1997) defines out-tasking as outsourcing in which the client designs and retains full control over the business process, the vendor simply providing the resources (usually labor or computer resources). Out-tasking is exemplified by a call center operation in which the client defines the scripts which the operators must follow. General Electric’s Trading Process Network (TPN) entails putting GE’s tender documents on the Web, in effect precisely defining, that is, outtasking, work that was often offshored. In this case, offshoring was not essentially different from onshoring. When distance, language, and culture are obstacles, out-tasking to a foreign entity may be less demanding. Contrastingly, a client may “black box”; that is, grant the vendor full control over how the operation (delivery, security, back-office) is performed (exploiting the vendor’s expertise) and simply monitor the amount and quality of work done.

Personal Offshoring Offshoring is usually treated as an option only for organizations. However, cheap communications and cheap travel also empower individuals. Banally, computer-literate consumers can purchase an increasingly wide range of goods and services (e.g., gambling and entertainment) non-locally from Amazon.com or E-bay, intensifying competitive pressures on local businesses once protected by distance. Duty-free shops could be construed as examples of offshoring. More controversially, consumers can avoid some of their country’s legal restrictions and imposts by using the Web to acquire pharmaceuticals, music, and pornography, and/or facilitate self-diagnosis of real or imagined ailments. The most striking example of personal offshoring is the recent emergence of “medical tourism” (Bradley & Kim, 1994; Colvin, 2004; Neelakantan, 2003). Customers save money (see Table 3) and avoid lengthy queues by having medical procedures performed overseas. It would

Offshoring

be technically possible for customers to enter symptoms at a Web page, have measurements of blood pressure, temperature, and so forth, done locally by paramedics, and receive diagnoses written by Indian doctors. It seems likely that Americans will increasingly obtain otherwise expensive professional services such as legal advice and accountancy from overseas.

pOliTical and sOcial implicaTiOns privacy and security issues The U.S. has a number of laws (e.g., the GrammLeach-Bliley Act) that allow corporations to share customers’ private data, provided certain criteria are met. Most of these laws were written before offshoring became prominent and do not forbid offshoring of individuals’ financial or health data. In Ohio, allegations that citizens’ birth records had been sent to a facility in Sri Lanka led to the U.S. company that had offshored the work being barred from state contract work for 15 months. A number of U.S. state legislatures have proposed laws preserving employments by restricting offshoring, but few such proposals have been enacted. “European consumers are afforded considerably greater protection (than U.S. citizens) by a European Union (EU) law that permits personal data to be sent offshore only to countries whose privacy laws have been deemed to provide equivalent privacy protections and that have been found to have strong enforcement capabilities. Because most countries cannot meet these ‘safe harbour’ requirements, European jobs that involve the handling of confidential information have been offshored at a far slower rate than in the United States” (Public Citizen, 2006).

Job creation and destruction The 1970s and 1980s saw a contraction, or “hollowing out,” of manufacturing in First World countries (Bronfenbrenner & Luce, 2004). Price differences and data mobility imply that, on the face of it, white-collar jobs will move from First to Third World countries. Not just clerical and call center jobs are threatened. It is reasonable to believe that work such as architectural drafting, product design, legal analysis, financial and market analysis, indexing of newspaper articles, programming, and systems design could be carried out in low-wage countries. Professional work can be loosely defined as transforming and analyzing data, or as obtaining information from data; any work done primarily on a PC can be done in a low-wage country. Some labor markets are now unconstrained by national boundaries; an emerging global market, for example, for English-speaking call center operators, will supplant national markets and reflect converging remuneration for U.S. and Indian workers with identical skills. Many consultants and interested parties have forecast the effects of offshoring on the First World job markets (Bardhan & Kroll, 2003; Business Council of Australia, 2004; Mann, 2003; McKinsey & Company, 2003). McKinsey argues that offshoring will increase the U.S. standard of living; $1 spent offshore will generate direct and indirect net benefits conservatively estimated at $1.12-$1.14, but the benefits of spending onshore are not given. EBS (2005) cites the following opinions: •

•

“By 2015, Forrester research estimates that as many as 3.3 million US jobs and $US13 6B in wages could be moved to countries such as India, China, and Russia.” “According to Deloitte consulting, 2 million jobs will move from the United States and Europe to cheaper locations in the financial services business alone. The exodus of

103

Offshoring

•

service jobs across all industries could be as high as 4 million.” Gartner opines that “500,000 of the 10.3 million U.S. technology jobs could move offshore in 2003-2004.” The Information Technology Association of America (2004, p. 1) opines that “In the software and services area, the economy is expected to create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 jobs without it. Of these 516,000 new jobs, 272,000 are expected to go offshore, while 244,000 are expected to remain onshore.” The report details essentially beneficial effects on growth, inflation, incomes, job markets, and interest rates.

The effect on job markets can be best understood using narrow and broad perspectives.

Narrow Perspective This perspective considers the direct effects only. Assume that a firm transfers work from the USA to India, exploiting 80% labor cost reductions. U.S. workers and shareholders in supplanted suppliers lose jobs and income. The benefits are transferred to Indian workers through better working conditions and remuneration and to the clients’ customers and shareholders. In competitive markets, customers will enjoy most of the benefit as lower prices and/or better quality. This scenario perhaps characterizes the cutthroat U.S. auto market.

Broad Perspective The broad perspective considers the indirect as well as the direct effects. Some indirect effects are: •

104

Stakeholders in Indian vendors spend their increased income. This will have a multiplier

•

•

effect on the Indian economy, stimulating imports some of which will come from the U.S., increasing employment. For example, more Indians will be able to afford American holidays. American consumers will have their quality of life increased by cheaper and better quality services. Clients’ shareholders will enjoy increased income, and consumers will spend a high proportion of the time and money saved on other goods and services. The extra competition will benefit consumers by limiting inflation and eroding the excess profits and restrictive practices of some industries hitherto protected from foreign competition. The medical and legal professions might suffer most.

The U.S. job market is dynamic. Edwards (2004, pp. 12-13) notes that most new technologies have been perceived as a threat to employment, but that new occupations emerge. “ ... Who would have guessed that America ... now has 139,000 psychologists, 104,000 floral designers, and 51,000 manicurists and pedicurists?” It is important to realize that a serious socio/ political problem remains (surfacing in the 2004 U.S. elections). The benefits of offshoring for the U.S., although large, are thinly spread and not immediate. The considerable costs of offshoring are shared among a comparatively few employees who lose well paid and stimulating jobs and may find it difficult to find equally satisfying employment. The adjustment process is likely to be more prolonged in other countries (e.g., Europe) with more protected and rigid labor markets. Firms have been understandably reluctant to admit that they are offshoring. It is tempting to fudge the issue by outsourcing work to an ostensibly domestic vendor and taking care not to find out where the work is actually performed.

Offshoring

an ausTralian casE: QanTas We illustrate some of the complexities of offshoring by summarizing an Australian company’s as yet tentative steps. Qantas is Australia’s dominant airline company. To reduce costs, it is threatening to offshore activities traditionally performed in Australia. Some major offshoring decisions were proposed early in 2005. The company has to evaluate the cost savings, transition costs, the costs of possible strike action, and the possible loss of reputation that would be caused by “exporting” Australian jobs. Some characteristics of Qantas and its environment are: Qantas does not operate in a perfect market, for example, the Australian government protects Qantas’s share of the lucrative AustralianNorth American market, but insists on Qantas being Australian majority-owned (restricting its ability to raise capital). The company is locked into long-term contracts with pilots and cabin crew who are probably receiving compensation higher than they would in a perfect market. In common with other airlines, Qantas has to cope with air travel becoming commoditized and extremely competitive (there is excess capacity, and the failure of some U.S. airlines is symptomatic). Threats of terrorist activities, airport congestion, and SARS have deterred travelers. Although Qantas dominates the Australian domestic market, it would like to obtain economies of scale by merging with other airlines (e.g., Air New Zealand), but it has been frustrated by governments and regulations enforcing competition. Qantas has taken some steps. Better information and accounting systems have facilitated better monitoring of costs (accentuating the competition between internal and external suppliers). Partly to circumvent extant agreements with unions, Qantas has established Jetstar, a low-cost airline. A new generation of aircraft will substantially reduce passenger-mile costs.

Offshoring in an airline is less visible than in other domestic businesses. Aircraft receive between-flight maintenance wherever they land, crew must be accommodated overseas, and some food is loaded overseas. In 2002, Qantas’s CIO stated that [the] offshoring of technology work to India was “a strategy for survival.” (Hayes, 2002, p. 36) In January, 2005, Qantas released plans to move more than 7,000 jobs offshore. These initiatives included proposals to: •

•

•

Hire overseas-based cabin crew who would be paid less than their Australian counterparts. This provoked Australian employees, but it has obvious benefits. The outcome was an agreement with the flight attendants’ union for some staff to be based (more cheaply) in London. Have non-Australian contractors supply and load more passenger meals. This issue is not yet resolved. Have aircraft maintenance performed overseas. The outcome was some consolidation of maintenance operations and an agreement with the union on productivity targets. The union proposed cost savings that contributed to the maintenance being done in Australia.

It is not clear (and scarcely matters) whether management’s ostensible intent to offshore was an ambit claim used in negotiations with unions or a firm intention. The issues of offshoring information technology and catering are in abeyance. Qantas recently agreed to outsource $A1.4B worth of Information Technology and data center services to IBM and Telstra (Australia’s dominant telecommunications company). The vendors could have some of Qantas’s work done overseas. Qantas constantly opines that it will have to continuously reduce costs to stay competitive (a claim belied by its large and growing profits and cash flows), and that offshoring is a way of obtaining drastic rather than incremental cost reduction.

105

Offshoring

This section was sourced from the Qantas Chairman and CEO’s reports at http://www.qantas. com.au/info/about/investors/annualReports, Qantas press releases at http://www.qantas.com.au/ regions/dyn/au/publicaffairs/introduction?, and reports from various Australian newspapers.

cOnclusiOn and suggEsTEd FurThEr rEsEarch summary The forces (especially access to lower wages) underlying outsourcing and especially offshoring are irresistible. Competition and customers demanding constant improvements in quality and price will force the most squeamish firms’ hands. Offshoring is the simplest and quickest way for First World firms to obtain substantial cost savings and improved service quality. Offshoring is an aspect of intensified and globalized competition (Porter, 2003), and services offshoring follows the offshoring of primary production and manufacturing. Because it will affect millions of white-collar workers who are more numerous and articulate than their blue-collar counterparts, offshoring will be a live political topic for several years. Especially pleasant (for some) and painful (for others) will be the emergence of a global market and converging remuneration, for example, for programming skills. There are many choices to be made when offshoring a business process; managerial discipline and adherence to a methodology multiply the chances of success. This chapter discusses the costs and benefits of offshoring and estimates of the offshoring market’s size and growth. The economic and societal effects of offshoring are noted. It suggests an offshoring methodology, and that more care is required when planning and monitoring an offshore relationship. There are several business models incorporating decisions on location, ownership, and degree of control that should be considered. Cultural dif-

106

ferences, some cost components, and some risks particular to offshoring should be noted.

suggested Further research Offshoring suggests several research problems. As the bibliography implies, academic research on outsourcing and especially offshoring is not proportionate to its importance to industry. This may be attributable to the research difficulties adumbrated here. Some outstanding research issues are: •

•

•

The size and growth of the offshoring market needs to be ascertained. This is difficult and expensive. Executives may be reluctant to admit that they are using offshoring or know that work offshored to an ostensibly local vendor is done overseas. An international research consortium might be appropriate. The tangible and intangible costs and benefits of offshoring to participants and broader society need to be ascertained. So too does the interaction between offshoring and organizations’ strategies and evolution. Case studies are probably the most appropriate instrument. However, a comprehensive study of one firm would require several interviews in the firm and with its vendors and/or clients; it is likely that some parties would decline participation. Low response rates would limit the generalizability of findings. Research determining the success of different methodologies and applications of offshoring is appropriate. Anecdotal evidence suggests that the relationship between vendor and client is often fraught. Typically, euphoria experienced when the contract is signed sometimes sours when unanticipated difficulties emerge; a working relationship emerges after much hard work. These difficulties can be exacerbated by geographic and cultural differences. The influence on

Offshoring

•

•

business success of the relationship between the two parties (intimate or arms-length) and its contractual basis (especially service level agreements) merits research. Statistical studies relating knowledge of a firm’s use of offshoring and financial success might be illuminating. For example, iconoclast Strassmann (1997) provides statistical evidence that heavy use of outsourcing presages a firm’s failure. The socio-political effects of offshoring merit investigation. Will they be as severe as some alarmists anticipate? What government policies would help spread offshoring benefits rapidly and widely? Will public disquiet impede free trade negotiations or fuel xenophobic political movements?

Bradley, R., & Kim, E. (1994). Loosening the reins: Autonomy boosts Cuban medical industry. Harvard International Review, 16(4), 66. Brett, J. M., & Gelfand, M. J. (2005, January). Lessons from abroad: When culture affects negotiating style. Negotiation, 3-5. Bronfenbrenner, K., & Luce, S. (2004). Offshoring: The evolving profile of corporate global restructuring. Multinational Monitor, 25(12), 26-29. Business Council of Australia (2004). Offshoring, global outsourcing and the Australian economy—continuing Australia’s integration into the world economy. Canberra: Business Council of Australia. Coase, R. H. (1937). The nature of the firm. Economica N. S., 4, 386-405.

rEFErEncEs Anonymous. (2004). Explaining offshoring/ outsourcing in India/What’s this India business: Offshore outsourcing and the global services revolution. Transnational Corporations, 13(3), 151. Bardhan, A. D., & Kroll, C. A. (2003). The new wave of outsourcing. Berkeley, CA: Fisher Center for Real Estate & Urban Economics. Beaumont, N. B. (2004). Outsourcing: A multidimensional relationship. Contract Management in Practice, 1(8), 84-86. Beaumont, N. B. (2006). An overview of service level agreements. In H. Kehal & V. Singh (Eds.), Outsourcing and offshoring in the 21st century: A socio-economic perspective. Hershey, PA: Idea Group. Beaumont, N. B., & Sohal, A. (2004). Outsourcing in Australia. International Journal of Operations and Production Management, 24(7), 688-700. Blainey, G. (1966). The tyranny of distance. Melbourne, Australia: Sun Books.

Colvin, G. (2004, December 13). Think your job can’t be sent to India? Just watch. Fortune, 150, 80. Cronin, B., Catchpowle, L., & Hall, D. (2004). Outsourcing and offshoring. CESifo Forum, 5(2), 17-21. Davies, P. (2004). What’s this India business? Offshoring, outsourcing, and the global services revolution. London: Nicholas Brearley International. Dieffenbach, J. (2003). A passport through issues in global outsourcing. Retrieved November 14, 2006 from http://library.findlaw.com/2003/ Jun/30/132840.html Dutta, S., Lanvin, B., & Paua, F. (Eds.). (2003). The global information technology report 20022003: Readiness for the networked world. Oxford University Press. EBS. (2005). Trends, statistics and perspectives 2005. Retrieved November 14, 2006 from http://www.ebstrategy.com/outsourcing/trends/ statistics.htm

107

Offshoring

Edwards, B. (2004, November 13). A world of work: A survey of outsourcing. The Economist, 1-16.

Kennedy, E., & Kolding, M. (2003). Offshore services: IDC’s view (No. R105K). International Data Corporation.

Field, T. (2002, April 1). The man in the middle. CIO US, 15, 70.

Ker, S., Murphy, T., & Valle, C. D. (2000). Mapping offshore: A new competitive landscape (No. 21645). International Data Corporation.

Franceschini, F., Galetto, M., Pignatelli, A., & Varetto, M. (2003). Outsourcing: Guidelines for a structured approach. Benchmarking: An International Journal, 10(3), 246 - 261.

Kobayashi-Hillary, M. (2005) Outsourcing to india: The offshore advantage (2nd ed.) New York: Springer

Gere, T. (2003). Accessing offshore: Options for strategies and relationships (No. 29459). International Data Corporation.

Kobitzsch, W., Rombach, D., & Feldmann, R. L. (2001). Outsourcing in India (software development). IEEE Software, 18(2), 78-86.

Greaver, M. F. (1999). Strategic outsourcing: A structured approach to outsourcing decisions and initiatives. New York: Amacom.

Lonsdale, C., & Cox, A. (2000). The historical development of outsourcing: The latest fad? Industrial Management & Data Systems, 100(9), 444-450.

Hayes, S. (2002, November 12) Taking an extra step in the airline world. The Australian, (p. 36). Ho, L., Torres, M., & Vu, P. (2004). The dynamics of outsourcing: Offshoring, insourcing, and a case study: India. Hofstede, G., & Bond, M. (1988). The Confucius connection: From cultural roots to economic growth. Organizational Dynamics, 16, 5-21. Information Technology Association of America. (2004). Executive summary: The comprehensive impact of offshore IT software and services outsourcing on the U.S. economy and the IT industry. Arlington, VA: Information Technology Association of America. Karmarkar, U. (2004). Will you survive the services revolution? Harvard Business Review, 82(6), 100-107. Karten, N. (1998). How to establish service level agreements. Randolph, MA: Naomi Karten. Keane Inc. (2004). A balanced approach to offshore outsourcing: Gain strategic improvements in business performance. Boston: Keane Inc.

108

Mann, C. (2003). Globalisation of IT services and white collar jobs: The next wave of productivity growth. Washington, DC: Institute for International Economics. McKinsey & Company (2003). Offshoring: Is it a win-win game? McKinsey Global Institute. McLaughlin, L. (2003). An eye on India: Outsourcing debate continues. IEEE Software, 20(3), 114-117. Momme, J. (2002). Framework for outsourcing manufacturing: Strategic and operational implications. Computers in Industry, 49(1), 59-76. Moore, S. (2002). Critical success factors for offshore outsourcing. Giga Information Group Inc. National Computing Center (2004). Guidelines for IT management: Planning for offshore outsourcing. London: National Computing Center. Neelakantan, S. (2003, November 6). India’s global ambitions. Far Eastern Economic Review, 166, 52-54.

Offshoring

Overby, S. (2003a, July, 2003). Inside outsourcing in India. CIO 16(1). Overby, S. (2003b, September, 2003). The hidden costs of offshore outsourcing. [Electronic version] CIO. Retrieved November 14, 2006 from http:// www.cio.com/archive/090103/money.html Overby, S. (2006). 2006 Global outsourcing guide; Risks, rewards, challanges and opportunities, country by country [Electronic version]. CIO 19(1). Retrieved November 14, 2006 from http://64.28.79.79/offshoremap/ Pinto, J. A. M. (2005). Swimming against the tide: The hidden costs of offshoring. The CPA Journal, 75(1), 9-11. Porter, M. E. (2003). Strategy and the Internet. Harvard Business Review, 79(3), 62-78. Public Citizen. (2006). Global trade watch. Retrieved November 14, 2006 from http://www. citizen.org/trade/offshoring/privacy/index.cfm

Preston, S. (2004). Lost in migration: Offshore need not mean outsourced. Strategy & Leadership, 32(6), 32-36. Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55. Robinson, M., & Kalakota, R. (2004). Offshore outsourcing: Business models, ROI, and best practices. Alpharetta, GA: Mivar Press. Shapiro, E. C. (1995). Fad surfing in the boardroom. Sydney, Australia: Harper Collins. Strassmann, P. A. (1997). The squandered computer: Evaluating the business alignment of information technologies. New Canaan, CT: Information Economics. Sturm, R., Morris, W., & Jander, M. (2000). Foundations of service level management. Indianapolis, IN: SAMS.

This work was previously published in Knowledge and Technology Management in Virtual Organizations: Issues, Trends, Opportunities and Solutions, edited by G. Putnik and M. Cunha, pp. 69-94, copyright 2007 by IGI Publishing (an imprint of IGI Global).

109

110

Chapter 1.7

Business-Related Determinants of Offshoring Intensity Shirish C. Srivastava National University of Singapore, Singapore Thompson S.H. Teo National University of Singapore, Singapore Partha S. Mohapatra Morgan State University, USA

absTracT Some researchers view information systems (IS) offshoring as extension of onshore IS outsourcing. However, others have the opinion that IS offshoring has its unique characteristics because of which, we cannot extend research made in onshore IS outsourcing without testing its applicability to the offshore context. This tension motivates our research to examine whether determinants of IS offshoring are indeed the same as determinants of onshore IS outsourcing? We examine the role of some firm level determinants of offshoring intensity. The four business related determinants that we analyze in this study are: business size, business cost, business financial leverage, and business performance. Results indicate a significant relationship between business size and

offshoring intensity, and also between business financial leverage and offshoring intensity. Based on the results, we analyze similarities and differences between traditional onshore IS outsourcing and IS offshoring. Implications and contributions arising out of this study are also discussed.

inTrOducTiOn Arnett and Jones (1994) define information systems (IS) outsourcing as the transfer of IS assets, leases, and staff to outsourcing vendors. In other words, IS outsourcing can be viewed as the decision and process by which firms transfer various functional aspects of their IS to thirdparty vendors. IS outsourcing has been a popular phenomenon since the time Kodak signed its

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Business-Related Determinants of Offshoring Intensity

first outsourcing deal in 1989 (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). But during this period, most of the outsourcing phenomenon was restricted within the borders of the country. In other words, most of the IS outsourcing work was onshore outsourcing. It is for this reason existing literature on IS outsourcing primarily focuses on onshore outsourcing. IS offshoring, which is an offshoot of IS outsourcing, is a relatively new phenomenon. IS offshoring refers to the migration of all or part of the development, maintenance, and delivery of IS services to a vendor in a country different from that of the client (Hirschheim, Loebbecke, Newman, & Valor, 2005). Developments in information and communication technologies (ICTs) in the last decade enabled effective and efficient delivery of digitized information across borders. Along with this, deregulations and removal of trade barriers spurred the development of IS offshoring. Firms now have convenient, real-time access to the skills of knowledge workers from countries across the globe. IS outsourcing and IS offshoring can be visualized as a decision which firms make regarding their strategy to cross the firm and the country

boundaries. This can be represented in a 2x2 matrix (see Figure 1). Simply speaking, the transcending of a firm’s boundary for IS functions can be described as IS outsourcing, whereas crossing the nation’s boundary for IS-enabled functions can be viewed as IS offshoring. Figure 1 illustrates that offshoring (quadrants II and III) can be both outsourcing and insourcing, bringing out the fundamental difference between definitions of onshore outsourcing and offshoring. Offshoring projects might be outsourced, or alternatively they might be insourced to a subsidiary of the parent company. In addition to the differences in definitions of outsourcing and offshoring, the firms’ motivations for such actions might also be very divergent. Outsourcing normally enables firms to focus on their core competencies. Firms can strategically outsource those business processes which they do not intend to develop and nurture as a core competency (Slaughter & Ang, 1996). In contrast, in addition to focusing on core competencies, offshoring purports to strategically route the required services from those countries which offer comparable or better skills at a cheaper price. It makes it possible to extend enterprise boundaries

Inside

Firm Boundary

Outside

Figure 1. The boundaries of outsourcing and offshoring

I Onshore Outsourcing

II Offshore Outsourcing

IV Onshore Insourcing

III Offshore Insourcing

Inside

Outside

Country Boundary

111

Business-Related Determinants of Offshoring Intensity

to effectively access skills from distant places without physical movement of labor (Hirschheim et al., 2005; Rao, 2004). This phenomenon of taking jobs to the country of the skilled worker allows firms to tap the services of that segment of labor, which may otherwise be unwilling to move away physically, from their home country. Hence, firms not only have an incentive in terms of cost reduction but can also exercise a wider choice in terms of labor skills (Rao, 2004). Another critical difference between onshore IS outsourcing and IS offshoring lies in the modalities for such arrangements. Unlike offshoring, it is relatively easier to monitor onshore outsourcing. There are two key reasons for this: the small physical distance, and the fact that both vendor and client are usually in the same time zones. In general, any function that does not require physical monitoring and can be easily digitized for transmission through electronic means is an offshore candidate. Thus, IS offshoring includes not only the firm’s IS functions and processes, but also its IS-supported business processes (Trampel, 2004). Though there has been a phenomenal increase in IS offshoring (Gardner, 2006; Ribeiro 2006; Watson, 2005), scholarly deliberations on the subject are relatively sparse. Current research on IS offshoring focuses on three broad themes: offshoring relationship development and evolution (Carmel & Agarwal, 2002; Kaiser & Hawk, 2004; Khan, Currie, & Guah, 2003; Nicholson & Sahay, 2004), best practices, management and impact of offshoring (Aron, Clemons, & Reddi, 2005; Mani, Barua, & Whinston, 2005; Rottman & Lacity, 2004), and the factors affecting growth of offshoring (Dutta & Roy, 2005; Whitaker, Mithas, & Krishnan, 2005). Though there is a need for deeper understanding in all the three above mentioned areas, it is equally important to understand whether IS offshoring is just an extension of the onshore IS outsourcing phenomenon or is it fundamentally different. The research agenda is important in light of the

112

fact that some researchers view IS offshoring as an extension of onshore IS outsourcing (Aron et al., 2005; Pfannenstein & Tsai, 2004) while others view IS offshoring as an altogether different phenomenon with its own unique contexts (Stack & Downing, 2005). In this article, we address two broad research questions. First, what are the important firmlevel business characteristics associated with the firms’ offshoring intensity1? Second, is the IS offshoring phenomenon different from onshore IS outsourcing in terms of the identified firmlevel characteristics? To answer these two broad questions, we identify some of the important firm-level business characteristics from onshore IS outsourcing literature2 and test their applicability in the offshoring scenario. The rest of the article is organized as follows. First, using literature on organization theory and onshore IS outsourcing, we identify businessrelated antecedents that explains firms’ offshoring intensity. Next, using firm-level data, we test the hypotheses that we formulated. Finally, we discuss the results and conclusions of this study.

rEsEarch mOdEl and hypOThEsEs Many recent studies on offshoring have investigated the host country characteristics contributing to a firm’s decision to offshore its business processes to that nation (Lewin & Furlong, 2005; Lewin, Peacock, Peeters, Russell, & Sutton, 2005; Rao, 2004). Surprisingly, there is little empirical research exploring the firm-level determinants of offshoring. In this article, we develop a model for the firm-level business-related characteristics which determine its offshore intensity. We define offshoring intensity as the amount of production or service that has been transferred by the company from its parent country to a foreign destination. We posit that the firm-level economic constructs prior to the offshoring event guide not only

Business-Related Determinants of Offshoring Intensity

the firm’s decision to offshore, but also determine the volume of its offshored activities. Economic constructs related to IS outsourcing activity have been conceptualized in the past literature (Loh & Venkatraman, 1992; Smith, Mitra, & Narasimhan, 1998). Taking onshore IS outsourcing literature as the point of departure, we hypothesize in a similar way for IS offshoring. Past literature on determinants of IS offshoring has focused primarily on the binary decision of whether to offshore or not (Whitaker et al., 2005). In contrast to this, our study accounts for the differences in offshoring volumes across the firms. Based on the theory of IS alignment (Henderson & Venkatraman, 1992; Teo & King, 1997), we suggest the specific constructs of the business domain that should be aligned with the decision for IS offshoring. The theory of IS alignment suggests that the business structure of the organization should be aligned with the IS strategy for better performance (Chan, Huff, Barclay, & Copeland, 1997). Consequently, offshoring, which can be a realized IS strategy, should be aligned and dependent on the business structure of the firm. Thus, we posit that the firm’s offshore intensity is dependent on the prior structural business characteristics of

the firm which include business size, business cost, business financial leverage, and business performance (return on assets, return on sales, and return on equity). The research framework for this study is depicted in Figure 2.

business size Past research finds organizational size, defined as total assets for the company, to be a major determinant of the firm’s actions. Larger firms are more capable of taking advantage of the opportunities to enter new and promising markets than smaller firms (Damanpour, 1992; Haveman, 1993). The decision to offshore is a strategic decision for the firm. It involves a major shift in the firm’s sourcing strategy and involves a lot of risk in terms of transferring a part of its value chain to a distant land with a different political, cultural, and social environment. Increased size of the organization gives it access to a greater amount of resources, leading to its ability to better manage the risks associated with offshoring decisions (Aron et al., 2005; Swartz, 2004). Further, larger firms tend to have more experience in dealing with overseas partners than smaller firms, and consequently

Figure 2. Research model: Business-related determinants of offshoring intensity Business Size

H1 Business Cost

H2 Offshoring Intensity

H3 Business Financial Leverage

H4

Business Performance - ROA - ROS - ROE

113

Business-Related Determinants of Offshoring Intensity

may have greater confidence in managing offshore contracts. Thus, we hypothesize: Hypothesis 1: The larger the size of the firm, the higher will be its offshoring intensity.

business cost Business cost is the total cost directly associated with the actual production and coordination of a firm’s product line (Loh & Venkatraman, 1992). Firms in a competitive marketplace are exploring ways to reduce their business costs to increase profitability (Porter, 1980). Firms having relatively high costs will consider the available options for bringing down their business cost. IS offshoring has been highlighted as a means to reduce the transaction costs for firms (Hirschheim et al., 2005; Khan et al., 2003; Pfannenstein & Tsai, 2004). Though traditional outsourcing reduces costs, offshoring purports to bring about greater reduction in costs because of significant cost arbitrage across national boundaries (Rao, 2004). For instance, cheap labor in India helps companies like American Express to reduce costs to the extent of millions of dollars (Agrawal, Farrell, & Remes, 2003). Thus, IS offshoring is one of the options which firms may exercise for reducing their business costs. This implies that firms that have relatively high business costs will be more inclined to follow this option. This argument is also supported by transaction cost theory, which suggests offshoring as an option to reduce the transaction costs (Carmel & Nicholson, 2005). Therefore, we hypothesize that a firm’s prior business cost is one of the vital determinants of its offshoring intensity: Hypothesis 2: The higher the prior business cost of a firm, the higher will be its offshoring intensity.

114

business Financial leverage Financial leverage describes the degree to which a firm’s business is utilizing borrowed money. Though financial leverage is not always bad, companies that are highly leveraged may risk bankruptcy if they are unable to service these debts. Financial leverage is one of the vital components describing a firm’s business governance strategy (Loh & Venkatraman, 1992). When financial leverage is high, firms are burdened with high debt. Offshoring arrangements generally include significant initial contractual arrangements and financial risks with vendors because of transactions beyond national boundaries. Firms that are already burdened with high debts may not want to risk this new offshoring strategy. Prior research shows that firms with high financial leverage do not want to take risky initiatives and are averse to new investments (Ertugrul, Sezer, & Sirmans, 2006; Gloy & Baker, 2002; Myers, 1977). Consequently, we hypothesize that firms with a high level of financial leverage will be less motivated to offshore their activities: Hypothesis 3: The higher the prior financial leverage of a firm, the lower will be its offshoring intensity.

business performance A vital component guiding the strategic decisions that firms make is their business performance. When business performance of firms does not match the desired levels, they are on the look out for ways to improve their performance. With this objective in view, the changes incorporated in the firms may not only be related to improving direct operations, but may also include changing strategic business mechanisms (Loh & Venkatraman, 1992; Smith et al., 1998). One of the changes in the business mechanisms that firms may consider is the use of IS offshoring to improve their business

Business-Related Determinants of Offshoring Intensity

performance. The strategic change literature also suggests that firms having low performance will attempt a turnaround through strategic change (Barker & Duhame, 1997; Kimberly & Quinn, 1984; Zhang, 2006). The strategic change may be in terms of a change in the arrangement of a firm’s resource allocation to different functional areas (Ginsberg, 1988). Thus, firms having a low business performance may be motivated to use offshoring as a viable option. In our study, we use three measures of business performance: return on assets (ROA), return on sales (ROS), and return on equity (ROE) (Loh & Venkatraman, 1992; Smith et al., 1998; Zhang, 2006). Hence, we hypothesize that the prior level of business performance of a firm is associated with its offshoring intensity: Hypothesis 4: The lower the prior business performance of a firm, the higher will be its offshoring intensity. Hypothesis 4a: The lower the prior ROA of a firm, the higher will be its offshoring intensity. Hypothesis 4b: The lower the prior ROS of a firm, the higher will be its offshoring intensity. Hypothesis 4c: The lower the prior ROE of a firm, the higher will be its offshoring intensity.

mEThOdOlOgy Though the research questions in our study can be answered by using any of the two prevalent methodologies in IS studies, namely case study approach or questionnaire survey, we chose to use secondary data analysis for four important reasons. First, because of the political sensitivity surrounding offshoring, companies are unwilling to participate in surveys. Further, companies participating in surveys may not be willing to divulge details of their offshoring endeavors. Second, audited financial data provide a more objective evaluation of the firm’s performance and other characteristics than the perception-based data used in case studies and surveys. Third, second-

ary data research is easily reproducible, thereby making it easier for other researchers to extend our work. Fourth, it gives an opportunity to deal with larger samples than when using in-depth case studies, which increases the generalizability of results. However, the limitation of using secondary data for research is that we have to depend on the information available in the databases. For our research, the dependent variable is offshoring intensity. In this article, we define offshoring intensity as the amount of production or service that has been transferred by the company from its parent country to a foreign destination. To operationalize the offshoring intensity, we use the number of jobs offshored by the company. Currently, there are relatively few secondary sources of information which provide information related to offshoring firms in the U.S. because of the political sensitivity of offshoring3 The data on the number of jobs offshored has been collected from the TechsUnite4 Web site database (TechsUnite, 2006). TechsUnite is a union for high-tech workers whose objective is to safeguard the interests of technical workers. The TechsUnite database tracks the number of jobs offshored by U.S. companies from the year 2000 onwards. Two researchers gathered data from this Web site database in early 2006 and the data collection took about five weeks. The data collected indicates the cumulative total number of jobs offshored by each firm from the year 2000 to the present. For testing the validity of the data collected from this Web site, we followed a two-fold analysis. First, we corroborated and checked the names of the firms listed in the Web site, whether they really offshore or not. This we checked by comparing with the list of offshoring firms available at CNN’s Web site on “Exporting America”5 Second, we explored the various newspaper reports referenced as the source of offshoring information on the TechsUnite Web site for 10% of firms in the dataset and found the information to be generally correct and updated. Following this two-step process gave us

115

Business-Related Determinants of Offshoring Intensity

confidence about the validity of our dependant variable (offshore intensity). We included those firms in our analysis (a total of 152 firms) for which we could get the data on all the variables in our research model. The firm-related independent variables have been taken from Compustat for the year 2000, which is taken as the pre-event year6. There are two reasons for choosing the year 2000 as the pre-event base year for the firm-level variables. First, the TechsUnite database recognizes the year 2000 as the critical year for the start of widespread offshoring phenomenon and tracks the number of jobs offshored by U.S. companies from the year 2000 onwards. Further, Reingold (2004) and Hirschheim, George, and Wong (2004) have stated that the current wave of offshoring took off from the Y2K phenomenon because of which foreign vendors got a chance to show their effectiveness in the U.S. market. Hence, the year 2000 marks the start of IT-enabled offshoring. Studying firm characteristics before IS offshoring may provide us with an understanding of firm characteristics that precipitated the decision to offshore. For measuring the business size, we take the total assets of that particular firm. This measure for size has been used by previous studies such as Ang and Cummings (1997), Loh and Venkatraman (1992), and Ang and Straub (1998). The business cost structure is indicated by the cost of goods sold (e.g., Loh & Venkatraman, 1992; Smith et al., 1998), and business financial leverage is directly reported from financial reports (e.g., Loh & Venkatraman, 1992). The business performance is indicated by the three measures of return on

assets, return on sales, and return on equity (e.g., Tam, 1998). In addition to the research variables, we controlled for the industry types in our analysis. To control for industry sector, we divided firms into five sectors based on the North American Industry Classification System (NAICS) and created a dummy for each sector: manufacturing and industrial, wholesale and retail trade, services, finance and real estate, and information (see Table 1). These five sectors comprehensively cover almost all the manufacturing and service industries in the U.S. Such industry controls have been used in past outsourcing/offshoring studies such as Brynjolfsson, Malone, Gurbaxani, and Kambil (1994) and Whitaker et al. (2005).

rEsulTs and analysis The descriptives and correlations among the various independent variables in our research framework are given in Table 2. Serious multicollinearity problems may lead to deviation in the estimation of regression statistics (Stevens, 2002; Tebachnick & Fidell, 2001). From Table 1, we see that all correlations are below 0.80, signifying no serious problem of multicollinearity in our data (Gujarati, 2003). But we also see that one of the correlations, between ROA and ROS, is rather high (> 0.70). Hence, to be confident that there is no serious problem of multicollinearity among the independent variables, we tested for multicollinearity among the independent variables by examining the Variance Inflation Factor (VIF), the results for which are given in Table 3.

Table 1. Industry dummies created as control

116

Sl. No.

NAICS 2-digit codes

Description

1

11, 21, 22, 23, 31-33

Manufacturing and industrial

2

42, 44-45

Wholesale and retail trade

3

48-49, 54, 55, 56, 61, 62, 71, 72, 81, 92, 99

Services and others

4

51

Information

5

52, 53

Finance and real estate

Business-Related Determinants of Offshoring Intensity

Table 2. Descriptives and correlations Variable

Std. Dev.

2106.82

3683.12

1

2

1

Offshoring Intensity

2

Size (Assets)

58547.95

139159.41

0.250**

1.000

3

Business Cost

11647.11

22557.52

0.223**

0.480**

4

Financial Lev.

5 6 7 *

Mean

3

4

5

1.000

**

1.000 0.211**

4.75

6.14

-0.015

0.630

ROA

2.64

15.09

0.162

-0.008

0.058

-0.051

1.000

ROS

15.42

34.70

0.078

0.222*

0.074

0.261**

0.717**

ROE

13.90

6

81.00

0.059

0.019

0.034

1.000

0.123

**

0.365

1.000 0.231**

p < 0.05 ;**p < 0.01 (two-tailed test)

Table 3. VIF for independent variables Independent Variables

VIF

1

Size (Assets)

1.459

2

Business Cost

1.057

3

Financial Lev.

2.683

4

ROA

1.083

5

ROS

1.096

6

ROE

1.036

Dependent variable: Offshoring intensity

VIF measures the impact of collinearity among the predictors in a regression model on the precision of estimation. In other words, it expresses the degree to which collinearity among the predictors degrades the precision of an estimate. Researchers suggest that multicollinearity is not a significant problem if the value of VIF is below 10 (Allison, 1999; Belsley, Kuh, & Welsch, 1980; Stevens, 2002). In our case, the VIF values for all the independent variables are below 5 (Pedhazur, 1997), which is the conservative limit for multicollinearity. Hence, we conclude that there is no significant problem of multicollinearity among the independent variables in our study. Table 4 presents the results of multiple hierarchical regression analysis where the dependent variable is offshoring intensity. In addition to the control variables, the independent variables were entered into the regression equation in four steps. After entering the industry dummies as controls,

the business size variable (assets) was entered in the first step, the business cost variable (cost of goods sold) was entered in the second step, the business financial leverage variable was added in the third step, and business performance variables (ROA, ROS, ROE) were added in the last step. Results in Table 4, Model 1 indicate a strong support for Hypothesis 1 (β=0.370, p “transition assistance” strategy 6. (multi-sourcing continuum:) co-sourcing -> “capability development” arrangement

“This strategy believes that insourcing is the best strategy but the internal IS department needs to adopt better practices to become more efficient and effective.” “…the IS organization is reformed through the assistance of a third party and then kept in-house.”

7. (multi-sourcing continuum:) outsourcing -> “option to reverse” strategy 8. (multi-sourcing continuum:) outsourcing -> “divest completely” strategy

130

“…a third party takes on certain IS activities while the internal IS group transitions itself to a new set of skills.” “…a third party takes on either permanently or temporarily IS activities while the IS organization develops new capabilities. This option allows the IS organization to focus on certain core capabilities.” “…hereby IS is outsourced to a third party but there is a specific plan which would allow the function to return inhouse without undue hardship at a later time if the management of the company deems this desirable.” “…the IS function is outsourced permanently. In such cases, IS is perceived to be a non-core business function best handled by an outsourcer.”

Making Sense of the Sourcing and Shoring Maze

Table 3. Categorization of sourcing alternatives based on How the Client Manages or Utilizes the Suppliers (Currie & Willcocks, 1998, pp. 122-125) # Terminology

Definition as quoted in literature (Currie & Willcocks, 1998, pp. 122-125)

1. Total Outsourcing

“Total outsourcing is when an organization chooses to outsource as much as 70-80% of its IT facility, usually to a large single supplier. These contracts are usually for between 5 and 10 years.” “…entered into IT sourcing arrangements with a variety of suppliers”

2. Multiple-supplier sourcing 3. Joint Venture / Strategic alliance sourcing 4. Insourcing

“An organization enters into a joint venture with a supplier on a shared risk/reward basis. This may involve selecting an existing IT supplier or helping to create a new company to which work can be outsourced. Sometimes an organization may take share ownership in an existing IT supplier or vice-versa.” “An organization opts to retain a large centralized IT department and insource management and technical capabilities according to the peaks and troughs of IT work. Contractors may be given employment contracts lasting between 3 months and a year, although there are many examples of them staying with an organization for several years.”

Table 4. Categorization of outsourcing capturing the range of Outsourcing Options (Lacity & Hirschheim, 1993a, pp. 17-18)

# Terminology

Definition as quoted in literature (Lacity & Hirschheim, 1993a, pp. 1718)

1. Body Shop

“…management uses outsourcing as a way to meet short-term demand. The most common type of body shop outsourcing is the use of contract programmers/personnel that is managed by company employees.” “…management outsources for a specific project or portion of IS work.” “…the vendor is responsible for managing and completing the work.” “…the vendor is in total charge of a significant piece of IS work.”

2. Project Management 3. Total outsourcing

•

•

Onshoring: The service provider is located in the same country as the client. This is also known as domestic sourcing or onshore sourcing. Nearshoring: The service provider is located in a country which is geographically close the client’s country. Hence, countries which share borders, or are neighbors can be considered as “nearshore” countries. Ireland and Spain may be considered as nearshore for the United Kingdom, whereas Mexico

•

and Canada may be considered as nearshore for U.S. This is also known as nearshore sourcing. Offshoring: The service provider is located in a country which is geographically far away from the client’s country. India and China may be considered as “offshore” for both the United Kingdom and U.S This is also known as offshore-sourcing.

131

Making Sense of the Sourcing and Shoring Maze

Table 5. Categorization of outsourcing based on How the Client Manages or Utilizes the Suppliers (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5)

# Terminology

Definition as quoted in literature (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5)

1. General outsourcing

“… encompasses three alternatives: (a) selective outsourcing …(b) value-added outsourcing … or (c) cooperative outsourcing …” “ …where one particular area of IS activity is chosen to be turned over to a third party, such as data center operations” “…where some area of IS activity is turned over to a third party who is thought to be able to provide a level of support or service which adds value to the activity that could not be cost effectively provided by the internal IS group” “…where some targeted IS activity(ies) is (are) jointly performed by a third party provider and the internal IS department”

2. (General outsourcing:) selective outsourcing 3. (General outsourcing:) value-added outsourcing 4. (General outsourcing:) cooperative outsourcing 5. Transitional outsourcing 6. Business process outsourcing 7. Business benefit contracting

“…involves the migration from one technological platform to another.” “…refers to an outsourcing relationship where a third party provider is responsible for performing an entire business function for the client organization.” “…contractual agreement that defines the vendor’s contribution to the client in terms of specific benefits to the business and defines the payment the customer will make based upon the vendor’s ability to deliver those benefits. The goal is to match actual costs with actual benefits and to share the risks.”

“Shore” in the words onshore, nearshore and offshore does not necessarily imply that the respective country has land along the edge of a body of water. It only indicates a different geographical location. The geographical distance is a predominant classifier when comparing between onshore, nearshore and offshore locations. At the same time, the time zones of the locations may also be considered. In the IS industry, as communication technology improves, the exact geographical distance is a lesser barrier when compared to the time zones. It may not be wrong if we choose to classify between onshore, nearshore and offshore on the basis of both time zones and geographical distance.

132

One may do away with the specific term “nearshoring,” and generally use “offshoring” instead. The term “offshoring” is often used to broadly imply “nearshoring” too. When someone says, that work has been “offshored,” it may simply imply that work has been sent away from onshore (i.e., to nearshore or offshore). Hence, we can adopt a simpler binary logic of onshore versus offshore, where anything that is not “onshore” can be simply called “offshore”. Offshoring may therefore be defined as a scenario where the service provider is located in a country that is different from the client’s country; this is also known as “global sourcing”.

Making Sense of the Sourcing and Shoring Maze

Table 6. Categorization of outsourcing based on Number of Clients and Vendors (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp.12-13) # Terminology

Definition as quoted in literature (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp.12-13)

1. Dyadic outsourcing arrangement

“one client, one vendor” “…presume that client firms seeking IT services act independently of each other, while IT vendors do the same. Thus the assumed relationship between client firm and IT vendor has been a simple ‘dyadic’ one.” “one client, multiple vendors” “A one-to-many relationship indicates that one client uses multiple outsourcing vendors to achieve its objectives, and that division-of-labor is jointly negotiated and understood by all parties to the agreement.” “many clients, one vendor” “A many-to-one alliance where several clients contract with a single IT vendor for services.” “many clients, many vendors” “…combining multiple clients and multiple vendor firms into a single contract or alliance”

2. multi-vendor

3. co-sourcing

4. complex outsourcing

basic cOmbinaTiOns OF ThE shOring and sOurcing sTraTEgiEs The shoring strategy may be either an onshore, nearshore or offshore strategy. And the basic sourcing strategy may be either insourcing or outsourcing. As illustrated by Figure 1 (onshorecentric view of sourcing and shoring), the various combinations are onshore-insourcing, onshoreoutsourcing, nearshore-insourcing, nearshoreoutsourcing, offshore-insourcing and offshoreoutsourcing:

Domestic Sourcing or Onshore Sourcing or Onshoring Alternatives •

Onshore-Insourcing: Both the client and its subsidiary or IS department that provides the services are located in the same country. This is also termed as domestic insourcing.

•

Onshore-Outsourcing: Both the client and the vendor are located in the same country. This is also termed as “domestic outsourcing”. This is also termed as domestic outsourcing.

Global Sourcing Alternatives •

• •

•

Nearshore-Insourcing: The client’s subsidiary or IS department that provides the service is located in a country which is geographically close the client’s country. Nearshore-Outsourcing: The vendor is located in a country that is geographically close the client’s country. Offshore-Insourcing: The client’s subsidiary or IS department that provides the service is located in a country that is geographically far away from the client’s country. Offshore-Outsourcing: The vendor is located in a country that is geographically far away from the client’s country.

133

Making Sense of the Sourcing and Shoring Maze

Figure 1. Sourcing and shoring: Onshore centric view

Figure 2. Sourcing and shoring: Insourcing centric view

134

Making Sense of the Sourcing and Shoring Maze

Figure 2 illustrates an insourcing-centric view of sourcing and shoring; the various combinations shown are onshore-insourcing, nearshore-insourcing, offshore-insourcing, onshore-oursourcing, nearshore-outsourcing, and offshore-outsourcing. As discussed earlier, the term “offshore” is often used to imply “nearshore”, too, that is, anything that is not “onshore” may simply be called “offshore”. While the term “domestic” relates to “onshore”, the term “global” relates to “offshore”, where “offshore” encompasses “nearshore” too (Dibbern et al., 2004, p. 43). Hence, for the purposes of simplification, one can narrow down the above classification to the following four basic choices, where the earlier nearshore sourcing options are now encompassed within the offshore sourcing options. Domestic sourcing or onshore sourcing or onshoring alternatives: 1. 2.

Onshore-insourcing or domestic-insourcing Onshore-outsourcing or domestic-outsourcing

Global sourcing or offshore sourcing or offshoring alternatives: 3. 4.

Offshore-insourcing or global-insourcing Offshore-outsourcing or global-insourcing

Therefore, in offshore-insourcing, the subsidiary or IS department (of the client) which provides the service is located in a country different from the client’s country; while in offshore-outsourcing, the vendor is located in a country different from the client’s country.

OvErviEw OF variOus sOurcing alTErnaTivEs Let us now gain an understanding of the various sourcing alternatives.

list of sourcing alternatives The sourcing alternatives that will be eventually discussed are summarized and listed in Table 7. The definitive feature of each term is provided along with information on the possible basic sourcing strategy (insourcing, outsourcing, both or any) and the possible shoring strategy (onshoring, offshoring or simply anywhere). We will now briefly explain each of the terms listed in the Table 7.

application service provision / application service providing / net-sourcing / On-demand •

Accessing remotely hosted IS applications

An application service provider (ASP) is a vendor that provides access to remotely hosted IS-applications over a wide area network (WAN), a virtual private network (VPN), or over the Internet (Susarla, Barua, & Whinston, 2003, p. 103). Bennett and Timbrell (2000, p. 196) define application service provision as a form of selective outsourcing where an organization rents generally available packaged software applications and related services. Dewire (2000, p. 14) states that an “application service provider (ASP) provides a contractual software-based service for hosting, managing, and providing access to an application from a centrally managed facility.” Furthermore, clients have remote web-access to the applications that are running on the ASP’s servers. Figure 3 illustrates a client having remote access to applications on servers hosted and managed by the vendor (ASP), over a wide area network (WAN),

135

Making Sense of the Sourcing and Shoring Maze

Table 7. List of sourcing alternatives Basic sourcing strategy: o Insourcing o Outsourcing o Both o Any Outsourcing

Shoring strategy focus: o Onshore o Offshore o Anywhere

Insourcing what was outsourced Linking payments to realization of benefits

Insourcing Outsourcing

Anywhere Anywhere

Using contract personnel Vendor performs client’s entire business processes Multiple clients and multiple vendors in a single contract or alliance Client’s internal IS department and the vendor perform IS activity cooperatively Client’s performance determines vendor’s revenue Helping the client’s IS department mature Multiple clients jointly seek services from vendor Innovative contracts for better deals Vendor has teams both at onshore and offshore Independent client dealing with independent vendor Vendor maintains the client’s assets Sharing ownership of facilities needed by each Selective, value-added and cooperative outsourcing Large vendor delivering services from various global locations to clients at various global locations Outsourcing the process of setting up facilities for offshore-insourcing One contract with multiple vendors multiple sourcing strategies in a continuum Client dealing with multiple interdependent vendors

Outsourcing Outsourcing

Anywhere Anywhere

Outsourcing

Anywhere

Both

Anywhere

Outsourcing

Anywhere

Outsourcing Outsourcing

Anywhere Offshore

Outsourcing

Anywhere

Outsourcing Both

Anywhere Anywhere

Outsourcing /Both Outsourcing

Anywhere

Outsourcing

Offshore

Outsourcing Both

Anywhere

Outsourcing

Anywhere

Vendor manages a project

Outsourcing

Anywhere

Terminology

Definitive feature

Application Service Provision / Application Service Providing / Netsourcing / On-Demand Backsourcing Benefit based relationships / Business benefit contracting Body Shop Outsourcing Business Process Outsourcing Complex sourcing

Accessing remotely hosted IS applications

Cooperative Sourcing Co-sourcing

Creative Contracting Distributed Consulting Dyadic outsourcing arrangement Facilities Management Facilities Sharing General outsourcing Global Delivery Managed Offshore Facilities Multi-sourcing

Multi-vendor outsourcing / Multiplesupplier sourcing / Dual sourcing Project Management Outsourcing

Anywhere

Offshore

continued on following page 136

Making Sense of the Sourcing and Shoring Maze

Table 7. Continued Basic sourcing strategy: o Insourcing o Outsourcing o Both o Any Both

Shoring strategy focus: o Onshore o Offshore o Anywhere

An IS department that now sells to the market Sharing risks and rewards

Any

Anywhere

Outsourcing

Anywhere

Outsourcing for rapid solution to problems

Outsourcing

Anywhere

Insourcing maximum % of IS budget Outsourcing maximum % of IS budget Vendor having complete charge of significant IS work Streamlining of client’s internal organization alongside outsourcing Outsourcing during a major changeover Combined strengths for the market Vendor adding value to IS activity

Insourcing Outsourcing

Anywhere Anywhere

Outsourcing

Anywhere

Outsourcing

Anywhere

Both Outsourcing

Anywhere Anywhere

Terminology

Definitive feature

Selective / Smart / Right / Flexible / Modular Sourcing Spin-offs

Outsourcing and insourcing optimally

Strategic alliances / Partnerships / Joint Ventures / Equity holdings / Strategic sourcing Tactical Outsourcing / Contracting-out / Outtasking Total Insourcing Total Outsourcing / Traditional Outsourcing

Transformational Outsourcing Transitional Outsourcing Value-added outsourcing

Anywhere

Figure 3. Application service providing

137

Making Sense of the Sourcing and Shoring Maze

virtual private network (VPN), internet/extranet or a dedicated line. IDC (International Data Corp.) explains the following about ASP (as cited in Dewire, 2000, p. 14): An end user accesses an application resident on a server, just as he or she would on a LAN or in the enterprise data center. However, the server resides at the ASP’s third-party data center and is reached via a dedicated line or the internet (or extranet). The applications can range from low-end, productivity programs (e.g., word processing) to high-end ERP modules. The service is provided on a subscription basis and can bundle a full range of hosted application services. The Application Service Provider Consortium defines an ASP as an organization that “manages and delivers application capabilities to multiple entities from a data center across a wide area network (WAN)” (as cited in Susarla et al., 2003, p. 92). Hence, ASPs purchase/develop/customize, install, and manage software applications at remote locations and host them for clients over the Internet

Figure 4. Backsourcing

138

(or maybe over a VPN or Extranet). Various flavors of this kind sourcing have also been termed as “Net-sourcing” (Kern, Lacity & Willcocks, 2002), “on demand” service, “application utilities”, “real-time delivery” and “software-as-a-service” (SAAS), all of which encourage the delivery of online and externally managed information systems (Pring & Ambrose, 2004).

backsourcing •

Insourcing what was outsourced

When the IS functions that had previously been outsourced are brought back in-house, it is known as backsourcing (Dibbern et al., 2004, p. 12). Backsourcing is the insourcing of previously outsourced IS functions. As illustrated by figure 4, the client decides to insource its previously outsourced IS needs from either its own internal IS department or its subsidiary.

Making Sense of the Sourcing and Shoring Maze

Benefit-Based Relationships / Business Benefit Contracting •

Linking payments to realization of benefits

In benefit-based relationships, both the parties (customer and external service provider) make an upfront investment in a relationship, and thereafter share both the benefits and the risks (Sparrow, 2003, p. 13). Sparrow (2003, pp. 13-14), has given the example of the UK government’s employment service which formed a public-private, benefitbased relationship with EDS to deliver IS services, thus securing business benefits from use of IS,

while establishing a payment methodology that links EDS’s reward to realizing those benefits. As illustrated by this example, private sector companies invest up-front in developing public sector services with payments based on outcomes or benefits gained from these services. In business benefit contracting, a contractual agreement defines the vendor’s contribution to the client in terms of specific benefits to the business and defines the payment the client will make based upon the vendor’s ability to deliver those benefits, thereby matching actual costs with actual benefits and sharing the risks (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As illustrated in Figure 5, the client makes its

Figure 5. Benefit-based relationships / business benefit contracting

Figure 6. Body shop outsourcing

139

Making Sense of the Sourcing and Shoring Maze

payments to the vendor depending on the specific benefits received. Lacity and Hirschheim (1995), note that though business benefit contracting is used often in the marketing of outsourcing services by vendors, it is typically not adopted due to the difficulty associated with measuring benefits. Furthermore, in business benefit contracting the vendor’s revenue and margin potential is linked to the benchmarks, and therefore it is not surprising that getting an agreement by both parties on the benchmarks proves to be problematic.

body shop Outsourcing •

Using contract personnel

Body shop outsourcing is a way for firms to meet short term demands, by the use of contract personnel (such as programmers), who are managed by the employees of the hiring firm (Lacity & Hirschheim, 1993a, pp. 17-18). As illustrated in Figure 6, the client contracts skilled personnel from a vendor; these contract personnel are the vendor’s paid employees who work at the client site, under the supervision of the client. The client shops for skilled bodies from vendors.

Figure 7. Business process outsourcing

140

business process Outsourcing •

Vendor performs client’s entire business processes

Business process outsourcing refers to an outsourcing relationship where a vendor is responsible for performing an entire business function for the client (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As shown in Figure 7, the client transfers certain business processes to the vendor, and the vendor site is now the back office for the client’s outsourced business processes. In business process outsourcing, companies hire external service providers to manage entire business process functions such as hotlines, helpdesks, claims management, call centers, document processing and storage, data management, payroll, financial services (banks and insurance), accounting, auditing, transportation, travel management systems, logistics and various IS services (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5; Sparrow, 2003, p. 11). Vendors provide a range of services spanning all areas of business with the overall aim to improve and allow seamless and consistent levels of customer service.

Making Sense of the Sourcing and Shoring Maze

complex sourcing •

Multiple clients and multiple vendors in a single contract or alliance

As illustrated in Figure 8, complex sourcing is a many-to-many relationship that involves both multiple clients and vendors in the same outsourcing contract or in an alliance (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). Moreover, this can be interpreted as a combination of both the multi-vendor and cosourcing relationships as defined by Gallivan and Oh (1999).

cooperative sourcing •

Client’s internal IS department and the vendor perform IS activity cooperatively

When a targeted IS function is performed jointly by the client’s internal IS department and the vendor, it is known as cooperative sourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As shown in the Figure 9, the client’s IS department works closely with the vendor as

a single team, towards the successful completion of the IS activity.

co-sourcing • • •

Client’s performance determines vendor’s revenue Helping the client’s IS department mature Multiple clients jointly seek services from vendor

Three interpretations of the term co-sourcing exist. While the first interpretation is based on performance being linked to revenue, the second interpretation is based on the role of the vendor in the growth or maturation of the processes in the client’s IS department, and the third interpretation is based on clients jointly seeking IS services. When the vendor’s revenue from the client to which it is providing services is linked to the performance of the client, it is known as co-sourcing (Willcocks & Lacity, 1998, pp. 26, 30-31). As shown in Figure 10, the vendor provides services to the client with the underlying contractual expectation that it would positively affect the client’s performance; the client evalu-

Figure 8. Complex sourcing

141

Making Sense of the Sourcing and Shoring Maze

Figure 9. Cooperative sourcing

Figure 10. Co-sourcing: Client’s performance determines vendor’s revenue

ates the improvement in its own performance due to the vendor’s contribution and pays the vendor proportionately. As shown in Figure 11, co-sourcing has also been interpreted as being part of a multi-sourcing continuum having three possible co-sourcing strategies: (a) the “rehabilitation and return” strategy where the internal IS department is reformed through the assistance of a vendor or consultant and the IS functions are kept in-house, (b) the “transition assistance” strategy where a vendor takes on certain IS activities while the internal IS department transitions itself to a new

142

set of skills, and (c) the “capability development” strategy where the internal IS department develops new capabilities and focuses on certain core capabilities, while a vendor either permanently or temporarily takes on IS activities (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11). Going by this interpretation, co-sourcing can be defined as a process where the vendor assists in the growth or maturation of the processes in the client’s IS department, as dictated by the needs of the client. The “transition assistance” part of co-sourcing has also been termed as “transitional

Making Sense of the Sourcing and Shoring Maze

Figure 11. Co-sourcing: Helping the client’s IS department mature

Figure 12. Co-sourcing: Multiple clients jointly seek services from vendor

143

Making Sense of the Sourcing and Shoring Maze

outsourcing” (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). Finally, in another interesting interpretation as shown in Figure 12, co-sourcing is defined as a many-to-one relationship where multiple clients form an alliance by pooling their needs and resources, and contract with a single vendor for joint delivery of IS services (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). Furthermore, Gallivan and Oh (1999) state that in addition to IS outsourcing such client alliances can also be found in business disciplines such as marketing (i.e., co-marketing) and management (i.e., R&D consortia), and have advantages of risk sharing and reduction, increased bargaining power, and buyer economies of scale.

creative contracting •

Innovative contracts for better deals

In creative contracting, the client is a tougher shopper and includes special clauses in the contract in order to satisfy its own needs and get better deals (Willcocks & Lacity, 1998, pp. 26, 32). The client examines various options and is looking for the best deal.

Figure 13. Creative contracting

144

As illustrated in Figure 13, the clients include ingenious and favorable clauses in the contract so that it can get the best deal. Willcocks and Lacity (1998, pp. 32-33), list the following four creative contracting practices:

• • • •

Inclusion of a customer-written contract with the request for proposal. Provide for competitive bidding of services beyond the contract. Flexible pricing mechanisms. Beginning a long term relationship with a short term contract.

distributed consulting •

Vendor has teams both at onshore and offshore

In the case of offshore-outsourcing, there is often a need to have vendor team both at onshore and offshore, where the onshore vendor team coordinates face-to-face with client and the bulk of the outsourced work is carried out by the offshore vendor team, this is known as distributed consulting (see Figure 14).

Making Sense of the Sourcing and Shoring Maze

Figure 14. Distributed consulting

This is a widely accepted practice to ensure effective coordination between onshore-based clients and offshore-based vendors. For example, TCS (http://www.tcs.com), Infosys (http://www. infosys.com), Wipro (http://www.wipro.com) and Satyam (http://www.satyam.com), all large software service providers (primarily based in India), have for long incorporated this concept into what they call the “global delivery model.” Kobyashi-Hillary (2004, p. 153) calls this particular concept of having offshore/onshore blends of vendor teams as distributed consulting.

dyadic Outsourcing arrangement •

Independent client dealing with independent vendor

A dyadic outsourcing arrangement assumes a one-to-one relationship between a client and a vendor, the presumption being that the client firms seeking IS services act independently of each other and that the vendor firms providing the IS services act independently of each other (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13).

As shown in Figure 15, in dyadic outsourcing arrangements a client can engage multiple vendors for various IS functions, however its vendors are independent of each other; similarly, a vendor can provide services to multiple clients, but its clients are independent of each other. There is a one-to-one relationship between each client and each vendor providing services to that client.

Facilities management •

Vendor maintains the client’s assets

In “facilities management” outsourcing, the client owns the technology assets but hires a vendor to take over the operational control of these assets (Dibbern et al., 2004, p. 7; Sparrow, 2003, pp. 6-7). As illustrated in Figure 16, the ownership of the technology assets (which may reside at either the client’s premises or elsewhere) is not transferred to the vendor. The vendor is expected to offer expertise and also lower the costs of maintaining these technology assets. For example, a vendor may be hired to manage the computer hardware and also regularly upgrade the software needs of the customer more efficiently. The vendor may involve in

145

Making Sense of the Sourcing and Shoring Maze

Figure 15. Dyadic outsourcing arrangement

Figure 16. Facilities management

operational and systems programming tasks (for the technology assets being managed), but not in the development of applications (which are outside the scope of “facilities management”).

Facilities sharing •

146

Sharing ownership of facilities needed by each

As shown in the Figure 17, in the “facilities sharing” form of outsourcing, a firm chooses to share ownership of IS facilities with either a vendor or others in the same industry (Dibbern et. al., 2004, p. 7). This can be prove to be a cost effective approach, where more than one firm chooses to share the ownership of the IS facilities required by each of the firms. The details regarding maintaining operational control over these shared facilities will need to be worked out.

Making Sense of the Sourcing and Shoring Maze

Figure 17. Facilities sharing

On one hand, a firm may choose to share both the ownership and operational control of facilities with another firm. On the other hand, a firm may choose to share the ownership of the facilities with a vendor, and in addition the vendor is hired by the firm to assume operational control over the shared facilities.

global delivery

The “global delivery model” is an offshoreoutsourcing model that takes advantage of the global talent pool to give the best value to the client in terms of cost and quality. As illustrated in Figure 18, the work is broken down into logical components, which are then distributed to suitable global locations such that the client gets access to the vendor’s global talent and also creates maximum value for the client in terms of cost and quality (Infosys, n.d.). For example, in the case of software production, the onshore vendor team can be involved in client interaction and co-ordination, systems planning and selection, systems analysis, requirements determination, high level design, acceptance testing, implementation, and rapid maintenance support; while the offshore vendor team can be involved in project management, requirements analysis, detailed design, coding, testing and integration, documentation, and maintenance.

•

managed Offshore Facilities

general Outsourcing •

Selective, value-added and cooperative outsourcing

General outsourcing encompasses the three alternatives of selective outsourcing, value-added outsourcing, and cooperative outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5).

Large vendor delivering services from various global locations to clients at various global locations

In global delivery, a large vendor’s IS delivery centers are located worldwide and are comprehensively networked with collaborative systems that allow seamless integration of projects delivered from multiple locations and thereby providing economies of scale and scope (Tata Consultancy Services, n.d.).

•

Outsourcing the process of setting up facilities for offshore-insourcing

As illustrated in the Figure 19, in “managed offshore facilities”, the client outsources the process of creating its offshore subsidiary to a vendor; once the offshore facility is up and running, the client can take full ownership and hence carry out

147

Making Sense of the Sourcing and Shoring Maze

Figure 18. Global delivery

Figure 19. Managed offshore facilities

its offshore-insourcing operations. Also, vendors may be given the task of “facilities management” of the client’s offshore subsidiary. Managed offshore facilities is a variant of the Build-Operate-Transfer model, where the vendor manages the process of creating the offshore facility, and the client has the option of taking full ownership by a specified date (i-Vantage, n.d.;

148

Kobyashi-Hillary, 2004, p. 153). This outsourcing alternative has the potential to reduce many hassles for a firm that decides to set up a subsidiary for offshore-insourcing.

Making Sense of the Sourcing and Shoring Maze

multi-sourcing • •

One contract with multiple vendors Multiple sourcing strategies in a continuum

The term multi-sourcing has been interpreted in two ways. In one interpretation of multi-sourcing, the client has one outsourcing contract with multiple suppliers (Willcocks & Lacity, 1998, pp. 26, 29-30). Willcocks and Lacity (1998) note that in multi-sourcing, while the risks of being dependent on a single vendor are reduced, additional time and resources are required to manage multiple vendors. This interpretation of Multi-sourcing has also been termed as “multi-vendor outsourcing” by Gallivan and Oh (1999) and as “multi-supplier sourcing” by Currie and Willcocks (1998). In another interpretation as shown in Figure 20, multi-sourcing has been defined as the multiple sourcing of IS services, specifically seen as a continuum, where the end points of the continuum

span from “OK as is” to “divest completely” (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11). Furthermore, the various strategies of the multi-sourcing continuum have been given as: (1a) (1b) (2a) (2b) (2c) (3a) (3b)

Insourcing -> “OK as is” Insourcing -> “fix and keep in-house” Co-sourcing -> “rehabilitation and return” Co-sourcing -> “transition assistance” Co-sourcing -> “capability development” Outsourcing -> “option to reverse” Outsourcing -> “divest completely”

multi-vendor Outsourcing / multiple-supplier sourcing / dual sourcing •

Client dealing with multiple interdependent vendors

In multi-vendor outsourcing a one-to-many relationship exists, indicating that one client

Figure 20. Multi-sourcing continuum

149

Making Sense of the Sourcing and Shoring Maze

uses multiple vendors and that division of labor is jointly negotiated and understood by all parties to the agreement (Gallivan & Oh, 1999, pp. 1-6; see also Dibbern et al., 2004, pp. 12-13). As shown in Figure 21, multi-vendor or multi-supplier outsourcing arrangements allow a client to engage multiple vendors for various IS functions which are then jointly performed by the multiple vendors through an agreed upon division of labor. This implies that a cooperative and also competitive environment exists between the vendors working together. In multiple-supplier sourcing the client enters into IS sourcing arrangements with a variety of suppliers/vendors (Currie & Willcocks, 1998, pp. 122-123). Currie and Willocks (1998), state the following three advantages of multiple-supplier sourcing: (a) the client can safeguard against being dependent upon a single vendor, and prevent a scenario where a single vendor controls all its IS assets, (b) the client with short-term contracts that are and liable for renewal not necessarily with the same vendor (or combination of vendors) encourages competition and innovation, and (c) the client can concentrate on its core business while the suppliers manage and provide IS services. The identical concepts of multi-vendor outsourcing (Gallivan & Oh, 1999, pp. 1-6) and multiple-supplier sourcing (Currie & Willcocks,

Figure 21. Multi-vendor outsourcing

150

1998) have also been termed as simply “multisourcing” by Willcocks and Lacity (1998). Klotz and Chatterjee (1995, p. 1317) have used the term “dual sourcing” to indicate a scenario where a client sources from two vendors, which prevents the client from being held by hostage by a monopolistic vendor over time, and helps the client to derive cost advantages due to the competition between the vendors.

project management Outsourcing •

Vendor manages a project

In project management outsourcing, the client outsources a specific project or portion of the IS work, and the vendor is responsible for managing and completing the work (Lacity & Hirschheim, 1993a, pp. 17-18). Further, project management outsourcing may involve the use of vendors for development of new systems, maintenance of existing systems, providing training, managing networks, and handle disaster recovery.

selective / smart / right / Flexible / modular sourcing •

Outsourcing and insourcing optimally

Making Sense of the Sourcing and Shoring Maze

Selective sourcing or smart sourcing is the practice of outsourcing select IS applications to vendors, while retaining other IS applications in-house (Lacity, Willcocks & Feeny, 1996, pp. 13-14). Right sourcing, flexible sourcing, and modular sourcing are synonyms of the same. When one particular area of the client’s IS activity is chosen to be turned over to a vendor, it is known as selective outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5). As illustrated in Figure 22, firms often prefer to keep select IS functions in-house based on their own strengths and capabilities, and outsource the IS functions which they feel can be better performed by a vendor. This is a flexible and modular form of outsourcing where all the IS functions are broken down into multiple modules, some of which are outsourced and some are retained in-house based on cost analysis, technology and resource needs. Selective sourcing, which eschews the allor-nothing approach in favor of more flexible, modular outsourcing, is characterized by shortterm contracts of less that five years for specific activities, and hence meets the customer’s needs while minimizing risks associated with total

outsourcing approaches (Lacity et al., 1996, pp. 13-14). In selective sourcing, clients outsource between 20 to 60% of the IS budget to vendors (typically around 40%) while still retaining a substantial internal IS department (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, this recommended approach is capitalizes on the respective strengths of both internal and external service providers.

spin-Offs •

An IS department that now sells to the market

A spin-off is an entity, which was originally an internal IS department of a firm, and is now selling its services to the market (Willcocks & Lacity, 1998, pp. 26, 31-32). The parent firm either totally or selectively sources IS functions from the spin-off (Dibbern et al., 2004, p. 12). A spin-off is a client entity as long as its ownership control remains with the client, however if the client gives up the ownership control (for example by divesting its majority equity stake) it becomes a non-client

Figure 22. Selective / smart / right / flexible / modular sourcing

151

Making Sense of the Sourcing and Shoring Maze

entity. So a client insources from a spin-off that it owns, but outsources to a spin-off that it does not own anymore.

strategic alliances / partnerships / Joint ventures / Equity holdings / strategic sourcing •

Sharing risks and rewards

As shown in the Figure 23, a client enters into a strategic alliance or partnership with a vendor on a shared risk/reward basis which may involve (a) contracting with a vendor to share risk/rewards, (b) helping to create a new joint venture company to which work can be outsourced, or (c) take share/ equity holding in each other (Currie & Willcocks, 1998, p. 124; Sparrow, 2003, p. 12; Willcocks & Lacity, 1998, pp. 26, 27-28). Furthermore, by entering into a joint venture a client has greater control of the vendor’s activities. Currie and Willcocks (1998) have treated the terms “joint venture” and “strategic alliance” synonymously. Benefit-based relationships (Sparrow, 2003, p. 13) and business benefit contracting (Millar, 1994, as cited in Lacity & Hirschheim, 1995,

pp. 4-5) may be considered as methodologies to share risk/reward on the basis of the contractual agreement. The client and vendor can set up a separate “joint venture” organization which has its own management team, and its IS staff can be provided by both the parties, thus enabling the client to gain access to new technical skills and resources, reorganize IS functions and processes and investigate new sources of revenue (Sparrow, 2003, p. 12). In equity holding deals, the client takes an equity position in the vendor, and vendor may also take an equity position in the client (Willcocks & Lacity, 1998, pp. 26, 27-28). In strategic sourcing, a customer decides in a wider business context on what, when, and how to outsource, and hence aiming to achieve a significant improvement in business performance rather than a short-term cost saving alone; the customer and supplier work towards mutual interests and are willing to share risk and rewards (Sparrow, 2003, p. 8). Ideally, a partnership, joint venture or strategic alliance is best classified as an arrangement for sharing risks and rewards between

Figure 23. Strategic alliances / partnerships / joint ventures / equity holdings

152

Making Sense of the Sourcing and Shoring Maze

a client and a vendor. Dibbern et al. (2004, p. 52) interestingly state the following: It should be noted that the terms partnership, alliance, and relationship are loosely defined in the outsourcing literature. For example, Grover et al. (1996) suggest a connection between the presence of certain elements of ‘partnership’ and outsourcing success. However, they go on to note that other researchers (Lacity & Hirschheim, 1993; Fitzgerald & Willcocks, 1994) believe the relationship between an outsourcing vendor and its customer should not be characterized as a partnership unless there is a true sharing of risks and rewards. In another example, Lacity and Willcocks (1998) state that the term “partnership” was commonly used by firms when referring to feefor-service contracts. The vague and inconsistent use of these terms contributes to the difficulties in comparing results among studies.

its internal IS departments’ bid over vendor bids, thus keeping over 80% of the IS budget in-house (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, total insourcing can sometimes be a poor IS strategy because it may fail to capitalize on the inherent cost advantages provided by vendors, and may create a political environment of complacency.

Total Outsourcing / Traditional Outsourcing • •

Outsourcing maximum percentage of IS budget Vendor having complete charge of significant IS work

Total insourcing

There are two interpretations of total outsourcing. One is based on the percentage of IS budget outsourced, and the other is based on the totality of the work or project outsourced. In the first interpretation of total outsourcing, clients outsource at least 80% of there IS budgets to vendors (Lacity & Hirschheim, 1995, pp. 4, 223-224; see also Dibbern et al., 2004, p. 10). Furthermore, total outsourcing can sometimes be a poor IS strategy because it fails to capitalize on the potential inherent cost advantages of internal IS departments. Total outsourcing has also been referred to as traditional outsourcing (Dibbern et al., 2004, p. 12). In the second interpretation of total outsourcing, the vendor is in complete charge of a significant piece of IS work, such as entire hardware operations (e.g., data center and/or telecommunications) and software support (sometimes including applications development) (Lacity & Hirschheim, 1993a, pp. 17-18).

•

Transformational Outsourcing

Tactical Outsourcing / contracting-Out / Out-Tasking •

Outsourcing for rapid solution to problems

Tactical outsourcing is adopted to solve a particular need or problem rapidly over a short period of time; it is also known as contractingout or out-tasking (Sparrow, 2003, p. 8). When a firm finds itself short of in-house resources to complete a particular task in quick time, the task can be contracted out to competent firms or individuals thereby giving the firm rapid access to new technical skills.

Insourcing maximum percentage of IS budget

In total insourcing, though a firm formally evaluates outsourcing options, it finally selects

•

Streamlining of client’s internal organization alongside outsourcing

153

Making Sense of the Sourcing and Shoring Maze

In transformational outsourcing, companies transform by comprehensive reorganization and streamlining of its business processes and technology infrastructure and the outsourcing of IS needs, in order to reduce costs and improve services (Sparrow, 2003, p. 10). As shown in Figure 24, a company (client) decides to transform by reorganizing and streamlining the way it operates; and a component of such reorganization and streamlining would be outsourcing.

Transitional Outsourcing •

Outsourcing during a major changeover

When companies need to introduce a major transition, such as migration from one technological platform to another involving the outsourcing

Figure 24. Transformational outsourcing

Figure 25. Transitional outsourcing

154

of one or more of the following three phases: (a) management of the legacy systems, (b) transition to the new technology/systems, and (c) stabilization and management of the new platform, it is known as “transitional outsourcing” (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5), which is illustrated in Figure 25. Firms sometimes undertake transitions like infrastructure overhauls and IS consolidation in order to bring in more efficiency, and make use of newer technologies. Conceptually, transitional outsourcing has also been addressed as “transition assistance” in the co-sourcing continuum (Wibbelsman & Maiero, 1994, as cited in Dibbern et al., 2004, p. 11).

Making Sense of the Sourcing and Shoring Maze

value-added Outsourcing • •

Combined strengths for the market Vendor adding value to IS activity

There are two interpretations of the term “value-added outsourcing”. One interprets on the basis of selling jointly developed products and services in the marketplace, and other interprets on the basis of additional value added to a service by the vendor. In the first interpretation of value-added outsourcing that is shown in Figure 26, both the client and the vendor combine their strengths to jointly develop and market new products and services (Willcocks & Lacity, 1998, pp. 26-27). Willcocks and Lacity (1998) argue that because each partner shares revenue from the external sales, the partnership resulting from value-added outsourcing is an alliance with shared risks and rewards. As per the second interpretation, when some area of the client’s IS activity which could not be cost effectively provided by the internal IS department, is turned over to a vendor that can provide a level of support or service that adds value to the activity, it is known as value-added outsourcing (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 4-5).

FuTurE TrEnds As the reader would gauge after reading this chapter, a large number of terminologies are already being used in the world of IS sourcing. There are two highly noticeable aspects that come to fore. The first is that most of the terminologies in literature deal with the client’s perspective (for example, what is best for the client and how the client should handle vendors), and the vendor’s perspective is almost absent. The second is that most of the terminologies in literature relate to the insourcing versus outsourcing line of thought and relatively fewer terminologies relate to the lateral phenomenon of offshoring. A large majority of available literature has analyzed issues from the perspective of the client. The lack of literature giving the vendor perspective implies that this gap may be filled in the future, leading to a greater understanding of the vendor’s methodologies. This would imply more terminologies being added with the vendor’s perspective in mind (like global delivery). Though offshoring in the manufacturing and textile industries had taken place a long time back, the offshoring of IS work is a relatively new phenomenon. Most the sourcing alternatives that were discussed in this chapter are conceptually applicable to both onshoring and offshoring. However, due to various advantages (like cost savings, skilled labor pool, etc.) and disadvantages

Figure 26. Value-added outsourcing

155

Making Sense of the Sourcing and Shoring Maze

(like communication and coordination problems, etc. …), the offshore versions of insourcing and outsourcing are quite distinctive from the conventional onshore versions. Hence, there is the possibility of a more onshore versus offshore line of research (for both insourcing and outsourcing).

cOnclusiOns This chapter compiled the maze of sourcing alternatives and terminologies that have come into being in recent times. The sheer number of these alternatives justifies the need for this chapter. This pursuit for terminologies and concepts resulted in the understanding of various sorts of insourcing, outsourcing, onshoring and offshoring of business needs and therefore elucidated this behemoth of a phenomenon that is continuously changing the way business is carried out globally.

rEFErEncEs Apte, U. M., Sobol, M. G., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T. & Vepsalainen, A. P. J. (1997). IS outsourcing practices in the U.S.A., Japan and Finland: A comparative study. Journal of Information Technology, 12, 289-304. Bennett, C., & Timbrell, G. (2000). Application service providers: Will they succeed? Information Systems Frontiers, 2(2), 195-211. Chakrabarty, S. (2006). The journey to new lands: Utilizing the global IT workforce through offshore-insourcing. In P. Yoong & S. Huff (Ed.), Managing IT professionals in the Internet age. Hershey, PA: Idea Group Publishing.

information systems. Journal of Information Technology, 10(4), 209-210. Currie, W. L. (1998). Using multiple suppliers to mitigate the risk of IT outsourcing at ICI and Wessex Water. Journal of Information Technology, 13(3), 169-180. Currie, W. L., & Willcocks, L. P. (1998). Analyzing Four Types of IT Sourcing Decisions in the Context of Scale, Client/Supplier Interdependency and Risk Mitigation. Information Systems Journal, 8(2), 119-143. Dewire, D. T. (2000). Application service providers. Information Systems Management, 17(4), 14-19. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Fitzgerald, G., & Willcocks, L. P. (1994). Contracts and partnerships in the outsourcing of IT. Proceedings of the 15th International Conference on Information Systems, Vancouver, Canada (pp. 91-98). Gallivan, M. J., & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. Proceedings of the 32nd Annual International Conference on System Sciences, Hawaii. Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116.

Chaudhury, A., Nam, K., & Rao, H. R. (1995). Management of information systems outsourcing: A bidding perspective. Journal of Management Information Systems, 12(2), 131-159.

Hirschheim, R. A., & Lacity, M. C. (1998). Reducing information systems costs through insourcing: Experiences from the field. In Proceedings of the 31s t Annual Hawaii International Conference on System Sciences, Hawaii (pp. 644-653).

Cheon, M. J., Grover, V., & Teng, J. T. C. (1995). Theoretical perspectives on the outsourcing of

Hu, Q., Saunders, C., & Gebelt, M. (1997). Re-

156

Making Sense of the Sourcing and Shoring Maze

search report: Diffusion of information systems outsourcing: A reevaluation of influence sources. Information Systems Research, 8(3), 288-301. Infosys. (n.d.). Global delivery model. Retrieved January 27, 2005, from http://www.infosys.com/ gdm/default.asp i-Vantage. (n.d.). Global insourcing services. Retrieved January 27, 2005, from http://www.ivantage.com/GlobalInsourcingServices.html Kern, T., Lacity, M. C., & Willcocks, L. P. (2002). Netsourcing: Renting business applications and services over a network. New York: Prentice Hall. Klotz, D. E., & Chatterjee, K. (1995). Dual sourcing in repeated procurement competitions. Management Science, 41(8), 1317-1327. Kobyashi-Hillary, M. (2004). Outsourcing to India: The offshore advantage. Berlin: SpringerVerlag. Lacity, M. C., & Hirschheim, R. A. (1993a). Implementing information systems outsourcing: Key issues and experiences of an early adopter. Journal of General Management, 19(1), 17-31. Lacity, M. C., & Hirschheim, R. A. (1993b). Information systems outsourcing: Myths, metaphors, and realities. Chichester, UK: Wiley. Lacity, M. C., & Hirschheim, R. A. (1995). Beyond the information systems outsourcing bandwagon: The insourcing response. Chichester, UK: Wiley. Lacity, M. C., & Willcocks, L. P. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M. C., Willcocks, L. P., & Feeny, D. F. (1996). The value of selective IT sourcing. Sloan Management Review, 37(3), 13-25.

Loh, L., & Venkatraman, N. (1992). Determinants of information technology outsourcing: A cross-sectional analysis. Journal of Management Information Systems, 9(1), 7-24. Pring, B., & Ambrose, C. (2004). Vendors vie for competitive position in ASP market. Gartner Research (Publication Date: 3 November 2004, ID Number: G00124388). Sparrow, E. (2003). Successful IT outsourcing. London: Springer-Verlag. Susarla, A., Barua, A., & Whinston, A. B. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-123. Tata Consultancy Services. (n.d.). Flexible global delivery. Retrieved January 27, 2005, from http:// www.tcs.com/investors/BusinessOverview/ FlexibleGlobal Delivery.aspx Tata Consultancy Services. (n.d.). Our industry practices. Retrieved January 27, 2005, from http:// tcs.com/0_industry_practices/index.htm Tata Consultancy Services. (n.d.). Our service practices. Retrieved January 27, 2005, from http:// tcs.com/0_service_practices/index.htm Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester, UK: Wiley. Willcocks, L. P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal of Information Systems, 7(1), 29-45.

nOTE The author may be contacted at schakrabarty@ tamu.edu or [email protected].

This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 18-53, copyright 2006 by IGI Publishing (an imprint of IGI Global). 157

158

Chapter 1.9

Information Technology Outsourcing Anne C. Rouse Deakin University, Australia

inTrOducTiOn

backgrOund

Organizations have used external vendors to supply information technology (IT) functions since the first commercial implementations. In the sixties, the use of facilities management, contract programmers, and contract project management were common, but during the 70s, many organizations relied increasingly on internal delivery of IT services. The term “outsourcing” arose in the late 80s. Since that time industry has seen a fundamental change in the way information technology (IT) services are organized and delivered, with increasing reliance on external, outsourced providers. Managing outsourced IT service delivery has now become a core competence for organizations

According to Willcocks and Lacity (1998, p. 3), outsourcing involves “handing over to a third party [the] management of IS/IT assets, resources and/ or activities for required results”. There is general consensus that outsourcing involves delegating the responsibility for “how” to produce definable outcomes to an external party, while retaining responsibility for specifying “what” is to be delivered. Instead of controlling the behavior of service staff directly, the purchaser controls performance through a contract or service agreement, which articulates the services required, and the performance criteria. The rise of the term “outsourcing” occurred when, in the 80s, several large U.S. corporations announced they were handing over control of their IT function to one or more vendors. The most prominent of these was Eastman Kodak. At that time, it was common in the trade literature

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Information Technology Outsourcing

(and some academic literature) to argue that IT had become a commodity. By outsourcing IT, it was asserted that organizations could more easily concentrate on core business. In the early 90s, announcements like Eastman Kodak’s tended to produce a rise in share price, as the market anticipated consequent cost savings or improved organizational performance. Thus, the stock market response was an important outsourcing driver. Another significant driver was the growth of communications technologies, which enabled vendors to provide services remotely. A less-frequently acknowledged reason for the rise in outsourcing was IBM’s entry into the IT services arena, joining Electronic Data Systems (EDS), which had been spun off as a separate IT service vendor from its parent, General Motors. The dwindling profitability of hardware and software sales acted as an impetus, as outsourcing provided a relatively stable and long-term source of income and profits. Thus, in many ways, outsourcing is a vendor-driven phenomenon. In the fifteen years since IT outsourcing emerged as an academic topic, the phenomenon has grown and adapted, and now embraces a range of variants. These include “business process outsourcing” (BPO), “off shore outsourcing” or “offshoring”, and “application service provider” services (ASPs). Gartner (2005) reports that outsourcing is the prime driver for the IT services market, estimated to be around $US600 billion in 2004. While growth in the IT outsourcing market has slowed, the growth in new outsourcing forms (offshoring, and BPO) is reportedly strong, so the topic is likely to remain important in the IS discipline for some time.

ThEOrETical undErpinnings There is no generally agreed “theory” of outsourcing but a range of theories drawn from economics, strategy, marketing, and public policy have been used to understand the phenomenon.

Economic Theory Economic theories tend to view outsourcing as a variation on the “make or buy” decision that organizations must take and to view sourcing decisions as being based on relative costs. Outsourcing is seen to lead to lower cost of delivery under certain circumstances. The most influential economic theory, and probably the most widely used in outsourcing research, is transaction cost theory (TCT) (Williamson & Masten, 1999). This theory predicts when decision makers will choose the market to deliver services and when they will choose in-house delivery through the organizational hierarchy. These are seen as polar forms of service provision, although a range of hybrid forms are possible. According to TCT, the relative costs for these two strategies depend on two types of costs: production costs—usually reduced in markets because of competition—and transaction costs; and the costs of finding, contracting with and dealing with vendors in the market. Transaction costs are difficult to measure and can be so high as to outweigh the outsourcing savings associated with reduced production costs. TCT predicts that several factors will influence whether outsourcing leads to cost savings, including level of uncertainty, frequency of transactions, and extent to which the services are “asset specific”, that is, tailored to a specific vendor or purchaser and so not easily deployed elsewhere. Some TCT propositions have been confirmed for IT outsourcing (Aubert, Rivard, & Patry, 2004) though it is also argued that many of the TCT constructs are difficult to operationalize and so the theory is difficult to disprove (Ghoshal & Moran, 2005). Resource dependency theory, and the Resource-based view (RBV) of the firm are two economic theories that underlie the “core competency” argument discussed next. Resource dependency theory argues that organizations will

159

Information Technology Outsourcing

seek to reduce dependency on external providers for key resources and that factors increasing dependency include a small number of potential suppliers, and switching costs. Resource-based theory (Barney, 2002) argues that it is differences (heterogeneity) in resources between firms that allow some to sustain competitive advantage and that outsourcing allows firms to access resources (usually intangible) they do not currently have. They can then devote attention to resources and capabilities they do possess that are likely to lead to greater profitability. These include resources/ capabilities that are rare, valuable, difficult to imitate, and not easily substituted—such services should not be outsourced. Another economic theory with implications for outsourcing is agency theory (Laffont & Martimort, 2002). This recognizes that the provider has different motives from the purchaser and that there is often information asymmetry between the two. This theory proposes that the purchaser needs different forms of control for different types of services. Where it is difficult to measure the effort involved in service delivery, agency theory predicts that an outcomes-based, contractual form of control (like that associated with outsourcing) will lead to lower costs.

strategic management Theories Much of the impetus to outsource IT has come from strategic theories related to the idea of core competency and the notion that managerial attention is a limited resource. The underlying proposition is that modern organizations cannot concentrate on all business functions and still achieve sustainable advantage so they must focus on those key processes or capabilities where they have unique advantages. Organizations should delegate to external providers as many non-core processes as possible, in the expectation that vendors will, through specialization and economies of scale, be able to provide higher quality services at lower cost.

160

As a result of this theory, there appears to be general consensus (e.g., Lacity & Willcocks, 2001) that core, or “strategic” IT services, should be kept in-house, while non-core services and commodities should be outsourced. However, this proposition has proved difficult to test as few IT services are commodities, and it is not easy to operationalize “core” services. An assumption underlying the core-competency view is that managing the relationship with a vendor will drain less attention than providing services in-house and that economies of scale and specialization will reduce vendor production costs low enough to outweigh increased transaction costs. These propositions have not been empirically verified.

marketing Theories While economic theories concentrate on the relative costs of outsourcing, marketing theories concentrate on the way quality, success, and value are judged by purchasers of outsourced services, and the way relationship elements, like trust, affect these judgments. An important notion that is used in studying outsourcing is that of service quality (Parasuraman & Zeithaml, 2002), which predicts long-term satisfaction with a vendor and intention to re-purchase. There has been increasing attention devoted in the IT outsourcing literature to the effects that the quality of the outsourcing relationship and notions of trust have on outsourcing satisfaction and other success measures (Kern & Willcocks, 2002; Lee, Huynh, Kwok, & Pi, 2003). Theories underlying this research include service quality theory, theories related to trust, and exchange theory. Good overviews of service marketing and relationship theories can be found in White and Schneider (2003).

public policy Theories The public sector is a major user of IT outsourcing, and in some regions (particularly, the

Information Technology Outsourcing

UK and Australasia) has pioneered large-scale outsourcing arrangements. In the public policy literature, outsourcing is often couched as part of the “steer rather than row” philosophy (Osborne & Gaebler, 1993). This philosophy, in turn, has been influenced by strategic management theories discussed previously.

OuTsOurcing rEsEarch A brief check of electronic resources (like ABI Inform) reveals thousands of articles on outsourcing and hundreds of papers labeled “peer reviewed” or “academic”. An examination of these, though, will show that most of them are practitioner (or academic) opinion. Much of the IT outsourcing literature is written either directly, or indirectly by staff employed by outsourcing vendors or by specialist outsourcing advisory services. A detailed review of the mainstream academic literature to 2001 is found in Dibbern, Goles, Hirschheim, and Jayatilaka (2004). This reveals that systematic empirical research into outsourcing has been limited and that much of this has concentrated on the reasons purchasers choose to outsource (or not outsource). The predominant research methodology has been “case studies” but the depth to which case studies are reported, and the extent to which the researchers adopted a critical, theory-testing approach, has varied. There have been few theory-testing studies in the literature and very few studies that have statistically tested propositions related to outsourcing practices. A widely cited and influential paper was published by Lacity and Willcocks (1998). This summarized 61 sourcing cases the authors had undertaken (of which around half involved outsourcing). The authors compared these cases to explore various outsourcing propositions but recognized that opportunistic cases are often atypical and that their research might not generalize to wider populations. More recent survey research (Lee & Kim, 1999; Rouse & Corbitt,

2003) has not been able to confirm one of their most widely-recognized assertions—that “selective” outsourcing is generally more successful than “total” outsourcing. It is possible that other findings Lacity and Willcocks reported were unique to the cases they studied. Drawing on either their own outsourcing experience, or on case studies, a number of writers have produced practical guidebooks for managing outsourcing arrangements. The prescriptions supplied in these guides provide rich source material for researchers, though few recommended practices have been confirmed empirically. Instead, much of the empirical research has investigated motivations for IT outsourcing. The most common goals include: to save costs, to concentrate more on core business, to gain access to skills and technologies not provided in-house, and to get better quality service or advice. Outsourcing is often employed to gain greater long-term flexibility by exchanging fixed costs or capital for variable costs. Public sector agencies also seek to outsource to increase accountability. Surprisingly, little evidence exists to confirm that these benefits (other than access to new skills and technologies) are widely obtained from outsourcing. More recent qualitative research has been concerned with the quality of the outsourcing relationship (e.g., Kern & Blois, 2002; Barthelemy, 2003; Levina & Ross, 2003; Lacity, Feeny, & Willcocks, 2004). Confirmatory research has also investigated the role of relationship elements in outsourcing success (e.g., Lee, 2001). However, confirmatory research is currently held back by the lack of agreement about what the dependent variable should be and how it should be measured. It is not yet clear whether judgments about the relationship are the result of vendor performance, and consequent purchaser satisfaction, or whether a high quality relationship leads to satisfaction. There is growing interest in the academic literature on the reconciliation of competing goals, and the management of the downsides or risks of outsourcing. Hirschheim and Lacity

161

Information Technology Outsourcing

(2000) warned that in many cases there is a trade off between different goals. So, for example, flexibility often involves higher short-term costs while exchanging capital for variable costs is often more expensive in the long run. A common theme in the literature is that outsourcing tends to bring both benefits and downsides and that even after 15 years of research still involves substantial risks. These may include failure to obtain expected cost savings, reduced business flexibility, loss of control, increased dependence on the provider (even “lock in”), threats to privacy/ confidentiality, and intellectual property issues (Aubert et al., 2004). Key researchers currently conducting empirical research into IT outsourcing are included in Table 1. Excluded from this table are researchers who have reported one-off case studies or studies into the motivations/drivers of outsourcing. In summary, a review of the literature reveals that, despite a large body of academic literature,

the empirical evidence base for making outsourcing decisions is surprisingly thin. The research available to guide decision makers consists mainly of singular case studies, argumentation, and opinion, and there have been few attempts to validate claims.

FuTurE TrEnds A growing trend in the trade literature has been the reporting of “consultant” surveys claiming IT outsourcing has generally failed to meet expectations, particularly for cost savings. This may be self-serving, though the limited academic data that has been gathered to date tends to confirm it (see Rouse & Corbitt, 2003). It is expected that more researchers will undertake hypothesis testing studies to determine whether the theoretical benefits of outsourcing are widely encountered and what the boundary conditions are.

Table 1. Key IT outsourcing researchers and their research focus Researcher(s) Ang; Ang and Straub

Nature of research Large quantitative studies

Aubert, Rivard and Patry

Quantitative studies, theoretical studies, case studies Case studies

Barthelemy

Kern; Kern and Willcocks; Willcocks and colleagues

Case studies focusing on vendor-client relationship

Lacity, Hirschheim

In depth case studies of outsourced and insourced IT services Case studies; cross case comparisons; small-n surveys, global outsourcing

Lacity, Willcocks, Feeny and colleagues

Lee, Leet et al., Lee and Kim Rouse; Rouse and Corbitt

162

Large quantitative studies Large quantitative study, longitudinal case study, focus groups

Key findings Outsourcing is related to skills shortage; outsourcing success is predicted by fulfilled obligations; outsourcing adopters tend to concentrate on production cost savings but non-adopters on transaction costs. Uncertainty is the major deterrent to outsourcing, access to technical skills is the major driver; outsourcing is risky; risk management model proposed. Outsourcing needs both hard (contractual) and soft management strategies; outsourcing has hidden costs, though some can be mitigated. A range of practices recommended as likely to lead to success; outsourcing can result in negative outcomes where both vendor and client suffer from over-promising; the vendor-client relationship evolves over time and involves contractual and non contractual elements; post contract management is important to success. Outsourcing motives are frequently political; the strategy has substantial risks; outsourcing benefits can often be obtained through in-house delivery; outsourcing usually involves trade-offs. The search for cost savings is the major driver for outsourcing; “selective outsourcing” is generally successful; a range of practices are recommended as likely to be successful; models of the outsourcing process proposed; key criteria for benchmarking suppliers and determining “knowledge potential” proposed. Relationship quality and trust predict outsourcing success; outsourcing falls into distinct configurations. Outsourcing is riskier than recognized; outsourcing leads to satisfaction, cost savings, in only a minority of organizations; some practices lead to discernible benefits, while others (e.g. “selective outsourcing”) do not; selective outsourcing not more successful than total outsourcing.

Information Technology Outsourcing

The growth in new variations of outsourcing (BPO, offshoring, and ASPs) provides additional research focuses, and proponents argue that these may lead to greater economic benefits than IT outsourcing has been able to provide. However, as with IT outsourcing, there has been little systematic research to date, and the little research that has been done has generally involved isolated, often anecdotal case studies. An emerging topic is how the risks and downsides of IT outsourcing (and later variants like BPO and offshoring) can better be identified and managed (e.g., Bahli & Rivard, 2005; Rouse & Corbitt, 2003b) . There is growing interest in the quality of the vendor-client relationship. With increasing proportions of IT services now outsourced, this is likely to be an area of growing interest in the future.

cOnclusiOn Despite more than 15 years of study, there are large gaps in academic knowledge related to IT outsourcing. The emphasis on case study research, and the scarcity of statistically-reliable studies have resulted in an abundance of conflicting findings and claims, with limited hypothesis-testing research to reconcile these. Consequently, a number of unchallenged recommendations regarding when, what, and how to outsource have arisen. There is a need for researchers to shift emphasis from theory-generation to theory testing so as to discover which plausible recommendations are supported by evidence, and to determine the boundaries for current theory. This in turn requires that attention be paid to the dependent variable(s) associated with outsourcing success and to the various competing expectations and consequent trade-offs that outsourcing involves.

rEFErEncEs and kEy rEadings Ang, S., & Straub, D. (1998). Production and transaction economies and IS outsourcing. A study of the U.S. banking industry. MIS Quarterly, 22( 4), 535-552. Aubert, B. A., Rivard, S., & Patry, M. (2004). A transaction cost model of IT outsourcing. Information and Management, 41(7), 921-933. Bahli, B., & Rivard, S. (2005). Validating measures of information technology outsourcing risk factors. Omega, 33(2), 175-187. Barney, J. (2002). Gaining and sustaining competitive advantage (2nd ed.). NJ: PrenticeHall. Barthelemy, J. (2003). The hard and soft sides of IT outsourcing management. European Management Journal, 21(5), 539-549. Dibbern , J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004, Fall). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Gartner (2005). Outsourcing drives IT services growth. Retrieved May 2005, from www.gartner.com/5_about/press_releases/pr2004.jsp Ghoshal, S., & Moran, P. (2005). Bad for practice: A critique of the transaction cost theory. In J. Birkinshaw & G. Piramal (Eds.), Sumantra Ghoshal on management: A force for good. NJ: Prentice-Hall. Hirschheim, R., & Lacity, M. (2000). the myths and realities of information technology insourcing, Communications of the ACM, 43(2), 99-107. Kern, T., & Willcocks, L. P. (2002) The relationship advantage: Information technologies, sourcing, and management. Oxford: Oxford University Press.

163

Information Technology Outsourcing

Lacity, M., Feeny, D., & Willcocks, L. (2004). Commercializing the back office at Lloyd’s of London: Outsourcing and strategic partnerships revisited. European Management Journal, 22(2), 127-140. Lacity, M. C., & Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363-408. Lacity, M. C., & Willcocks, L. (2001).Global IT outsourcing: In search of business advantage. Chichester, UK: Wiley. Laffont, J. J., & Martimort, D. (2002). The theory of incentives: The principal-agent model. Princeton NJ: Princeton University Press. Lee, J. N. (2001) The impact of knowledge sharing, organizational capability and partnership quality on IS outsourcing success. Information and Management, 323-335. Lee, J.-N., & Kim, Y.-G. (1999, Spring). Effect of partnership quality on IS outsourcing: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61. Lee, J. N., Huynh, M. A., Kwok, R. C., & Pi, S. M. (2003). IT outsourcing evolution: Past, present, and future. Communications of the ACM, 46(5), 84-89. Levina, N., & Ross, J. W. (2003). From the vendor’s perspective: Exploring the value proposition in IT outsourcing. MIS Quarterly, 27(3), 331-364. Osborne, D., & Gaebler, T. (1993). Reinventing government: How the entrepreneurial spirit is transforming the public sector. Reading, MA: Addison-Wesley. Parasuraman, A., & Zeithaml, V. A. (2002). Measuring and improving service quality: A literature review and research agenda. In B.

164

Weitz (Ed.), Handbook of marketing. CA: Sage Publications. Rouse, A. C., & Corbitt, B. (2003). Revisiting IT outsourcing risks: Analysis of a survey of Australia’s Top 1000 organizations. The 14th Australasian Conference on Information Systems, Perth. Rouse, A., & Corbitt, B. J. (2003b). Minimising risks in IT outsourcing: Choosing target services. The 7th Pacific Asia Conference on Information Systems, Adelaide, South Australia. White, S. S., & Schneider, B. (2003). Service quality: Research perspectives. CA: Sage Publications. Williamson, O. E., & Masten, S. E. (1999). The economics of transaction costs: Elgar critical writings reader. London: Edward Elgar Publishing. Willcocks, L., & Lacity, M. C. (1998). Strategic sourcing of information systems: Perspectives and practices. Chichester, UK: Wiley.

kEy TErms Application Service Provider (ASPs): Standardized IT applications (such as enterprise processing, office systems, and e-mail) or software that is hosted by a provider, and accessed over the Internet by purchasers, who are charged on a transaction basis. Business Process Outsourcing (BPO): The outsourcing of relatively complex IT-supported business functions or processes. In practice, this often also involves “offshoring”. IT Insourcing: This is a term with multiple meanings and so often unclear. It can mean services delivered in-house; services put to tender and then awarded to an in-house team in competition with the market; or services originally outsourced

Information Technology Outsourcing

then brought back in house (this latter is sometimes labelled “backsourcing”). IT Outsourcing: The provision, at an agreed price, of specified IT services by an external vendor that is contracted to manage the day-today activities (and IS/IT assets and resources) so as to meet agreed performance and quality standards. Outsourcing can involve either the once-off development of a new information system or the ongoing provision of IT services (such as mainframe operations, PC support, software maintenance, etc.) over a specific period. Off-Shore Outsourcing or “Offshoring”: Outsourcing that is provided across national borders. In most cases this involves sourcing services from a low-salary nation like India, China, or parts of the former Soviet Union, where “salary arbitrage” (definition follows) leads to reduced costs.

Salary Arbitrage: Differences in average salary rates between developing nations (such as India, China, various South American countries) and developed nations in Europe, North America, etc. Transaction Costs: The costs of contracting with a vendor through the marketplace, in contrast to coordinating and managing service provision “in-house” (i.e., through the hierarchy). Key costs include finding, choosing, contracting with, monitoring, and controlling the work of the vendor, as well as coordinating the vendor’s activities with others being carried out by the purchaser.

This work was previously published in Encyclopedia of Information Science and Technology, Second Edition, edited by M. Khosrow-Pour, pp. 2030-2035, copyright 2009 by Information Science Reference (an imprint of IGI Global).

165

166

Chapter 1.10

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology:

Practitioner and Academic Perspectives Karl Knapp University of Indianapolis, USA Sushil Sharma Ball State University, USA Kevin King Clarian Health, USA

absTracT Offshore IT outsourcing has been gaining acceptance among corporations as a mainstream alternative to in-house operations. Various studies conducted over the last 10 years have shown that outsourcing allows firms to reduce high overhead costs and improve productivity, contribute flexibility, and thus improve overall performance of the firm. However, offshore IT outsourcing brings new challenges and risks. The skeptics believe that outsourcing may weaken the local business competitiveness of the region, investors’ confi-

dence in investing in local businesses, and may create a spiral effect on economic indicators such as unemployment, enrollment in schools, living styles, housing, and construction, etc. Little deliberate research has been conducted to date. This study investigates the macro- and socio-economic consequences of offshore IT outsourcing in the United States using a system dynamics model. The research finds significant effects perceived and experienced by IS professionals. The research also finds significant differences in the perceptions of practitioners and the academy, especially students whose inflated expectations may cause

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

disappointment with the reality of the current IS professions.

inTrOducTiOn Offshore information technology (IT) outsourcing has grown rapidly in recent years. Outsourcing now spans across IT, operations and call center functions. Offshore IT outsourcing has become a major trend as it harnesses the power of information technology from distant locations to bring economies of scale and cost competitive operations. The term offshore IT outsourcing has variously been defined in the information systems (IS) literature. We define offshore IT outsourcing as: “…the contracting of various information systems’ sub-functions by user firms to outside information systems vendors” (Chaudhury, Nam, & Rao, 1995, p. 132) or “…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” (Cheon, Grover, & Teng, 1993, p. 209). In today’s high-tech world, the terms “onsite,” “offsite,” and “offshore” only refer to the physical locations. Outsourcing has enabled firms to reduce cost, improve cycle time, and speed timeto-market (Carmel & Agarwal, 2003; D’Costa, 2002; De Looff, 1995; Gurbaxani, 1996; Quinn, 1999, 2000; Quinn & Hilmer, 1994; Sheperd, 1999). Offshore IT outsourcing is becoming mainstream for a variety of business processes in retail, banking, financial services, insurance, and telecom industries. The larger Fortune 1000 firms are aggressively moving forward by offshoring to service providers in India, Singapore, Hong Kong, China, the Philippines, Vietnam, Thailand, Hungary, South Africa, Malaysia, and Russia. A study by Logica CMG predicts that “the outsourcing of IT and other business processes is likely to move from a 2005 average of 12% of organizational costs to 20 % by 2008” (Logica

CMG, 2005). According to Forrester Research Inc., 3.3 million white-collar jobs will go overseas by 2015 (Computerweekely.com, 2003; McKinsey Global Institute Report, 2003; Susan, 2003; Tekrati, 2004). International Data Corporation (IDC) also reports that offshore outsourcing is the dominant trend in the IT services industry, with 42% of the application management contracts now having some offshore component (Benko, 1992, 1993; Computerweekely.com, 2003; Muthuswamy & Crow, 2003; Tekrati, 2004). Making outsourcing decisions also means confronting the social stigma that comes with sending jobs out of the US Employment in the technical sector has fluctuated and Congress is facing a voting populace more worried about themselves than other countries (The Wall Street Journal, 2004). The current debate regarding immigration has fueled the debate regarding foreign workers and foreign sourcing. Along with the potential social stigma, offshore IT outsourcing brings new challenges, risks, and uncertainties (Barthelemy, 2001; Barthelemy & Geyer, 2001; Dibbern, Heinzl, Hirschheim, Heinzl, & Dibbern, 2002). The risk areas include the legal and regulatory environment of the outsourcing country, the geopolitical, economic, and physical stability of the offshore country, regional turmoil, poor infrastructure, intellectual property, and data security issues, loss of control over physical protection of data and quality monitoring, and cultural and human resources issues and lack of exposure to Western business culture (Quinn, 1999, 2000, Quinn et al., 1994). The purpose of this study is to investigate the macro-economic and social impacts of IT outsourcing using a system dynamics model. The study identifies and examines significant relationships among the macro- and socio-economic variables relating to offshore IT outsourcing. The research also documents varying perceptions of practitioners from the perceptions of those in academia. The socio-economic effects and

167

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

potential disconnect with the reality of the IS professional market may have long-term impact on the IS educational field. A great deal of this debate is covered recently in practitioners’ professional and trade journals, yet little deliberate research has been conducted to date. Most of the research in offshore IT outsourcing has been largely focused on justifying how offshore IT outsourcing will help both outsourcer and its partners in a win-win situation. There has been no serious attempt to study potential socioeconomic loss from outsourcing. Our intention in this article is to concentrate solely on research that directly addresses offshore IT outsourcing. The article is structured as follows: Section 2 describes the literature review. Section 3 discusses the research methodology research framework adopted for creation of hypothesis. Section 4 analyzes the results of the data and summarizes the findings. Lastly, the discussion section offers reflective thoughts regarding the possible implications of our findings on research and practice.

liTEraTurE rEviEw Information systems play a key roll in the US economy. During the 1990s, firms increased their investment in information systems seeking strategic advantage. Some of this increase is attributable the firms’ strategic reactions to the rise of the Internet. In the late 1990s, firms felt increasing pressure to hold down costs in order to increase profits. As information systems budgets grew, they became targets for cost reduction. These pressures for cost reduction have not abated and continue today.

Outsourcing business Functions Outsourcing information systems function is a continuing trend. International Data Corporation (IDC) estimated that the worldwide IT

168

outsourcing services market will grow 7.7% a year, to reach nearly $1 trillion in sales in 2007 (Gilbert, 2003). Encouraged by the projections of phenomenal cost savings, many Fortune 500 firms are jumping on to the “outsourcing bandwagon” (Lacity & Hirschheim 1993a, 1993b; Jones, 1997). A survey of US CEOs shows that 42% of communication firms, 40% of computer manufacturers, and 37% of semiconductor companies rely on outsourcing from foreign firms. These same CEOs expect the figures on outsourcing to exceed 50% before the mid-1990s (Malhotra, 1995). Yet, despite its growth, outsourcing is frequently perceived to be poorly controlled, high in cost, and a drain on quality and service performance (Barthelemy, 2001; Barthelemy et al., 2001; Jacobson & LaLonde, 1993,). Cost savings has often been cited as the main driver for the IS outsourcing decision (Ang & Slaughter, 1998a; Ang & Straub, 1998b; Due, 1992; Loh & Venkatraman, 1992a, 1992b). The transaction cost of these arrangements has also fallen (Ang et al., 1998a; Ang et al., 1998b). Firms may also outsource to an external supplier so that they can better focus on their core business or gain access to scarce skills (Aubert, Rivard, & Patry, 1996; Grover et al., 1993; Huber, 1993; Lacity et al., 1993a, 1993b; Lacity & Willcocks, 1998; Palvia, 1995; Quinn 1990). Companies also consider outsourcing when the internal IS function is perceived to be inefficient, ineffective or technically incompetent (Lacity et al., 1993a, 1993b). Some critics (Due 1992; Lacity et al., 1993a) argue that IS outsourcing can result in loss of control over information systems and technology assets, the loss of IS expertise, and a decline in the morale and performance of the remaining employees (Richey, 1992). They also suggest that the anticipated cost savings might also be achieved internally (Benko, 1992; Carlyle, 1990; Davis, 1992; Due, 1992; Lacity et al., 1993a; Sharp, 1993). Most controversy regarding IS

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

outsourcing remains around the issue of balance between strategic implications and financial returns (DiRomualdo & Gurbaxani, 1998).

is Outsourcing decision processes A review of the literature on information systems outsourcing yields some disconcerting observations on the IS outsourcing decision process. De Looff (1995) found that formal methods were often not used in the outsourcing decision; a one-sided emphasis on cost was the driver; the decisions were made at high levels, with very little knowledge of the IS function. Fowler and Jeffs (1998) found similar results in a case study of a UK firm. They found that the decisions were driven from a desire for economic benefit, but insufficient attention was being paid to the full array of the more subtle costs and risks with outsourcing arrangements. They further suggested that outsourcing decisions were sometimes driven by business managers’ frustration with information systems professionals. Other studies conducted demonstrate that offshore outsourcing was in the interests of business (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). Their argument is that when jobs move offshore from the US, they not only allow US firms to procure cheaper labor abroad, but they also free up talent within the US that can be re-skilled and used elsewhere. Freenstra and Hanson (1996) found that outsourcing production jobs has contributed substantially to the increase in the relative demand for non-production labor for the period of 1970 to 1990. Outsourcing also accounts for more than 30% of the increase in the non-production wage share that occurred in the 1980s (Freenstra & Hanson, 1995). However, a recent report generated much media attention when Gartner Inc. predicted that 1 out of 20 US corporate IT jobs and 1 out of 10 jobs in IT vendors and technology service firms will be moved offshore (Hoffman, 2003).

Displaced IT workers and organized labor are lobbying to prevent government agencies from outsourcing their IT services offshore, either directly or indirectly (Glasner, 2003; Thibodeau, 2003). But has protectionism helped the US economy in the past? After a thorough review on protectionism and the US textile industry, Finger, Harrison, and Krueger (1996) concluded that the protection granted to the textile industry, while substantial, was not enough to prevent significant increases in import competition. With the increased import penetration, the textile industry was more successful in downsizing its labor force than achieving substantial increases in productivity.

rEsEarch mEThOdOlOgy Both practitioner and academic populations were surveyed to measure perceptions of socio-economic consequences of offshore IT outsourcing. The sample includes members with responsibilities throughout the entire spectrum of information systems tasks and is representative of trends in the mid-western information systems labor market. Seventy-six former members of an information systems department dislocated due to a merger 2 years prior to the study comprised the largest information systems sample. This group contains 56 information systems professionals and 13 managers. This group provides insight into both the perceptions of information systems professionals on offshore outsourcing, as well as information on the IS job market. Their dislocation was in no way related to outsourcing, although most are aware of this trend. In order to provide a balanced and statistically valid sample of information systems managers, the 30 member central Indiana chapter of the Society for Information Management (SIM) is also included in the analysis (SIM, 2004). Two groups from the Miller School of Business at Ball State University represent the academic perspective in the study. These groups include

169

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

the 110 members of the business school faculty, who are informed about the topic of offshore outsourcing, but from different academic disciplines. The second group from the Miller School of Business includes three sections of a required junior-senior level course in operations management taught by one of the authors. These sections include 130 students from a similar representative range of business disciplines; 103 students participated in the survey. The students had engaged in a variety of discussions over the course of the semester regarding the evaluation of make-buy (outsourcing) decisions, cross-cultural challenges and opportunities of international business, and the micro- and macro-economic theories and consequences of outsourcing.

apparatus The survey instrument was designed to specifically test the hypotheses under study. The instrument was pilot-tested and refined with the same four groups (IS professionals, IS managers, educators and students) drawn from similar but different firms and institutions. The pilot-test groups are representative of the sample population. For information systems professionals and managers, the instrument is also designed to gather information regarding recent personal employment and personal financial experience.

procedure The survey instrument was developed in both paper and electronic forms. The electronic form is the preferred method so as to reduce cost and potential transcription error of the survey. The electronic form of the survey was utilized to reach the information systems and educator populations. Their participation was solicited through electronic mail announcements of the study that included a link to the survey web site. Two subsequent reminder notices were sent during the course of a three-week period in order

170

to increase the response rate. The electronic form of the survey was anonymous and set up without specific login parameters. Participants were offered the opportunity to receive copies of the final study by entering their email address along with their survey answers. For those that chose to enter this information, their perception of the anonymity of the study may have been somewhat compromised, depending on the ease of identification of the email address. Links to the web-address of the survey were limited to those contained in the solicitation email messages and no search engines or other web sites provided access to the survey. This process was utilized to limit the participants of the survey to those specifically solicited. The student sample was measured using a paper-based version of the same online survey instrument. In order to ensure that the paper and online instruments were identical, the web-site software utilized in the online survey was used to print the paper version of the instrument.

Theoretical Framework We model the offshoring phenomenon using the system dynamics methodology. The system dynamics approach maps the dynamic relationships between variables to understand the possible consequences of those relationships. This allows exploration of the effects of different levels of intervention, or enables theories to be developed about them. Causal loop diagrams are used for this study consisting of arrows connecting variables in a way that shows how one variable affects another - a theorized cause-and-effect relationship. The offshoring phenomenon is behavior generated by a socio-economic system consisting of different components. Therefore system dynamics approach is especially well suited to capture this behavior containing positive and negative feedback loops (Richardson, 1996). Based on the literature review, the following figure (Figure 1) shows a possible set of causal relationships. A plus (+) sign implies that a change

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

Figure 1. Systems dynamics model of information systems offshore outsourcing Competitve -ness

Security & Privacy Concerns

-

Community Investment

Time with Family

+

-

-

Retirement Age

+

Business Investment

-

-

-

-

-

-

Social Impacts

Business Climate

-

-

-

+

Brain Drain

-

IS Outsourcing -

-

Macro Economic Impact

-

Consumer Spending

Income Distribution

-

+

+ +

White Collar Unemployment

-

+ +

Unionization

+ + -

+

Availability of Labor

Consumer Confidence

Protectionism

+ +

Tax Changes for Wealth Distribution

+ -

Lower Wage Jobs

Tax Revenue

+

+ +

-

+ -

Savings & Retirement

Standard of Living

Value of Currency

+ +

Welfare Benefits

IS Program Enrollment

in the variable will cause a change in the variable in the same direction. Similarly, a minus (-) sign implies that a change in the variable will cause a change in the variable in the opposite direction. Because system dynamics involves the study of the relationships between feedback structure and dynamic behavior, there is a great impetus to try to infer dynamic behavior from representations of structure. That impetus has apparently led to a set of definitions of the polarities of causal-loops, which are phrased in terms of behavior over time (Coyle, 1998; Goodman, 1974).

NonTraditional Enrollment

hypotheses The information systems literature does not include studies of the effect of outsourcing on the employees and the community where they work. While this gap is fairly clear, the development of hypotheses can be guided by the literature on the predicted and actual effects of free trade, the movement of labor between markets, and on the effects on the workers and economy when events occur that cause a displacement of workers.

171

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

unemployment Effects In the case of two trading nations with factor differences in labor-abundance (e.g., India) and capital-abundance (e.g., the United States), economic theory predicts that this imbalance leads to a decline in the natural rate of unemployment in the labor-abundant nation (India), but a rise in the natural rate of unemployment in the capitalabundant nation (the United States) (Hoon, 1991). Further economic modeling somewhat softens this prediction if increased product-market competition offsets the adverse effects of unemployment (Hoon, 2001). Studies of a similar market condition prior to the enactment of NAFTA were conducted where the majority of economic models indicated that free trade and the movement of labor and goods would result in modest positive effects for the US and significant positive effects for Mexico (Almon, 1992; Bachrach & Mizrahi, 1991; Hufbauer & Schott, 1992; Roland-Holst & Reinert, 1992). The popular press is frequently critical of the effect of NAFTA on US unemployment. Academic studies are not conclusive in establishing a correlation between NAFTA and the higher levels of US unemployment. The rise of the Indian IT outsourcing destination has been almost simultaneous with the rise in unemployment of US information systems workers. The economic theory of labor / capital inequality between India and the US predicts a rise in the unemployment rate for US information technology workers as the movement of labor is facilitated by enabling communication technologies. •

Hypothesis 1: US information systems outsourcing is a positively correlated with unemployment of US information systems workers.

An increase in unemployment has the effect of increasing the availability of skilled labor. With an oversupply of skilled labor, laborers must seek

172

employment in other areas, frequently in lower classes of employment. Workers that are displaced often experience a decline in occupational status, or “occupational skidding,” which includes decline in job status, pay, or lower work satisfaction upon reemployment (Bluestone & Harrison, 1982). Displaced workers experience earnings declines from 9 to 15% as compared with continuously employed workers (Farber, 1993; Moore, 1990; Stevens, 1997). Declines are most significant for high tenure workers (with six or more years tenure) (Jacobson et al., 1993). Displaced workers frequently endure significant drops in earnings and benefits, experienced decreased work satisfaction, and unstable employment patterns (Aronson & KcKersie, 1980; Dorsey & Eckstein, 1967; Knapp & Harms, 2002). Older displaced workers suffer greater amounts of earnings loss than do younger displaced workers (Koeber and Wright 2001); they experience longer spells of unemployment (Knapp et al., 2002; Love & Torrence, 1989); they may experience not only a loss in earnings but in assets (Chan & Stevens 1999); and are less likely to be hired in jobs that provide fringe benefits (Scott et al., 1995). The theory and effects of increased unemployment lead to several hypotheses and predicted effects for information systems workers displaced by outsourcing: •

• •

Hypothesis 2: The availability of skilled information systems labor is positively correlated with information systems workers taking jobs in other employment areas at lesser wage rates, with a greater predicted effect for long tenured employees. Thus, tenure of displaced workers is positively related to new employment wage rates. Hypothesis 3: Change in wages (decrease) is positively correlated with worker standard of living. Hypothesis 4: Change in wages (decrease) is positively correlated with worker savings

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

• •

(as savings are drawn down to support a prior standard of living). Hypothesis 5: Decrease in wages are positively correlated with decrease in the level of retirements funds. Hypothesis 6: The availability of skilled information systems labor has a positive correlation with demand for non-information systems training programs.

The employment and wage attractiveness of a particular industry has an effect on the number of students interested in that area of study. If students see potential employment and wage growth opportunity, they will be drawn to that field. On the other hand, if students see an increase in unemployment and reduction in wages in a particular field, they may be less likely to study and subsequently seek employment in that field. This effect may lag because students who are already enrolled in programs either may not wish to change, or may not be aware of the changes in the labor market. •

Hypothesis 7: The availability of skilled information systems labor is negatively correlated with demand for information systems training programs.

income distribution Effects Globalization and the increase in free trade reduce poverty. But as competitive systems produce winners and losers, they do not necessarily reduce the inequality that is increasingly visible in a globalized world (Pitts, 2002). The inequality of wealth and income is increasing in the US despite the fact that nationwide the level of education, which has traditionally been associated with higher income, has risen. In an economy which is energized by high levels of technology, a reduction in disparities of income is not easy to obtain (Stewart, 2002). Outsourcing of information systems is a part in this drive toward globalization.

•

Hypothesis 8: US information systems outsourcing is positively correlated with a wider distribution of wealth in the US and in India.

The widening distribution of income may, in turn, have significant effects in the attitudes of workers in the markets with this widening distribution. A world in which the assets of the 200 richest people are greater than the combined income of the more than 2 billion people at the other end of the economic ladder should give everyone pause. In global terms, this mix of rising inequality, slow growth, and falling or stagnant wages increases excess capacity across the globe. As big business has gone global, the labor movement has become more internationalist. Globalization is most destructive in countries where independent unions do not exist and organizing is suppressed (Mazur, 2000). Some displaced workers adopt more critical attitudes toward big business and government and strengthen support for organized labor (Knapp et al., 2002). The workers’ attitudes toward their employers and toward government as a result of globalization and job displacement may provide motivation for employees to seek structural changes in the economy including an increase in protectionist sentiment (Atkinson, 1997). • • •

Hypothesis 9: A wider distribution of wealth is positively correlated with attitudes toward unionization. Hypothesis 10: A wider distribution of wealth is positively correlated with attitudes toward protectionism. Hypothesis 11: A wider distribution of wealth is positively correlated with attitudes toward tax law changes that result in a narrower distribution of wealth.

173

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

social Effects As workers’ income levels, status, education, and attitudes about business and the role of government change, clearly several significant social effects may arise from these changes (Earl, 1996). As workers attempt to maintain their standard of living on lower wage rates in lesser status jobs, they may be forced to work longer hours to earn the same total wages. This may have the unfortunate direct effect of workers spending less time with their families. Offshore outsourcing also raises concerns about extended retirement age, deleterious effects on US intellectual capital, and the security of information stored at offshore firms. • • • •

Hypothesis 12: US information systems outsourcing is negatively correlated with time spent with family. Hypothesis 13: US information systems outsourcing is positively correlated with retirement age. Hypothesis 14: US information systems outsourcing is positively correlated with the brain drain on US intellectual capital. Hypothesis 15: US information systems outsourcing is negatively correlated with the security and privacy of domestic firms’ information systems.

business climate Effects The local/regional economy may face several deterioration effects as a result of outsourcing of information systems. Information systems jobs have historically been attractive because of higher average wage rates and the positive economic effect of these higher paying jobs. Offshore outsourcing of these kinds of jobs creates negative economic effects for the local and regional economies affected. The preceding discussion leads to the following hypotheses that US information systems outsourcing has a negative correlation with (1) the

174

competitiveness of the local economy and region (H16); (2) the investment in infrastructure and development of the local community (H17); (3) the business investment in the community (H18); (4) consumer spending (H19); (5) tax revenue of the local, state, and US government (H20); (6) consumer confidence (H21); (7) increasing welfare benefits paid (H22); (8) and value of the US currency (H23).

spiral Effects Some firms will be unable to take advantage of the lower price of local labor in the information systems area due to internal equity issues with current employees. If a firm has several incumbents in a particular area in information systems, the firm is limited in the amount it can offer to new employees. Internal equity issues must be addressed in employee compensation. The lure of the available skilled labor at lower wage rates can cause firms to make drastic changes in order to reap the benefits. Because of internal equity issues, some firms may seek to outsource an entire functional area in IS in order to reap these benefits. The lowered wages rates caused by structural changes in the information systems area can cause a spiral effect on outsourcing. Outsourcing increases supply of available skilled labor and lowers labor cost. Internal equity issues cause firms to outsource in order to take advantage of the lower wage rates (Garaventa & Tellefsen, 2001). This in turn can lead to additional outsourcing until equilibrium is reached with the offshore market in terms of total cost of the internal versus external costs. Researchers conclude that, contrary to domestic apprehensions, outsourcing is not a zero-sum game and it has benefited the US overall. Game theory says that a zero sum game is a condition where one’s gain is another’s loss (Elitzur & Wensley, 1997). A 2003 study conducted by the McKinsey Global Institute (MGI) revealed that

Macro-Economic and Social Impacts of Offshore Outsourcing of Information Technology

offshoring creates wealth for the United States as well as for outsourcing partners. (“Offshoring: Is It a Win-Win Game?” McKinsey Global Institute, August 2003.) The MGI study asserts that every $1.00 offshored yields $1.14 in benefits for the US economy, a net gain of $0.14. However, the same calculation that yields $0.14 in benefits for the US economy shows a $0.26 loss for US workers resulting from every $1.00 offshored.

rEsulTs The hypothesized increase in IS unemployment (H1) yields homogeneous perception between the four groups, widely varying perceptions among the four groups, and is not supported by actual IS unemployment statistics. An analysis of variance on H1 indicates the perception of the four population groups (IS professionals, IS managers, college educators and students) is statistically homogeneous (F=1.40, df=3, p=0.25). Hypothesized IS unemployment has the widest variation in perception within respondents with

Table 1. Analysis of variance for perceptions between groups Source

df

F

η2

p

IS Unemployment (H1)

3

1.40

2.27

0.25

IS Wages (H2)

3

26.23*

30.54

4.13E-14

IS Standard of Living (H3)

3

23.17*

27.97

1.02E-12

IS Savings Account Balances (H4)

3

18.06*

23.36

2.73E-10

IS Retirement Account Balances (H5)

3

18.55*

24.03

1.67E-10

Demand of Non-IS Training (H6)

3

5.33*

8.11

1.54E-3

Demand for IS Training (H7)

3

16.15*

21.30

2.47E-9

Distribution of Wealth (H8)

3

0.94

1.55

0.43

Attitudes Toward Unionization (H9)

3

9.60*

13.79

6.52E-6

Attitudes Toward Protectionism (H10)

3

10.90*

15.44

1.31E-6

Attitudes Toward Tax Law Change (H11)

3

3.74*

5.89

0.01

Time Spent with Family (H12)

3

6.05*

9.30

6.06E-4

IS Retirement Age (H13)

3

1.89

3.14

0.13

Brain Drain (H14)

3

30.51*

33.71

5.38E-16

Security & Privacy Concerns (H15)

3

14.82*

19.80

1.16E-8

Competitiveness of Local Economy (H16)

3

10.16*

14.55

3.28E-6

Development of Local Economy (H17)

3

12.44*

17.25

1.99E-7

Business Investment in Local Economy (H18)

3

10.83*

15.37

1.42E-6

Consumer Spending (H19)

3

10.86*

15.18

1.35E-6

Tax Revenue (H20)

3

10.21*

14.82

3.13E-6

Consumer Confidence (H21)

3

3.97*

6.10

0.01

Welfare Benefits (H22)

3

1.57

2.62

0.20

Value of US Currency (H23)

3

3.34*

5.22

0.02

Note. *p Better Communication -> Sufficient outcome Socialization -> Trust building -> Promotion of knowledge transfer-> Sufficient outcome Communication -> Knowledge transfer -> Sufficient outcome Training -> Knowledge transfer -> Sufficient outcome

Finding 5: research model for control mechanism that Facilitates knowledge Transfer in global bps The following research model is derived as results of the case findings:

Propostion1: The use of social control is positively associated with the level of knowledge transfer in Global BPS. Propostion2: Properly designed and reliable communication mechanism is positively associated with the level of knowledge transfer in Global BPS. Propostion3: The use of project control mechanism is positively associated with the level of knowledge transfer in Global BPS. Propostion4: Control mechanism with higher level of hierarchy governance contributes to higher level of knowledge transfer. Propostion5: The level of knowledge transfer is positively associated with the success of Global BPS.

survEy dEsign and daTa cOllEcTiOn In the prior portions of the paper, (1) literatures on control mechanisms and knowledge transfer were described and integrated, (2) an exploratory case 415

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Figure 1. Research model of effective control structure in global BPS

Social Control Mechanism

Communication Mechanism

Degree of

Success of Global

Knowledge Transfer

BPS

Project Control Mechanism

Governance Mechanism

study was performed, and (3) research model for control mechanisms in Global BPS was derived. In the next portion of the paper, we confirm and refine the research model using survey method. This section discusses how the questionnaire items were derived to measure each construct in the model. The questionnaire items were either adapted from the previous studies or developed in this study. Before distribution of the survey, the contents validity of the survey was rechecked by two academic colleagues who are experts in organizational strategy and project management. In summary, this checking process is a two-stage process. The first stage was involved with deriving the survey instruments based on previous research. The second stage involves rechecking the instru-

ment by domain experts. This two-stage process ensured that the instrument covers the range of meanings included in the construct (Pitt et al., 1995). The items of Table 3-6 were included as part of a larger survey. Each item was anchored by five-point scale ranging from 1 = strongly disagree to 5 = strongly agree.

social control mechanism Trust and commitment of the social control mechanism were asked to measure the level of the social control mechanism. Trust and commitment were measured by modifying the instrument in Lee and Kim (1999) and Lee and Cavusgil (2006) (Table 3).

Table 3. Measure of social control Question Posed (TR: Trust, CT: Commitment) In our relationships... TR1. We make beneficial decisions under any circumstance. TR2. We are willing to provide assistance to our counterpart without exception TR3. We are sincere at all time. CT1. We perform prespecified agreements. CT2. We faithfully provide prespecified support in a contract. CT3. We always try to keep each other’s promises.

416

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Table 4. Measure of IT-based communication mechanism Question Posed (CM: Communication) CM1. We and our counterparts have properly designed an interorgazniational communication interface. CM2. There is no error when we communicate with our counterparts using the IT-based communication infra.

iT-based communication mechanism

3. 4.

Having properly designed and reliable communication mechanism were asked to measure the level of IT-based communication mechanism. A properly designed communication mechanism is associated with providing a variety of media, such as phone, video-conferencing, and e-mail. Reliability of the system represents the user’s sense of assurance or certainty about the communication mechanism (DeLone and McLean, 1992).

project control mechanism The control in IS project management is associated with defining the followings (Valacich et al., 2006; Murray and Crandall, 2006; Beise, 2004; Dvir et al., 2003): 1. 2.

project goals and requirements, activities to be performed for each phase of system development,

5. 6.

deliverables to be produced for each phase, resources and time requirements for each phase, tools and standards used for each phase, responsibilities of the project members.

Sharing the project goal among members, having a clear project plan, allocating adequate resources are critical to making knowledge flow smoothly among project members (Karlsen and Gottschalk, 2004). Based on common and shared goals and plans, the teams generate a high degree of focus and goal accomplishment (Goffee and Jones, 1996). In addition, composing project team with the employees who have capability to absorb knowledge is another way to facilitate the knowledge transfer. Efficient management of organizational knowledge deals with having individual members interact and collaborate (Goffee and Jones, 1996; Grant, 1996; Nonaka and Konno, 1998). Participative culture is essential to share knowledge among individual project members.

Table 5. Measure of project management Question Posed (PP: Project Planning, OSC: Organizational Structure and Culture, SD: Standardization) PP1. We have realistic project goals. PP2. We have adequate overall project plan. PP3. We adequately allocate our project resource. OSC1. We have effective project team. OSC2. We and our counterpart have an understanding about knowledge sharing needs. OSC3. We have an adequate culture for knowledge transfer. SD1. We have adequate standardized documentation for project management. (e.g. Project Workbook, Gantt Chart) SD2. We share project management method with our counterpart.

417

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Table 6. Measure of knowledge transfer and success of global BPS Question Posed (KT:Knowledge Transfer, SG: Success of Global BPS) KT. During this project, my interactions with counterpart have increased my ability to ask penetrating questions about this project. SG. Through this project, our client can approach excellent world-wide technical human infra.

The standardized project management method as well as project documentation, such as Project Workbook and Gantt Chart, allow project members to communicate effectively (Valacich et al., 2001). The following categories of questionnaire items—(1) project planning, (2) organizational structure and culture, and (3) standardization— were used to measure the level of project control mechanism.

governance mechanism In this study, a governance mechanism is used as a moderator variable to moderate the influence of the independent variables on knowledge transfer. A sample of service providers were asked to indicate their governance structure among three categories of the governance mechanism is used in this study: vendor, subsidiaries and jv mechanisms.

knowledge Transfer and success of global bps The questionnaire item to measure the degree of knowledge transfer was adopted from Ko et Al. (2005). The original items to measure the degree of knowledge transfer between clients and consultants in the outsourced IS project were modified to be relevant in Global BPS. Outsourcing success can be measured from either a client or vendor perspective. While Lee and Kim (1999) measurements were from the client perspective, Karlsen and Gottschalk (2004) measurement were from the vendor perspective. These measurements were modified to be relevant in the context of Global BPS. In this study, the

418

success of Global BPS is measured by the degree of realization of the client’s benefits perceived by the service provider; that is, the approach to excellent world-wide technical human infra. The survey was distributed to 17 service providers in Mauritius. Mauritius is a French and English speaking country where the majority of the population is of Indian descendant. Viewing their dual language speaking manpower as competitive advantages, the government aspires to capture a share of English and French speaking BPS market. The government has been “investing massively to assemble the pre-requisites in terms of modern infrastructure, appropriate policy, legal framework and fiscal incentives” (Board of Investment, 2003). Recently, the government set up Cyber City in Ebene, which is 15 Km from the capital city, Port Louis, to attract BPS industry. The respondents of the survey must be able to describe a control structure and degree of knowledge transfer. Those individuals who were considered to be ideal for this study are directors and managers. The profiles of the respondents are summarized in Table 7 in the following section. Convenience sampling was adopted. That is, sample companies were selected on the basis of easy access due to acquaintance. First, the sample companies were contacted via telephone. If company agreed with the survey, then the survey was distributed via e-mail. To ensure return of the survey, the sample companies were then contacted for a second time via telephone.

survEy analysis Of 17 surveys, 15 were used for analysis. The remaining questionnaires were removed because

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Table 7. Descriptive statistics for sample companies

Company Age

Industry (BPO)

Position

Department

Frequency

Percentage

Less than 2 years

3

20%

2~4 years

8

53%

4~6 years

2

13%

Over 6 years

2

13%

ICT

8

53%

Call Center

2

13%

Accounting

2

13%

Finance

1

6%

Not Answered

2

13%

Manager

9

60%

Director

5

33%

Engineer

1

6%

Management

6

40%

IT

4

26%

Finance

1

6%

Software Development

1

6%

Etc

3

20%

they were considered as outliers. Table 7 shows descriptive statistics of the surveyed firms. 53% of the sample companies were 2-4 years old. 73% of them are less than or equal to 4 years old. 100% of the sample businesses are in the BPO industry. 53% of the sample companies are considered themselves to be in ICT (Information and Communication Technology) sector of BPO. The respondent’s description of ICT sector included batch Information processing, data capture, e-business and ERP (Enterprise Resource Planning). 95% of the respondents are either a director or manager. 40% of respondents are a general manager and 26% of them are an IT manager. For governance structure question, 75% of the sample answered that the governance structure of its firm is either subsidiaries or JV. Most of these subsidiaries and JVs also have separate businesses from the mother company as the vendor. Therefore, most of them have the governance structure of subsidiaries/vendor or JV/vendor.

Due to a small sample size, KolmogorovSmirnov Goodness-of-Fit Test for each variable was performed to test the sample distribution against a normal distribution. Except TR2, TR3, CT3 and OSC1, none of variables had normal distribution (p < .05). Due to the fact that most of the variables do not have a normal distribution and the sample size is less than 30, interpretation of the results is limited and done cautiously. The sample companies seem to agree that they have trust and commitment in the Global BPS relationships. This is based on the consensus measures and means of the social control variables in Table 8. All social control variables except TR1 have consensus measure (i.e. Cns) greater than or equal to 0.67 and mean over 4.0. The consensus measure ranges from 1 to 0 (Tastle and Wierman, 2006, Tastle et al., 2005). While the complete agreement is defined as 1, complete disagreement is defined as 0. Consensus denoted as Cns and dissention denoted as Dnt are related

419

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Table 8. Consensus and dissent measures Variables

SA

A

N

D

SD

Mean

Cns

Cns%

Dnt

Dnt%

TR1

4

4

6

1

0

3.73

0.66

66%

0.34

34%

TR2

10

1

4

0

0

4.40

0.67

67%

0.33

33%

TR3

12

3

5

0

0

4.60

0.82

82%

0.18

18%

CT1

7

3

5

0

0

4.13

0.67

67%

0.33

33%

CT2

8

4

3

0

0

4.33

0.71

71%

0.29

29%

CT3

12

2

1

0

0

4.73

0.83

83%

0.17

17%

CM1

5

4

2

4

0

3.67

0.53

53%

0.47

47%

CM2

5

5

4

1

0

3.93

0.68

68%

0.32

32%

PP1

7

6

2

0

0

4.33

0.75

75%

0.25

25%

PP2

5

5

4

1

0

3.93

0.68

68%

0.32

32%

PP3

4

8

3

0

0

4.07

0.80

80%

0.20

20%

OCS1

3

9

2

1

0

3.93

0.78

78%

0.22

22%

OSC2

5

5

5

0

0

4.00

0.72

72%

0.28

28%

OSC3

5

6

1

3

0

3.87

0.62

62%

0.38

38%

SD1

2

7

3

2

1

3.47

0.59

59%

0.41

41%

SD2

3

8

2

2

0

3.80

0.70

70%

0.30

30%

SA – Strongly Agree / A – Agree / N – Normal / D – Disagree / SD – Strongly Disagree / Cns – Consensus / Cns% – Consensus as a percentage / Dnt – Dissent / Dnt% – Dissent as a percentage

and given one, the other is easily calculated by Cns= 1- Dnt. The first five columns of Table 8 show how many of the sample companies chose each response in the survey. The sixth column provides the mean of each variable with SA=5, A=4, N=3, D=2 and SD=1. While Cns and Cns% are the consensus values in decimal and rounded percent, Dnt and Dnt% are the dissention values in decimal and rounded percent. The surveyed firms less agree that they have proper IT-based communication interface (Cns 0.53, mean 3.67). But they seem to more agree that communication is fairly reliable (Cns 0.68, mean 3.93). This is attributed to their choice of communication media. The firms were asked to rate the frequency of the media choice using a five-point scale anchored on very infrequently (1) and very frequently (5). The most frequently used media are E-mail (4.87) and Telephone (4.33) while the least frequently used media is Video Conferencing (2.20). E-mail plays a key role to

420

motivate knowledge sharing between knowledge workers by mitigating temporal and special barriers (Hendricks 1999). However, e-mail has limitation to deliver cues of the communicator thus less effective to transfer knowledge than video conferencing (Sapsed, et al., 2005). This is also the case with telephone communication. In contrast, videoconference technology is effective to access and share the knowledge of remotely located virtual team (Davenport and Prusak 2000; DeSanctis and Moge, 1999). The companies agree that they have realistic project goal (PP1), overall project plan (PP2), adequate project resource (PP3), effective project team (OSC1), appropriate knowledge sharing culture (OSC2, OSC3) and project management method (SD1). Compared to other aspects of the project management control, they less agree that they use standardized project document (SD1) with Cns 0.59 and mean 3. 47.

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Table 9. The results of correlation analysis Knowledge Transfer

Success of Global BPS

Success of Global BPS

0.005**

TR1

0.303

0.454

TR2

0.282

0.043*

TR3

0.273

0.463

CT1

0.246

0.371

CT2

0.028*

0.078

Social Control Mechanism

Communication Mechanism

CT3

0.050*

0.277

CM1

0.126

0.014*

CM2

0.034*

0.018*

PP1

0.460

0.107

PP2

0.405

0.107

PP3

0.260

0.350

OSC1

0.493

0.030*

OSC2

0.092

0.015*

OSC3

0.413

0.041*

SD1

0.246

0.020*

SD2

0.257

0.038*

Governance Mechanism

0.258

0.182

Project Control Mechanism

** significant parameter at p=0.01 *significant parameter at p=0.05

The correlations between variables were checked and the results are presented in Table 9. The following is notable: while project control variables have a correlation with only Success of Global BPS, social control variables and communication variables have a correlation with both Knowledge Transfer and Success of Global BPS. This indicates that the Project Control Mechanism is a determinant of Success of Global BPS rather than Knowledge Transfer. Not all the variables in Social Control Mechanism have a correlation with knowledge transfer. The construct validity and content validity of the social control mechanism were already proven because the instrument was validated in the previous research. In the future, with more sample data, the construct validity of the Communication Mechanism and Project Control Mechanism needs to be per-

formed. Success of Global BPS and Knowledge Transfer show a correlation. The governance mechanism does not have a correlation with Knowledge Transfer or Success of Global BPS. Most of the samples had a hierarchical governance structure of either subsidiaries or JV; that is, there was not much variation in governance mechanism. In the future, with larger samples, the effect of governance mechanism as moderator variable should be tested. The findings can not be extrapolated to all service providers but merely provide an indication of the correlation in the sample frame. A margin of error also exists in this study because this study is based on a small sample. This is the major limitation of this research. More rigorous survey including a more diverse sample from major offshoring countries like India, China,

421

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Figure 2. Revised research model of effective control structure in global BPS

Project Control Mechanism Social Control Mechanism Degree of

Success of Global

Knowledge Transfer

BPS

Communication Mechanism

Governance Mechanism

Philippines or Ireland remains as future research. Nonetheless, the findings still provide some fairly significant insights in exploratory research. As a result of this study, the initial research model could be revised, as shown in Figure 2. The difference with the initial model is that the revised model incorporates the analysis results— project control variables have a correlation with Success of Global BPS rather than Knowledge Transfer. The creation of this model was driven by a process understanding of knowledge transfer and their impacts, Global BPS success. The process model has three components: the control of knowledge flow, the degree of knowledge transfer, and the consequences of the knowledge transfer (i.e. Success of Global BPS). Each of these steps is a necessary, but not sufficient, condition for the resultant outcome. The following propositions are derived as results of this study: 1.

2.

3.

422

Commitment as social control mechanism is positively associated with the level of knowledge transfer in Global BPS. A properly designed and reliable communication mechanism is positively associated with the level of knowledge transfer. Structural, cultural and standardization

4.

5.

aspects of a project control mechanism are positively associated with the level of success in Global BPS. The level of knowledge transfer is positively associated with the level of success in Global BPS. A control mechanism with more hierarchical governance contributes to a higher level of knowledge transfer.

discussiOn and cOnclusiOn Despite the limitation of this research stated in the previous section, this study made a contribution. This study found the research model and propositions that would help both academics and practitioners to understand the effective control structure in Global BPS. It was widespread notion that Global BPS is governed by a market mechanism. Unlike early offshore BPO, this study showed that business process is increasingly sourced under hierarchy governance in a form of overseas subsidiaries or JV. Under this trend, this study also showed that the success of Global BPS is influenced by (1) a commitment and proper communication systems facilitating knowledge transfer and (2) a project control mechanism.

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

These results have some implications for countries like Korea. The recent decrease in IT exports, especially in the area of hardware, such as wireless communication equipments prompts Korea to rethink about the structure of IT exports—more balanced mix of exports in hardware and IT services (ICA 2004). The IT service industry in Korea has the best infrastructure in the world in terms of technology as well as human resources. However, language is a major barrier for providing IT services to other countries. The language barrier makes knowledge transfer difficult. The results of this study can be noted to build control structure facilitating knowledge transfer.

rEFErEncEs Adler, P. (2001). Market, hierarchy, and trust: the knowledge economy and the future of capitalism. Organization Science,12. Applegate, L. and Gogan, J. (1995). Electronic commerce: trends and opportunities, Business Fundamentals. Harvard Business School Publishing. Beise, C. (2004). IT Project Management and Virtual Team. Proceeding of the 2004 SICMIS Conference on Computer Personnel Research: Careers, Culture, and Ethics in a Network Environment. Board of Investment, (2003). Study on the Potential of Business Process Outsourcing in Mauritius. July, 2003. Curtis, B., Krasner, J. and Iscoe, N. (1988). A field study of the software design process for large systems. Communications of ACM, 31(11), 1268-1287. Das, T. and Teng, B. (1998). Between trust and control: developing confidence in partner cooperation alliances, Academy of Management Review, 23, 491-512.

Davenport, H. and Prusak, L. (2000). Working knowledge: How Organizations Manage What They Know. Boston: Harvard Business School Press. Decker, H. (2003). Control of inter-organizational relationships: evidence on appropriation concerns and coordination requirements. Accounting, Organizations and Society. DeLone. W. and McLean, E. (1992). Information Systems Success: The Quest for the Dependent Variable. Information Systems Research, 6095. DeSanctis, G. and Monge, P. (1999). Introduction to the Special Issue: Communication Processes for Virtual Organizations. Organization Science, 10(6), 693-703. Dvir, D., Raz, T. and Shenhar, A. (2003). An empirical analysis of the relationship between project planning and project success. International Journal of Project Management, 21(2), 89-95. Eisenhardt, M. (1985). Control: organizational and economic approaches. Management Science, 31(2). Eisenhardt, M. (1989). Making fast strategic decisions in high-velocity environments. Academy of Management Journal, 32(3). Fiol, M. and Lyles, M. (1985). Organizational learning. Academy of Management Review, 10, 803-813. Goffee, R. and Jones, G. (1996). What holds the modern company together?, Harvard Business Review, 74(6), 133~148. Grant, R. (1996). Toward a Knowledge-Based Theory of the Firm. Strategic Management Journal, 17, 109-122. Gulati, R. And Singh, H. (1998). The architecture of cooperation: managing coordination costs and appropriation concerns in strategic alliances. Administrative Science Quarterly, 43.

423

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Hart, O. (1989). An Economist’s Perspective on the Theory of the Firm. Columbia Law Review, 89 (7), 1757-1774.

Kobitzsch, W., Rombach, D. and Feldmann, R. (2001). Outsourcing in India. IEEE Software, March/April.

Hendricks, P. (1999). Why Share Knowledge? The Influence of ICT on the Motivation for Knowledge Sharing. Knowledge and Process Management, 6(2), 91-100.

Heeks, R. and Nicholson, B. (2001). Synching or Sinking: Global Software Outsourcing Relationships. IEEE Software, 18 (2), 54-60.

Hewett, K. and Bearden, W. (2001). Dependence, Trust, and Relational behavior on the Part of Foreign Subsidiary Market Operations: Implications for Managing Global Marketing Operations. Journal of Marketing, 65(4), 51-66. ICA (2004). The Analysis of Korean IT exporting trend 2004, ICA. INFO. (2006). http://www.infomil.com (accessed 10th October 2006). Inkpen, A. and Dinur, A. (1998). Knowledge Management Processes and International JVs. Organization Science, 9 (4), 454-468. Jones, S. (1987). Technology, Transaction costs, and the transition to factory production in the British Silk Industry, 1700-1870. Journal of Economic History, 47(1), 71-96. Kale, P., Singh, H., Perlmutter, H., (2000). Learning and Protection of Proprietary Assets in Strategic Alliances: Building Relational Capital. Strategic Management Journal, 21, 217-237. Karlsen, T. and Gottschalk, P. (2003). An empirical evaluation of knowledge transfer mechanisms for IT projects. Journal of Computer Information Systems, 44(1), 112-119. Kim, G. (2007). Governance Structure for Knowledge Transfer in Global Business Process Sourcing, Information Systems Review, 9(2). Ko, G., Kirsch, L, and King, W. (2005). Antecedents of knowledge transfer from consultants to clients in enterprise system implementations. MIS Quarterly, 29(1), 59-85.

424

Lee, Y. and Cavusgil, S. (2006). Enhancing alliance performance: The effects of contractualbased versus relational-based governance. Journal of Business Research, 59, 896-905. Lee, J. and Kim, Y. (1999). Effect of partnership quality on IS outsourcing success: conceptual framework and empirical validation. Journal of Management Information Systems 15(4). Leifer, R. and Mills, P., (1996). An Information Processing Approach for Deciding Upon Control Strategies and Reducing Control Loss in Emerging Organizations. Journal of Management, 22(1). Makhija, M. and Ganesh, U. (1997). The relationship between control and partner learning in learning-relate JV. Organization Science 8(5), 508-527. Mansfield, E. and Romeo, A. (1980). Technology transfer to overseas subsidiaries by U.S.-based firms. The Quarterly Journal of Economics. May, R., Puffer, S. and McCarthy, D. (2005). Transferring management knowledge to Russia: A culturally based approach. Academy of Management Executive, 19(2), 24-25. Nonaka, I. and Konno, N. (1998). The Concept of “ba”: Building a Foundation of Knowledge Creation. California Management Review, 40(3), 40-54. Murray, M. and Crandall, R. (2006). IT Offshore Outsourcing Requires a Project Management Approach. SAM Advanced Management Journal, 71(1),.4-12.

Exploratory Study on Effective Control Structure in Global Business Process Sourcing

Nam, K., Rafagopalan, S., Raghav, H. And Chaudhury, A. (1996). Information systems outsourcing. Communications of the ACM, 39(7). Ouchi, W. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 23(9). Pitt, F., Watson, T., and Kavan, C. (1995). Service quality: A measure of information system effectiveness. MIS Quarterly,19(2). Sarker, S., Sarker, S., Nicholson, D. and Joshi, K. (2005). Knowledge transfer in virtual systems development teams: an exploratory study of four key enablers. IEEE Transaction on Professional Communication, 48(2). Sapsed, J., Gann, D., Marshall, N. and Salter, A. (2005). From Here to Eternity?: The Practice of Knowledge Transfer in Dispersed and Co-located Project Organizations. European Planning Studies, 13 (6), September 2005, 831-851. Shrivastava, P. (1983). A typology of organizational learning systems. Journal of Management Studies, 20(1), 7-28. Sobrero, M. and Schrader, S. (1998). Structuring Inter-firm Relationships: A Meta-Analytic Approach. Organization Studies, 19(4), 585-615. Szulanski, G. (2000). The process of knowledge Transfer: A Diachronic Analysis of Stickiness. Organizational Behavior & Human Decision Processes, 82 (1), 9-27

Tastle, W. and Wierman, M. (2006). An Information theoretic measure for the evaluation of ordinal scale data. Behavior Research Methods, 38(3), 487-494.

Tastle, W., Wierman, M. and Dumdum, U. (2006). Ranking Ordinal Scales Using the Consensus Measure. Issues in Information Systems, 6(2), 96-102. Turner, K. and Makhija, M. (2006). The role of organizational controls in managing knowledge. Academy of Management Review, 31(1), 197-217. Tushman, L. and Nadler, D. (1978). Information processing as and integrating concept in organizational design. Academy of Management Review, 3, 613-624. UN. (2003). United Nations e-Commerce and Development Report 2003, (New York and Geneva, USA and Switzerland, 2003). United Nations Conference on Trade and Development, UNITED NATIONS. Valacich, J., George, J. and Hoffer, J. (2006). Essentials of Systems Analysis and Design. New Jersey: Pearson Education. Williamson, E. (1979). Transaction cost economics: the governance of contractual relations. Journal of Law Economics, 22. Williamson, E. (1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36, 269-296. Yin, R. (1984). Case study research: design and methods. Sage Publications, Inc.

EndnOTE 1

This study is conducted with the support of Korea Research Foundation

This work was previously published in Information Resources Management Journal, Vol. 21, Issue 3, edited by M. KhosrowPour, pp. 101-118, copyright 2008 by IGI Publishing (an imprint of IGI Global).

425

426

Chapter 2.4

Understanding Global Information Technology and Outsourcing Dynamics: A Multi-Lens Model Robert C. Yoder Siena College, USA Vera Eccarius-Kelly Siena College, USA Suvarna Cherukuri Siena College, USA

absTracT This chapter provides information technology (IT) project leaders, call center management, researchers, and educators with an analytical tool to examine current concerns and anticipate future trends related to globalization and information technology. The authors propose to use a multi-lens analysis as a framework for evaluating outsourcing opportunities. This approach offers a valuable and effective full-circle methodology for assessing technological, political, organizational, economic, legal, educational, and cultural considerations that encourage a fuller understanding

of the issues, problems, and opportunities that globalization and technological innovation creates. An understanding of these factors related to outsourcing and other technical collaborative projects can avoid costly miscalculations, reduce misunderstandings, and promote mutually beneficial results. Outsourcing is part of a larger socio-political and cultural process, and extends beyond the narrow parameters of economic and technological considerations. The discussion of the various lenses is supported by relevant material from case studies and qualitative interview data collected by the authors in Germany and India from IT experts, call center managers, and call center agents.

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Understanding Global Information Technology and Outsourcing Dynamics

inTrOducTiOn In this chapter, the authors propose the multi-lens model as an analytical tool offering a systematic view of the forces and trends that influence outsourcing decisions. This tool provides a framework that encourages a multi-pronged assessment of the outsourcing phenomenon. Recognizing that the rapid development and diffusion of information and communications technologies is a major driver of globalization, the authors present a group of factors that we believe impact the outsourcing process. It is simplistic to look at outsourcing as purely an economic or technical decision–it is important to recognize that outsourcing contains social, legal, and political aspects as well, and to understand their interrelationships. This model is presented in the context of outsourcing and offshoring—pertinent and pervasive issues that many organizations confront in order to continue their success in today’s global, interdependent business environment. The authors believe that a broad understanding of globalization and its effects upon knowledge-based professions will benefit call center supervisors, their team leaders, and information and communication technology (ICT) managers by encouraging them to innovate and adapt continually to new opportu-

nities created by globalization. Thus, companies will need to train and deploy their staff in new ways to maintain flexibility and competitiveness. This includes effective use of technology for supporting the collaboration of work processes and increasing cultural awareness to enhance team building across geographic and organizational boundaries. Using lenses is not a new idea. Andersen and Dawes (1991) presented four lenses, or perspectives, to explore the political, organizational, economic, and technological aspects of information management. Here the authors have enlarged the scope of these perspectives and added additional legal, cultural, and educational lenses (Figure 1) to reflect categories immanent in recent globalization literature, such as The Lexus and the Olive Tree (Friedman, 1999), In Defense of Globalization (Bhagwati, 2004) and Globalization and Its Discontents (Stiglitz, 2003). Globalization is a force that significantly influences all lenses of the model. Note that there is flexibility in which lenses to use for a specific situation, and the relative importance of each lens will vary. Our goal is not to present a detailed discussion of every possible lens, but to show that understanding globalization issues is naturally multidisciplinary. As Manfred Steger writes, “The greatest challenge facing

Figure 1. Multi-lens model

TECHNOLOGICAL

ORGANIZATIONAL

LEGAL LENSES

CULTURAL

ECONOMIC

EDUCATIONAL

POLITICAL

427

Understanding Global Information Technology and Outsourcing Dynamics

today’s globalization researcher lies, therefore, in connecting and synthesizing the various strands of knowledge in a way that does justice to the increasingly fluid and interdependent nature of our postmodern world” (Steger, 2003).

Outsourcing, Offshoring, and nearsourcing Often located in industrialized countries, many corporate IT and call center managers consider the practice of outsourcing as a panacea to rising operating costs and at-risk revenue in expensive North American and Western European facilities. It is common for managers to argue that additional financial benefits arise from aggressive international direct marketing and sales strategies. However, outsourcing IT departments and call center services often creates a host of multi-faceted problems. This chapter encourages corporate leaders and decision-makers to think beyond the immediate financial benefits and to consider key factors that determine success or failure following an outsourcing decision. Commonly ignored predicaments include sudden political instability in emerging democracies or repressive regimes, and inadequate employee training that leads to stress, absenteeism, and poor customer service. Excessive centralization of organizational operations also undermines teamwork and empowerment of employees. Managers must think creatively about how they can build a successful relationship with facilities abroad. To ensure that an outsourcing decision leads to reduced operating costs and improved customer satisfaction, it is imperative that managers first engage in the research necessary to achieve clearly defined and articulated goals. The Multi-Lens model assists managers in creating successful business plans and execution strategies that involve outsourcing. The authors use the more general term outsourcing to indicate any task or business processes performed by another company, regardless of where that company is based. Traditionally this

428

process most strongly affected the manufacturing sector (cars, furniture, textiles, etc.). Historically, most U.S. manufacturing has taken place in lowcost assembly operations in countries like China, Taiwan, and Mexico, where “over a million Mexican citizens work in more than 3000 maquiladora plants, carrying out assembly operations for U.S. companies” (NASSCOM, 2004, p. 78). In the 1980s, it became commonplace for U.S. businesses to outsource professional information technology support tasks to other U.S. companies like Electronic Data Systems (EDS) and IBM with large multi-year contracts. For example, “Dow has systematically outsourced its information technology needs over the past decade. In 1994, it outsourced a 10-year IT contract to EDS. In 1997, it outsourced help-desk operations to Compaq under a 3-year deal. In 2000, it signed a 7-year $1.4 billion contract with EDS for building and maintaining a converged voice-data network. In 2001, it entered into a five-year agreement with IBM for an end-to-end Web hosting service” (NASSCOM, 2004, p. 79). As the demand for IT workers outstripped supply, companies increasingly imported talented, yet lower-cost foreign workers. The term offshoring (offshore outsourcing) refers to discrete business components that typically are performed in a lower-wage country to take advantage of reduced cost structures for labor expenditures, building rents, tax rates, etc. Foreign workers in the IT sector tend to be highly educated and motivated individuals who provide sophisticated services to U.S. customers in such sectors as finance, banking, pharmaceuticals, and healthcare. Network and data center management tasks also are increasingly outsourced. Such tasks are handled by separate companies abroad that specialize in particular and often narrowly focused services, and are located in societies that are perceived as future power-houses of innovation, including India and China. U.S. corporations became early adopters of the business process

Understanding Global Information Technology and Outsourcing Dynamics

outsourcing (BPO) and call center industry in the early 1980s, however, less than a decade later most large corporations headquartered in other industrialized countries also began offshoring jobs related to call center services, payroll, and software application development. Some multinational companies including General Electric, Hewlett Packard, and Deutsche Bank created their own “captive” organizations in developing countries. Thus, some offshore work is not necessarily outsourced. In another significant development, Hindustan Computers Limited (HCL), previously owned by Deutsche Bank and now one of India’s leading IT and technology companies, initiated a process now called reverse-outsourcing by establishing call centers in Northern Ireland to obtain language skills and infrastructure advantages. Nearsourcing is a relatively new term indicating a tendency to re-assess the original enthusiasm for outsourcing business components to developing countries far away from corporate headquarters. Some European and U.S. corporate leaders find it easier to employ teams with closer “cultural proximity” and ideally reach their sub-contracted facilities within a short 3-4 hour flight. European Union (EU) member states have developed a strong interest in highly capable Eastern European IT and call center operations, specifically those located in Poland, Slovakia, or Hungary since they are now an integral part of the enlarged EU. Their universities have a tradition for excellence in the technical sciences, producing graduates strong in mathematics and computer science while salaries are only about half of those in Western Europe (Woodard, 2007). Leveraging language skills can play a significant role in such choices as many Polish and Hungarian employees speak German, English, and other languages. But Western European businesses also go beyond E.U. borders by seeking out IT experts in Ukraine and Russia. U.S. businesses nearsource to Canada and also throughout Latin America, where there appears to be a particular interest in Central American Free

Trade Agreement (CAFTA) countries, including the Dominican Republic. High-speed Internet connections make outsourcing, offshoring, and nearsourcing a reality anywhere in the world, yet companies prefer to set up in politically stable (and not necessarily democratic) environments to establish sub-contracting partnerships. Clearly, this allows companies to compete more easily with businesses on a global level by collaborating with foreign companies or opening subsidiaries abroad. Recently, outsourcing structures have become more complex as offshore companies in places such as India and Eastern Europe accept sophisticated design tasks, and, in turn, outsource to companies located in even lower-wage countries, such as Indonesia or Vietnam. This “ladder” effect for comparative advantage encourages industrialized countries to specialize in “high-end” capital- and knowledgeintensive activities to attract “inshoring” foreign investment that utilizes a skilled workforce (Neuhaus & Kunze, 2006). As the offshoring market matures and becomes more sophisticated, cost alone will not be the determining factor for selecting business partners. Offshoring has evolved from shifting commodity work to low-wage countries to a web of “complex, multishore arrangements with more nuanced and strategic goals” to create a synergistic relationship between skill sets, location and cost (Brandel, 2007).

ThE basics OF glObalizaTiOn Outsourcing should be understood in the context of the larger globalization debate because of its impact on societies. According to the World Bank: … globalization—the growing integration of economies and societies around the world—has been one of the most hotly-debated topics in international economics over the past few years.

429

Understanding Global Information Technology and Outsourcing Dynamics

Rapid growth and poverty reduction in China, India, and other countries that were poor 20 years ago, has been a positive aspect of globalization. But globalization has also generated significant international opposition over concerns that it has increased inequality and environmental degradation. (The World Bank, 2007) Technology has been driving the globalization process throughout history. Warfare, the most primitive form of globalization, has spread technological inventions, caused cultural diffusion, and forced the migration of millions of people. While the perspective of economists on the nature and timing of globalization tends to represent a more short-term (post-1970s) emphasis on corporations and technology, political scientists and sociologists analyze globalization trends from the perspective of the rise of modern capitalism as it emerged in the 16th century (Pieterse, 2004, p. 17). Historians and anthropologists, in contrast, take a much more long-term approach to examining social forms of interactions (Pieterse, 2004). Pointing to the Middle Ages when people traded with each other, historians suggest that global trade crossed great geographic distances. The famous Silk Route provides a convincing example to illustrate the long-standing exchange of goods between European and Asian traders. The Economic and Social Research Council (2007), an independent British research institution, proposed a categorization of the globalization phenomenon into four sub-categories including (a) economic globalization (the expansion of financial capital and markets), (b) political and military globalization (the increase of global interdependence and of political actors), (c) social and cultural globalization (the movement of ideas, values and people), and (d) environmental globalization (the long-distance transport of often harmful substances, etc.). For the purpose of this chapter, the authors broadly define globalization as an economic, political, and social process that fundamen-

430

tally changes the way in which the international economy is organized. Globalization means that instant telecommunications and modern forms of transportation now prevail over economic barriers and political boundaries that once tended to insulate countries from each other’s influence and economic pressures in the past (Mittelman, 1997). The effect has been powerful. People and organizations around the globe now interact in ways that challenge the established post-war order within the economic, social, political, cultural, and ideological realms. Social scientists disagree about how governments should respond to the displacement of workers as a consequence of globalization, and to what extent the middle class in high-wage countries will shrink in the coming decades. In the highly industrialized, technologically advanced world, workers who are currently excluded from the workforce will require specialized job training programs if they hope to re-enter the job market. New and young entrants into the global job market require entirely different preparation to be able to compete in the future. As a result, the European Union re-launched its Lisbon Plan in 2005 for sustained growth and new employment opportunities, hoping to position its member states as knowledge-based economies rather than competing with inexpensive labor or exploiting natural resources. In the developing world, the discussions are less lofty but have focused on the need to increase educational opportunities for young people who may otherwise become permanently excluded from entering the global workforce. Cognizant of this reality, knowledge workers and managers alike require a clear understanding of the political, socio-economic, and ideological discord that exists as a result of the impact of globalization on different societies. A lack of attention to such issues will lead to poor decision making—causing long-term damage to corporate interests abroad.

Understanding Global Information Technology and Outsourcing Dynamics

discussiOn OF lEnsEs Global IT is taking us into uncharted territory, which is transforming our cultures, politics, legal systems, and economic systems. Any discussion on offshore outsourcing will be incomplete without taking into consideration various factors that influence decision-making processes. When technology relocates, it does not do so in a vacuum. It relocates along with capital and labor in multiple contexts of culture, economy, and politics. Therefore, we provide the multi-lens model, which we hope will enable a holistic understanding of offshore outsourcing. The multi-lens model diagram (Figure 1) incorporates a variety of perspectives and ideas that researchers and corporate decision-makers might not consider in order to gain insight into the complexities of the globalization debate today. The proposed set of lenses (technological, political, organizational, economic, legal, educational, and cultural) encourages analytical thinking about how a variety of countries, corporations, social groups, and individuals perceive both threats and opportunities presented by the outsourcing phenomena. Within each lens, the unit of analysis can be at the international, national, or organizational level. The reader will encounter many examples of crossconnections between the lenses, where topics could just as easily be presented in other lenses. This is a natural result of using our approach— recognizing interrelationships reinforces a holistic understanding of globalization in general and outsourcing in particular.

The Technological lens In Strategic Outsourcing, Benn and Pearcy (2002) highlight technology as the leading catalyst in the present wave of outsourcing. The emergence of global communications systems has driven globalization to new levels. Internet bandwidth is plentiful and inexpensive due to an over-investment

during the dot-com boom in the U.S. The Internet, as an interoperable “network of networks,” provides seamless global communication regardless of the computer system used or the geographic location of the user. Since the Internet reduces transaction costs to almost zero, newly industrialized countries can quickly become producers of information products, using the Internet as a delivery mechanism. This increases competition since geographic distance can be overcome with a simple click of a mouse. Decision-making power becomes diffused because consumers can now search for the lowest available price. Although the Internet facilitates entry into global markets to challenge established and large companies, continuous innovation, personal contacts, and cultural understanding will be required to maintain a competitive advantage. The Internet permits instantaneous interconnectedness and an easy way to disseminate information and products. New “time-compression” forces have been unleashed to speed up product development cycles. Products become obsolete or commoditized quickly, and trends happen quicker. Information gathering and distribution happens at little cost to individuals enabled by cell phones/cameras, Web sites, and blogs. The Internet tends to break up information monopolies leading to state agencies and companies to lose absolute control of the flow of information. Organizations are adopting e-commerce and other sophisticated global information systems to integrate with suppliers, customers, distributors, and other stakeholders to cut costs and provide the best value for their customers. The open-source movement uses global collaboration to create excellent software at no cost, giving individuals and companies in newly industrialized countries the basic and necessary software components such as operating systems [Linux] and Web servers [Apache] to launch their own e-commerce sites. The cost dynamic between Linux and Windows may change due to

431

Understanding Global Information Technology and Outsourcing Dynamics

the emerging pool of low-cost Linux developers and system administrators in India, China, and elsewhere (Fishman, 2005). Workflow technology that automates and monitors complex business processes has been instrumental in increasing the efficiency of call centers and other BPO organizations. Companies like the American National Insurance Company use workflow software to provide their call center agents with instant access to customer information and to enforce business rules (Worthen, 2004). Similarly, European call centers have invested in automatic call distributor (ACD) devices to handle heavy flows of incoming calls. ACD systems route incoming calls based on a set of instructions that determine the best available employee for a specific type of incoming call. The routing instructions are often linked to regional language specializations, accents, or other variables that are taken into account to determine why the customer contacted a call center. ACD systems consist of hardware for terminals and software for the routing strategy. An additional function for these external routing applications relates to computer telephone integration (CTI) technology. CTI allows call center agents to be highly efficient as the routed customer call pulls up data that informs the agent on the PC about the customer’s prior history of calls, the number of complaints filed, or purchases completed. The agent can then quickly assess how to deal with the customer and even decide to re-route him/her to someone better prepared to respond to a specific inquiry based on available data. Management can easily monitor calls and track workflow statistics. Workflow extends to manufacturing as well. Some companies, like Dell computer, have moved from mass production to mass customization, a demand-pull rather than supply-push model, which means that a Dell computer is not assembled until a customer configures and orders it over the Internet. Sophisticated supply chains like Wal-Mart will order a replacement item as

432

soon as it is scanned at the checkout register. The use of extranets (secured access into an information database) as a way to link a company with suppliers, distributors, and other stakeholders is becoming commonplace. Similarly, supply chain management offers a strategic advantage for many companies, and represents the manifestation of globalization as the physical Internet of products flowing from country to country. However, some flexibility may be required for maintaining continuous operation in politically sensitive or disaster-prone areas of the world. Companies are discovering that different supply chains may be needed for different products, and instant communication is required to keep “just in time” inventory costs down and to avoid the whiplash effect of variances in demand being amplified within the supply chain (The Economist, 2006). The worldwide sourcing of components is evolving into a supply web that is constantly changing. The use of radio frequency identification (RFID) tags to continually track the location of goods throughout the supply chain is becoming commonplace. These tags, along with tag readers and software allow an unprecedented level of real-time visibility into the supply chain. Sophisticated RFID tags can detect temperature changes or the impact of dropped goods. An emerging global concern is that the radio frequencies assigned to such devices has not yet been standardized among countries. Videoconferencing, voice over IP (VoIP), and the availability of other computer-mediated communication between workers at any location increases collaboration and productivity, and makes offshoring of complex projects possible. While occasional face-to-face meetings contribute to building trust among team members and can be critical for promoting understanding, most projects can be kept on track through the complementary use of e-mail, videoconferencing, source code version control software, and other technological innovations such as wiki that enables the creation of collaborative Web content and project

Understanding Global Information Technology and Outsourcing Dynamics

documentation. The “Wikipedia” is an example of this technology. Sophisticated Internet-based multiplayer computer games such as World of WarCraft utilizing 3D-simulated worlds are being developed around the world. Some companies are using this game technology for training and team building (Jana, 2007). All of these collaborative technologies depend on a robust and secure Internet; the global supply of customers and potential partners also includes a global supply of hackers. Providing secure network connections continues to be a challenge. The rapid global adoption of the Internet and creation of new products that communicate using the Internet protocol (IP) is leading to a shortfall of unique network addresses. In a way, the Internet is a victim of its own success. The version of IP commonly in use (version 4) was not designed for such expansion and uses a 32-bit network address mechanism that does not efficiently allocate all 32 bits. Many countries already use a technical work-around called network address translation to share IP addresses. A global transition to IP version 6 that provides 128-bit network addresses and improved security features will be necessary in the near future (Hain et al.). China already has embarked on the China Next Generation Internet (CNGI) project to use IP version 6 to support its computer infrastructure and its burgeoning population of mobile data networking users, who access Internet services. Cell phone technology allows emerging countries to leapfrog the traditional wired telephone network and go directly to advanced communications services. Competition among cell phone manufacturers is increasing as China enters the market. The potential for cell phone games and as a mechanism for mobile commerce—the buying and selling of goods and services through wireless devices—is driving innovative, high-end applications. The use of cell phones for commerce is still in the experimental stages, but prototypes for vending machines that dispense soda in response

to a customer calling a number posted on the machine already exist in South Korea, Japan, and Europe. The charge shows up on the customer’s phone bill. Other approaches include using the cell phone as a charge card. Purchases are captured by a radio transmitter in the cell phone and a special receiver at the point-of-sale terminal (Baltzan & Phillips, 2008). It is clear that, in the past, technology was merely a business tool. Today it drives the direction of businesses as one of the most powerful competitive advantages outsourcing firms can have over their rivals in the fast moving economic landscape.

The political lens The political lens is an important one because understanding the nature of politics in the globalized world lessens the risks of conducting international business and better prepares outsourcing managers for political events that may hinder business process outsourcing opportunities. Yahoo’s travails are a striking reminder that even if the Internet reduces the distance between two points, politics will always matter. The study on human organ selling in China was self-censored by Yahoo on its China Web site, because Chinese officials had been implicated in the scandal, though the article received substantial attention on its U.S. Web site. Yahoo decided it was better to censor itself rather than risk offending Chinese authorities (Wild, Wild, and Han, 2005). The political lens may be understood at multiple levels: a. b. c. d. e.

Political risk. Situations of insurgency, terrorism, and regional instability. Immigration laws, anti-immigration sentiments, and movement of labor. Acceptance of foreign capital. Governmental intervention.

433

Understanding Global Information Technology and Outsourcing Dynamics

Managers must be aware of how political risk can affect their companies. In a broad sense, macro political risk threatens all companies regardless of industry. Among political factors that concern U.S. corporate management during a decision to outsource to a particular location will include foreign governments’ attempts to control the flow of information, the potential for corporate espionage, sudden regional instability, and terrorism. The growing practice of abducting engineering and IT staff for ransom in Nigeria and Mexico now worries U.S. and European managers, as regionally based violence and the potential for acts of terrorism deter investment. In the Philippines, a preferred location for offshore IT operations, a militant Muslim group called Abu Sayyaf engaged in a series of bombings, abductions, and murders. The group currently operates in the southern part of the country (Mindanao) and is accused of past collaboration with Ramzi Youssef, who was involved in the 1993 World Trade Center bombings. Unanticipated political events can cause sudden and severe interruptions to regular business operations. The recent military coup targeting the elected prime minister of Thailand, or the violent protests in Hungary as a response to the ruling government’s misleading information about the state of the economy, are typical examples. It is impossible to prepare for all contingencies, but business managers must be aware of potentially disruptive political developments, and implement plans that position the corporation with flexible and possibly redundant business capabilities. Immigration policies and movement of labor across countries has been critical to the outsourcing debate. In the U.S., outsourcing became an issue in the 2004 U.S. presidential election. From 2001-2003, 180,000 new foreign IT workers had been contracted in the U.S. Growing political pressure from displaced technology workers culminated in Congress lowering the number of H1-B visas to 65,000. This level was reached very quickly, even though Congress approved 20,000

434

extra visas in 2004 (Francis, 2004). H-1B visas allow workers to reside in the U.S. for up to six years and require paying comparable U.S. wages. Although companies must certify that bringing in these “specialty” workers won’t eliminate U.S. jobs, some U.S. labor unions claim that H1-B visas were designed for short-term niche labor shortages and are being misused for long-term IT positions that have the effect of driving down wages in the U.S. for the benefit of businesses by substantially increasing the size of the labor pool. However, the growth of offshoring tends to reduce the immigration of technology experts, since they can now find jobs that allow them to enjoy a high standard of living in their own countries. In reaction to an intensification of the antiimmigration mood in the U.S., some politicians proposed stricter tax policies on companies that relied substantially on offshoring, while others criticized state agencies, including Indiana’s department of labor, for outsourcing IT work (Ribeiro, 2003). Following the dot-com bust in 2001 with immense pressure on companies to reduce expenditures, the number of outsourcing contracts increased and employees of multinational companies were transferred to the U.S. on L-1 visas that do not require salaries comparable to standard U.S. wages. The L-1 visa, which is an intra-company transfer of employees from a foreign company to a U.S. company, has no ceiling. During the last few years the U.S. issued approximately 320,000 L-1 entry visas each year (NASSCOM, 2004). In addition to the introduction of antioutsourcing bills in the U.S., there is a rising political awareness of the effects of outsourcing and immigration in the European parliament and other related institutions. According to Kabayashi-Hillary (2002), the European Trade Union Congress has started to take the view that corporate restructuring related to outsourced services may be for short–term profit at the cost of long-term sustainable development. An issue

Understanding Global Information Technology and Outsourcing Dynamics

of concern is the fact that IT experts from Eastern Europe, Ukraine, and Russia temporarily work in Western European facilities. They receive training for particular projects prior to their return to their respective home countries where they lead specialized software development teams. Germany, in particular, pursues this nearsourcing approach since many of the foreign IT workers speak both German and English fluently. German IT experts interviewed for this chapter complained that such arrangements lead to a reduction of overall wages, lower traditional benefits packages, and weaken both development and control over software development projects. On the global level, lower-wage countries are spurring investment by fostering transparent government with less corruption, free markets, and convertible currency. Other factors include having an autonomous legal system, tax laws that protect foreign investment, and a sound transportation and information infrastructure. Equitable privacy and intellectual property policies also are critical success factors. A recent A.T. Kearney report in Foreign Policy (2005) ranked countries by their “globalization index.” The index based on four general areas includes: Economic Integration (trade and foreign investment), Technological Connectivity (number of internet users and hosts, network infrastructure), Personal Contact (travel and tourism, telephone traffic, compensation and other transfers), and Political Engagement (membership in international organizations, treaties signed, UN presence). The highest ranked countries in the report were Singapore, Ireland, Switzerland, the United States, and the Netherlands. The report also found a “strong relationship between globalization and political freedom” and that “globalized countries have lower levels of perceived corruption” (p. 59). Positive political will toward foreign capital is another factor of which companies should be well aware. Governments can hinder smooth business operations through tariffs, quotas, embargoes, lo-

cal content requirements, administrative delays, and currency controls. Managers of companies that intend to outsource should do a thorough analysis of political and governmental policies. A clear example of positive political engagement relates to China’s decision to join the World Trade Organization (WTO) in 2001. All WTO members comply with the same tariff regulations and must allow arbitration for trade disputes. Although some Chinese companies are subject to foreign competition, a number of industries in China remain protected, forcing foreign companies to form alliances with Chinese manufacturing and distribution firms. Political tensions between mainland China and Taiwan, and growing trade disputes continue to present the main threats to developing more efficient U.S.-China relations. For example, the China Currency Act of 2005 (HR 1498) specifically targets the undervaluation of the Yuan as “both a subsidy for exports from the People’s Republic of China and a non-tariff barrier against imports into China, to the serious detriment of the United States manufacturing industry.” China also has been criticized for maintaining import tariffs in some industries and shutting out foreign firms from government contracts (Magnusson, 2004). The future of world organizations setting global standards for trade agreements, the management of financial markets, and concerns related to social justice is uncertain. The 2006 WTO Doha round failed to consider the specific needs of poor and less-developed countries as trade ministers from highly industrialized nations protected their own interests. The U.S. called for liberalization of markets while protecting its agricultural subsidies for cotton, rice, and soybeans. The EU and India criticized farm subsidies but were unwilling to cut their own farm and industrial tariffs (The Economist, 2006a). Although multilateral trade agreements reduce the complexity and level the playing field for smaller, impoverished, and less technologically

435

Understanding Global Information Technology and Outsourcing Dynamics

advanced countries, most successful trade agreements now occur on a bilateral level or take place between politically aligned trading blocs. Stiglitz (2003) heaps criticism on the International Monetary Fund because the IMF did not take into account how people would be affected by its cookie cutter solutions to economic crises. Some of the IMF’s policies for developing countries included implementing strict budgetary controls and preferred payback to creditor banks. This resulted in massive unemployment, artificially high exchange rates, and rapid privatization of industries and natural resources, often at bargain prices for buyers linked to corrupt governments. In addition, ensuing one-sided trade liberalization policies opened up developing countries’ markets to goods from developed countries without granting similar access to markets in Europe and the United States.

The Organizational (management) lens The most immediate and obvious implication of outsourcing for U.S. and Western European companies relates to the replacement of internal jobs with hires abroad. The advantages of lower labor costs, cheaper real estate, and related support staff expenses must be weighed against the loss of valuable employee knowledge and experience. In addition, negative effects on company morale can increase turnover, create inefficiencies among insecure teams, and even encourage acts of sabotage. Other concerns include loss of control of IT projects, especially if subcontracting occurs, and the need to acquire expertise in negotiating outsourcing contracts. Effective management of remote teams becomes more complex and can create a feeling of disconnect between the corporate mission and the teams abroad. Scheduling work becomes more complicated because of different (and more frequent) holidays in Europe and by weekends that start on Thursdays in Israel. High

436

turnover rates in India and elsewhere among programmers and call center technicians lead to project delays, quality concerns, and uncontrolled dissemination of proprietary information. The potential advantages of outsourcing are considerable. Companies can quickly acquire technology expertise utilizing best practices, gain increased flexibility for variable demand for IT services, and free up internal staff for highervalue, strategic projects. Many companies take advantage of time zone differences to operate 24x7. Off-hours call centers and IBM’s “Java Around the Clock” programming teams are examples. Sometimes, mainframe and other computing resources can be used more effectively by staggering the workload over the entire day. Outsourcing and offshoring can be thought of as organizational innovations in response to the availability of a large pool of talented and inexpensive labor along with an abundance of network bandwidth and networking infrastructure in developing countries. This is different from internal process improvements, such as total quality management and continuous improvement that were developed in Japan and other countries in the 1980s that mostly targeted manufacturing jobs. Today, outsourcing primarily affects professional, knowledge-based jobs. Businesses outsource “any activity where we can digitize and decompose the value chain” (Friedman, 2005a), and “activities comprising a job that does not require physical proximity, local knowledge, and complex interactions” (Magnusson, 2004). Software development, IT services, banking, and insurance sectors are particularly susceptible to outsourcing, while customer-facing service jobs are less amenable to outsourcing (McKinsey, 2005). Globalization exerts pressure on businesses to compete in the global market and take advantage of offshore talent through innovative ways to “fragment complex management processes and reintegrate them into the whole” (Pralahad, 2005). Companies are learning how to outsource

Understanding Global Information Technology and Outsourcing Dynamics

and how to determine what level of outsourcing works for them. Many begin this transition by “transaction outsourcing” that outsources only “well-defined processes that have clear business rules” (Overby, 2005). Transaction outsourcing does not require protracted contract negotiations or extensive hands-on management. This work is readily extractible from the value chain, and non-core as it does not have significant strategic value. Most companies choose to retain control over strategic, proprietary processes and methodologies, so that they can distinguish their brand in order to charge a premium. Successful companies adapt quickly to new market conditions and seek competitive advantage through technology. These “virtual firms” use networks to create and link dynamic workgroups without being limited by traditional organizational structures or geography. IBM has implemented this idea globally by creating a human supply chain that tracks the skill set of its technical staff and optimizes the creation of teams worldwide to work on specific tasks. Engineers track world news events and weather patterns in command centers to anticipate problems. IBM has increased its presence in India from about 9,000 employees in 2003 to over 43,000 in 2006. Other staffing increases took place in China, Brazil, and Eastern Europe to give IBM flexibility to perform work at many locations using the most appropriate people for the job (Hamm, 2006). A related organizational innovation, virtual integration (also known as insourcing), combines separate organizations to operate as a single entity as far as the customer is concerned. An example of this is Toshiba and UPS. Broken Toshiba laptop computers are sent via UPS to their repair center staffed by specially trained UPS employees (Bowman, 2005). Innovation is becoming the most important strategic advantage. Former outsourcing companies are now developing their own electronic designs and software to compete with their former

trade partners. Businesses focus on controlling leading-edge technologies and products to attain the best profit margin, otherwise they risk becoming a low-profit commodity supplier. Another approach for fostering innovation in organizations is deploying Business Intelligence technology so that employees at all levels and all departments can make better and faster decisions. This is done by loading information from a variety of organizational and external databases into an enterprise data warehouse, and providing users with intuitive reporting and analytic tools to mine the warehouse for patterns and trends so that the company can quickly respond to changing business conditions and opportunities. Some organizations have been able to sell information from their data warehouse as a value-added product, turning a former cost center into a revenue stream. Increased competition from efficient firms around the world increases the importance of becoming a “learning organization” by “creating new business knowledge, disseminating it widely throughout the company, and quickly building the new knowledge into their products and services” while encouraging new ideas and calculated risktaking (O’Brien & Marakas, 2006). A successful business strategy emphasizes creating value for the consumer. That, however, can only be achieved once human resources—and not just financial capital—are categorized as essential. Training, coaching, and ongoing performance evaluations encourage staff to feel valued and appreciated by the company. In particular, it is essential for IT teams abroad and call center supervisors and their team managers to perceive themselves as empowered decision-makers within the organizational structures. Effective team building takes place in less rigidly organized environments that encourage staff members to feel empowered to pursue solutions that satisfy customer needs. Organizational structures that encourage continuous learning, team-oriented attitudes, and independent decision-making capacities on all levels of the

437

Understanding Global Information Technology and Outsourcing Dynamics

company succeed at satisfying customer needs at a much higher level.

The Economic lens The economic lens reveals a very important dynamic that continues to drive the outsourcing movement. An increase in trade opportunities along with greater access to information has allowed millions of consumers in newly industrializing countries to consider global goods and services. At the same time, access to new markets also has created large cohorts of knowledge workers ready to compete for jobs in finance, information technology, insurance, and many other service areas. By 2004, the effects of globalization were swift and stunning—the market research company, “International Data Corporation (IDC) valued the annual global business process outsourcing (BPO) market at $382.5 billion, a 10.8% jump over 2003. IDC estimates that by 2009, the market will hit $641.2 billion. GE has gained significantly by offshoring of business services to India over the last 6 years. It has invested close to $400 million in India. Annual revenues are at about $1 billion and the company saves $300 million every year” (Couto & Divakaran, 2006, p. 2). Also, estimates exist that in the areas of application development, integration, and maintenance, offshore IT services providers have already reached a 17% market share, increasing to a 24% share by 2008 (Gens, 2004) and that finance and accounting outsourcing will exceed $47 billion by 2008. A study by Forrester Research indicates that over 3 million professional and service jobs will move out of the U.S. by 2015 (McCarthy, 2002). Economic theory predicts that work and production of goods will move to regions that permit cost-structure efficiency. Outsourcing work not only frees up capital, it also allows employees to do different, more sophisticated work, resulting in a cheaper and better final product. However,

438

the expanding labor market exerts tremendous downward pressure on labor costs. Overseas firms offer high-quality work at much lower costs in comparison with Western European and U.S.-based companies, often by paying workers 75% less. Attendant support costs, such as health benefits, taxes, and workplace and environmental regulatory requirements also can be much lower offshore. The lack of unions and organized labor in developing countries contributes to this trend, although that will be changing in a number of newly industrialized countries including Mexico, China, and India. The emerging middle class in India is pushing up wages and benefits, prompting Indian companies to outsource work to even lower-wage countries. Call centers, once known for driving the Indian high-tech revolution, are becoming a commodity. The Indian trade organization NASSCOM estimates that call centers account for only 35% of the business process outsourcing industry as compared to 85% in 2000 (Kripalani, 2006). Indian companies are taking on call center tasks only in conjunction with high-margin software development and data center management contracts, prompting some companies to consider building call centers in lower-cost areas in the U.S. or Canada. More and more frequently now, European companies are opening up call centers closer to their own operations, preferring Eastern Europe and Ireland at the moment. Although offshoring drains jobs from highwage countries, workers and companies in newly industrialized countries can now afford to buy products from highly industrialized countries, resulting in a much larger market for goods and services. The growth of the middle class in India and China has raised literacy rates and the standard of living while enabling more women to enter the workforce, resulting in reduced birth rates and child mortality (Friedman, 2005a).

Understanding Global Information Technology and Outsourcing Dynamics

The legal lens The legal lens allows for an examination of corporate preparedness on the international, national, and local organizational levels. It is important for organizations to understand the legal environment in which they operate. Some countries have enacted laws that restrict transborder flow of data or require the data to reside on a server within the country of origin. In addition, negotiating outsourcing contracts to ensure that proper safeguards are included is a complex process and requires expert advice. Successful contracts require the outsourcing company to perform background screening of their employees and to hold them responsible for any actions that break contract agreements (non-compete agreements and intellectual property clauses, for example). It also is important to build flexibility into the contract to allow for changing business conditions. In addition, the contracting company needs to verify network security and to ensure that test data does not identify actual customers (Fitzgerald, 2003). In countries where the legal framework provides for portable health care insurance, pension benefits, and continued training, displaced workers have the opportunity to move to new jobs in a new industry (Friedman, 2005c). Increasing numbers of labor activists in the U.S. push for the creation of legislation that provides government benefits for retraining, healthcare, and relocation expenses for displaced IT workers by expanding the Trade Adjustment Assistance act (Thibodeau, 2006). In Western Europe, such rights have been guaranteed through the Lisbon Accords. Since offshoring jobs are predominantly knowledge-based today, the enforcement of intellectual property laws abroad has become crucial to protect patents and copyrights. Several high-profile cases have alerted corporate managers to this growing problem. The lack of a police response to a stolen source code in India (Vijayan,

2004), and Indian call-center staff members who used passwords from banking customers to transfer funds to their own accounts are just two examples (Puliyenthuruthel, 2005). In June 2006, an HSBC employee was charged with stealing confidential data of the bank’s customers in the UK to illegally transfer their money. Working for HSBC in Bangalore, India, the employee accessed personal security information leading to an estimated loss of 233,000 British pounds. A similar case was reported from MphasiS BFL, New Delhi. Several employees of this firm were involved in a scam that targeted Citibank trying to steal approximately $350,000. Such instances are common in the corporate world. However, it is complicated when fraudulent cases involve cross-border legalities. Similarly, China’s lax enforcement of software, music, and movie piracy are a major concern as well. It is estimated that over 90% of Chinese computers run on pirated or unlicensed software, contributing to the ability of Chinese companies to underbid U.S. rivals (Magnusson, 2004). A related issue is the lack of environmental and labor/workplace regulations that allow countries to create below-market prices for goods and services. This so-called “China price” reflects exploitation that ultimately damages both trading partners in the long run. Trade agreements must deal with this unfair arrangement to address the treatment and living conditions of labor. It should be noted, however, that an increasing number of countries recognize offshoring as a strategic imperative for their economic well-being and have taken dramatic steps to rectify some of these problems. Of interest to corporate managers are the Global Sullivan Principles, developed by the Leon H. Sullivan Foundation, that promote a holistic approach to economic, social, and political justice for corporate relationships with local communities. The principles support human rights, equal opportunity, racial and gender diversity on decision-making committees, and serve to improve the quality of

439

Understanding Global Information Technology and Outsourcing Dynamics

life in communities important to the economic success of corporations. Collaborative agreements and economic partnerships between companies that outsource projects and communities abroad can lead to more profitable outcomes and reduced legal costs. With knowledge as an evermore valuable asset and increasing access to instantaneous global communication, it is important to ensure that the legal contract defines how knowledge related to an outsourcing relationship should be treated. Kobayashi-Hillary (2002) remarks that: International clients, particularly U.S. companies, tend to throw in their standard intellectual property clause and assume that U.S. law would govern. That is not the case if another country’s laws apply; special requirements for assignment need to be fulfilled for the client to own the intellectual property. International clients also need to ensure that the dispute resolution mechanism specified in the contract can be enforced, for example, a U.S. court judgment cannot be enforced in all countries. (p. 202) The U.S. Department of Commerce recommends that businesses create contracts containing very clear terms for payment and performance standards when dealing with Chinese firms. It is important to be specific about when events happen and which currencies will be used. The mechanism for contract disputes should be stipulated in the contract. Usually the first approach to invoke is simple negotiation; Chinese government-recognized arbitrators may be used if negotiations fail. Furthermore, all agreements should be in compliance with WTO rules (U.S. Department of Commerce, 2003).

The Educational lens Outsourcing has exacerbated the global competition for brain power or intellectual capital. In the

440

past, the best and brightest students dreamed of going to the U.S. for graduate school or to obtain a professional job. That has changed, however. Today, offshoring can provide high quality jobs in newly industrialized countries and does not require extended stays in either the U.S. or in Europe. Excellent universities in China and India (University of Science and Technology of China, Indian Institute of Technology, and Indian Institute for Management) are attracting top-quality students. The United States attempts to attract students by creating 20,000 visas for foreign workers who hold graduate degrees from U.S. universities. A National Academy of Science report recommends “granting automatic 1-year visa extensions to foreign students in the U.S. who receive doctorates in science, engineering, or math so they can seek employment here” (Friedman, 2005b). Although post-9/11 immigration restrictions remain a barrier for some foreign students wishing to study in the U.S., many American universities have established partnerships with foreign institutions to expand research collaboration, increase their international stature, and to facilitate student and faculty exchanges. The sheer number of foreign graduates is staggering. Some 70,000 new accounting grads emerge from Indian universities each year and many start their careers at a pay rate of about $100/ month. India has some 22 million graduates (6 million science graduates, 1.2 million engineering graduates, and 600,000 doctors). China had more than 2 million students graduating from its universities in 2003 (600,000 engineering degrees, 200,000 science degrees, and 100,000 medical degrees) (Wharton School, 2005). However, companies should ensure that the degree-granting institutions represent the quality education they officially claim. The percentage of students that graduate with engineering, math, or science degrees in Asia (Japan: 66%, China: 59%) is substantially higher than in the U.S. (32%) (Friedman, 2005a).

Understanding Global Information Technology and Outsourcing Dynamics

Meanwhile, the number of U.S. college freshmen planning to major in computer science dropped to 1.4% in 2004, down from 3.4% in 1998 (Denning, 2005). In the U.S. 12th graders scored below the national average of 21 other countries in math and science, identifying a growing weakness within the educational system (Friedman, 2005b). Requiring sciences and mathematics in every year in high school and substantial efforts to encourage women and minorities to study engineering could increase U.S. competitiveness in the coming decades. An article published in the New York Times (2005) outlined the economic risks linked to faltering governmental and private support that at one time could be counted on to spur invention and scientific research. Now the long-term outlook required for breakthrough research results, often gives way to short-term commercial interests because immediate returns on incremental improvements have been preferred in the U.S. The need for increased funding for basic scientific research is becoming a more and more serious issue as the U.S. trails many Asian countries in research and development funding as well as the number of doctoral degrees awarded in science and engineering. An interesting indicator for this shift is that the number of U.S. patents awarded to foreign residents has grown to about 50 percent of the total (O’Brien, 2005). To address this issue, two important shifts need to be taken into consideration with regard to education. There is an alarming lack of new U.S. scientists, especially among women and minorities, and there is woefully insufficient funding for basic research in engineering and the physical sciences. If these developments are not reversed, the U.S. will lose both its technological and innovative edge within the coming generation. Recent calls for educational reform are reminiscent of the United States’ response to the Soviet Union’s launching of the Sputnik satellite in 1957. By 1958, the U.S. had passed

the National Defense Education Act in response to the challenge. In effect, this nationalized the education system to meet the needs of Cold War competition by adopting more formal methods of instruction, and providing economic and other incentives for private and state universities to perform federally supported research. While the U.S. government expressed a willingness to invest heavily in education, innovation, and research at that time, that is no longer the case today. It also is interesting to note that both Russia and Japan have backed away from state-mandated curricula and exam-driven assessments as the U.S. continues to broaden the use of standardized examinations as exemplified by the No Child Left Behind Act. The downturn in the Japanese economy in the 1990s fueled educational changes to respond more effectively to the pressures of globalization. Japan determined that its educational system needed to de-emphasize uniformity and promote innovation by decentralizing control of schools, to allow more parental involvement, and increase intellectual diversity. A Japanese educational report stated that “people in the world are linked directly, information is instantly shared, and the globalization of the economy is progressing. The structure and aspects of society have been changing on a global scale, and complexities have emerged which are difficult to cope with given existing organizations and systems. … The traditional education system is lagging behind the current of the times” (Spring, 2006, p. 217). Clearly, the U.S. Department of Education ought to take studies and trends in the international educational arena into account to prepare future generations of U.S. students for an increasingly globalized market. Businesses need to take increased interest in training their knowledge workers to maintain their competitive edge. EDS is a leading example by “providing 20,000 of its 87,000 technical workers with updated business and technology skills... by enrolling in one or more of the 718 training

441

Understanding Global Information Technology and Outsourcing Dynamics

courses it has set up for 2005” (Hoffman, 2005). Some analysts stress that people skills and verbal communication skills are equally important as technical skills to develop future leaders with the ability to synthesize and integrate knowledge across many disciplines. The E.U.’s educational policy uses regionalism to cope with global economic competition by encouraging students to learn two additional languages beside their own, while emphasizing sciences and mathematics. The “Lisbon strategy” includes improving education and teacher training, and developing skills for a knowledge-based society by improving access to IT, increasing recruitment in scientific and technical studies, and an emphasis on lifelong training. Several European countries have initiated apprenticeship programs to train call center operators able to respond effectively to customer needs in multiple languages. Their training consists of effective e-mail responses to customer inquiries, problem-solving, and technical training. One company, Techovate, has hired young, adventurous European workers for their call centers in India. These workers receive the prevailing Indian pay, live quite well locally, and gain valuable international experience that often leads to management positions after several years abroad (Overdorf, 2005). The U.S. faces a politically charged problem with regard to language studies. Cultural conservatives support English-only instruction to enhance national unity and economic strength, which also is enforced by the No Child Left Behind Act. Some politicians believe that it is unnecessary to learn other languages since the U.S. dominates the world economic scene, but others are realizing that “gaps in our national language capabilities have undermined cross-cultural communication and understanding at home and abroad” (Spring, 2006, p. 249). An article in Education Week reports that “national-security experts have warned that U.S. foreign-language capabilities are insufficient to meet the demands for translators, analysts, and

442

other critical positions in government and business” (cited in Spring, 2006, p. 249). This shortage has prompted the U.S. Department of Defense to open foreign language centers.

The cultural lens Cultural understanding and cross-cultural communication is a significant driver for offshore outsourcing. It is also one of the most neglected issues often causing consternation among corporate managers. At the outset, culture does not seem to be a factor in the cost-cutting equation of outsourcing, but it is important for enhancing communication and for the development of strong client-vendor relationships. Prahalad and Lieberthal (1998) raise some pertinent questions: “How many of today’s multinationals are prepared to accommodate 30 % or 40 % of their top team of 200 coming from China, India and Brazil? How will that cultural mix influence decision making, risk taking, and team building? Diversity will put an enormous burden on top-level managers to articulate clearly the values and behaviors expected of senior managers, and it will demand large investments in training and socialization…” (cited in Deal, 2000). Cultural sensitivity or rather the lack of ethnocentrism plays a pivotal role in international business. Inter-cultural communication between clients and vendors across the globe will require cultural literacy in terms of understanding the other culture to function effectively within it. Managers in the outsourcing business should be aware that different cultures have different attitudes towards work and time. People in Latin America, Mediterranean and South Asian cultures are casual about their use of time, while Americans and Japanese are typically punctual. Notable cultural differences exist in leadership styles, too. Large American firms developed leadership in terms of professional management and its capital is obtained from the capital mar-

Understanding Global Information Technology and Outsourcing Dynamics

kets rather than from private family fortunes. Therefore, their leadership styles are responsive to boards of directors and to Wall Street (Quinn, 2005). Other cultures may have a high prevalence of family based leadership styles. Quinn (2005) notes that European and Japanese chief executives are the most consensus-oriented, and Chinese and American top executives are more likely to make decisions based on their own sense of accountability. When a company is hiring a vendor for outsourced work, it should acquaint itself with local leadership styles and work ethic. Organizations hoping to operate successfully on a global level must be cognizant of both language and cultural traditions in order to promote their goods effectively in the global marketplace, particularly when collaborating with offshore companies. In addition, social pressures among workers in newly-industrialized countries, who earn a higher than average income in comparison with workers in other sectors, can quickly reject traditional arrangements of communally-oriented decision making, which often creates intergenerational or communal conflict. A host of cultural challenges for new and established business ventures can be found in every country, and even in specific regions within each country. Corporate managers interested in serving the best interest of their company, and keen on satisfying both the needs of their customers and employees, need to display clear signs of cultural competency and sensitivity. Managers must now be astute observers of political and social conditions, and attain the ability to acquire superb local support networks, including language experts. Operating a supply chain in China, for example, can create obstacles that are unfamiliar to many U.S. and European managers. The Chinese government regularly interferes with international trade regulations complicated by the fact that laws are not uniformly enforced. The practice of bribing, although officially classified

as a crime in China as in the U.S. and Europe, is a reality in China and can become necessary to accomplish specific transactions. Personal relationships—guanxi—play an important role in Chinese business, leading many Western companies to hire Chinese import/export companies to utilize their regional contacts in order to expedite customs clearances and facilitate other transportation issues (Koch, 2005). A collaborative relationship with local experts, not just expatriates who have long-standing experience in a country, creates a network that allows for rapid assessments of emerging cultural conflicts and can reduce disputes over the interpretation of contractual terms. The Internet and other commercial forces have spread pop culture through music, movies, and fashion, but the underlying ideas and values expressed through pop culture often cause the most intense cultural disagreements around the world. The Internet as a medium for cultural exchange has prompted some to protect their regions from perceived threats of Western influence. Negative public reactions to the dissemination of Western commercial and media images, and the availability of certain products have caused disruptions, particularly in countries where cultural taboos, religious beliefs, and social conservatism are in direct conflict with more liberal traditions in the West. This leads to restrictive import laws in several Islamic countries such as Pakistan, Iran, and the Gulf States including Saudi Arabia where sexuality and women’s roles in society are formalized, controlled, and restricted. The Wahhabi reform movement, which originally emerged within Saudi Arabia, introduced limits on the use of alcohol and tobacco, and imposed a far stricter enforcement of rules related to the segregation of the sexes. Over the past decades Saudi Arabia spent substantial amounts of money on religious and social projects in other Muslim countries that are dependent on financial support from wealthy oil countries in the Gulf region. As a consequence,

443

Understanding Global Information Technology and Outsourcing Dynamics

a growing number of religious institutions have made a reactionary shift towards conservative ideas and values. Managers must be fully aware that the impact of globalization, including the spread of ideas, customs, and commercial ventures, has been highly controversial in many countries. While an increasing amount of web pages in languages other than English will eventually cause a backfeed of ideas and practices from East to West and from South to North, the current dominance of English and Western concepts of commercialism often threaten local cultures. Supporters of globalization argue that the spread of ideas such as democracy and capitalism will lead to eventual improvements in standards of living worldwide. They propose that free markets will allow people in less developed countries to gain economic opportunities that they did not enjoy before. Opponents of globalization, however, assert that free markets provide multinational corporations with the ability to ignore labor, cultural, human rights, and environmental standards to increase their profits. In turn, those profits are utilized, critics suggest, to continue to marginalize or exclude local enterprises and cultural peculiarities. This translates into a growing gap between the wealthy and the poor, some of whom remain permanently excluded from the benefits of globalization. Stiglitz (2003) warns that rapid globalization can have a devastating impact on the environment, and also inhibits cultural adaptation to market changes, resulting in increased crime, migration, and other effects of social dissolution. The widespread use of English in business and media is driving a process of cultural homogenization, albeit to varying degrees. International aid organizations, such as the World Bank, the Asian Development Bank, the Association of Southeast Asian Nations (ASEAN), the International Monetary Fund (IMF), the United Nations (UN) and other non-governmental organizations use English as one of their predominant working

444

languages. English has become a vehicle for participation in the global economy and has taken on a utilitarian, commercial purpose. English, however, also represents a different legacy. It is one of the languages of colonization, used to train the native elite to implement repressive laws on behalf of the colonizers and to protect colonial structures. The dominance of English today creates new global boundaries based on emerging post-modern social and economic class structures. The lack of specific language skills can create insurmountable barriers, prohibiting people from contributing their knowledge and experience to conversations about their own country’s future, and its political, economic, and socio-cultural direction. Elite schools that teach English in developing countries often exacerbate economic inequalities that contribute to strong anti-western feelings. After several devastating terror attacks in Africa, Europe, Australia, and the U.S. it has become quite obvious that studying English and having a sense of familiarity with Western education and culture may not necessarily lead to the adoption or acceptance of those value systems, but instead can contribute to a process of extreme alienation and rejection. In the case of India, it is clear that the country enjoys a language advantage in comparison with other newly industrialized nations such as Mexico. India’s English-speaking workforce, its strong cultural bias towards education and selfimprovement opens up vast opportunities for the current generation of young and educated workers. But some language difficulties continue to persist. For example, Dell closed a customer support center in India because customer satisfaction plummeted after callers failed to understand accents or terminology used by call center staff (Castro, 2003). However, there are many successful help desk operations and call centers in India who provide their employees with specific language training in American, British, and Canadian accents to facilitate communication and improve customer

Understanding Global Information Technology and Outsourcing Dynamics

service. Most call center respondents interviewed for this chapter in Bangalore have gone through “accent neutralization” courses. Call center agents are expected to speak without a heavy accent. It is interesting to find “call center colleges” and training institutes that initiate the young workforce into the outsourcing culture. In India, English language skills can raise an individual’s income from about $80/month to over $200/month within a call center environment and in data entry related employment. This represents a dramatic rise in social status. Call center work is much more respected in emerging countries than in highly developed countries. A call center college principal in Bangalore interviewed for this study remarks: “The training program goes on for 4-5 weeks. We assure them placement on the successful completion of the training. The idea is to get into an international call center because of the higher pay-scale…Some companies have higher demands. For example, IBM wants royally excellent people.” Some Asian countries, including Japan and China, maintain their strong national identity while focusing on English language instruction. Japan promotes English at all levels of school, and encourages overseas study. China highlighted its growing competency in English by competing for and winning the bid to host the 2008 Olympics. Many countries emphasize the utility of English as the common commercial language yet support regional and national languages in schools and at home. Local dialects and expressions are often helpful for creating effective advertising campaigns although the pervasiveness of international consumer brand names regularly contributes to the adoption of foreign phrases, symbols, and terminology. Many transnational corporations have successfully adapted to local tastes while maintaining their brand identity.

FuTurE rEsEarch dirEcTiOns: gEndEr, hEalTh, and EnvirOnmEnT We propose gender, health, and environment as three additional areas that merit attention for future research directions. The increasing and evolving role of women in IT and outsourcing makes it imperative for future research agendas to do a systematic analysis of gender issues. In addition, health and environment directly impact employees’ levels of stress, absenteeism, and customer service. Managers will need to assess the conditions under which employees work prior to undertaking outsourcing initiatives. The BPO industry is witnessing an overwhelming entry of women into the hi-tech workforce in countries like India, Israel, and Turkey. However, in developing countries, “women are concentrated in routine jobs at lower levels and lower salaries than men. For example, women constitute a disproportionately high number of employees in call center services, data entry, and programming, but there are very few women at the managerial levels” (World Bank, 2006). This reality must be taken into consideration. Hafkin and Taggart (2001) argue that, in order to retain and build upon the employment gains associated with globalization and information technology, women also need to have the opportunity to move into more technical, higher-level, and better-paying jobs. It is essential to note that global information technology and offshore outsourcing does not simply have an impact on technical aspects of a society, but also influences social aspects. This is nowhere more evident than in the discussion of gender. When women enter technological spaces, they are also promoting social and cultural changes. Increased employment opportunities allow women to control their earnings and strengthen their status within the household. Over time women become empowered as wage earners and eventually gain a political voice in countries where they have not mobilized traditionally. Just as technology is often

445

Understanding Global Information Technology and Outsourcing Dynamics

accompanied with social change—Jansen (1989) aptly remarks “technological designs are social designs” (p. 196)—gender has a similar impact. Many outsourcing stakeholders are increasingly realizing the importance of gender issues and capability building among women (Brennan, 2004). In countries like India, where women would have ordinarily worked in a typical 9-5 job or stayed at home, they are breaking conventional barriers by working at odd hours, usually the night shift. They are making use of multiple domain expertise like banking, insurance, investment, and information technology. The ratio of Indian women software professionals in information technology is rising steadily and is likely to be 65 (men):35 (women) by the end of 2007 (Padmanabhan, 2006). In contrast to the Indian scenario, a recent study conducted by the Information Technology Association of America shows a large decline in women’s workforce in IT (it was 41% in 1996 and fell to 32.5% in 2004). This reduction in the percentage of women in the IT workforce primarily targeted women holding administrative positions (Bakshi, 2005). Besides India and China, Israel is another big player in the BPO space. Additional countries where a growing number of women work in call centers include South Africa, Northern Ireland, Ireland, the Philippines, the Czech Republic, Poland, Hungary, and Russia. In 2004, the proportion of male versus female workers in IT services was 76:24, while in contrast, the ratio stood at 31:69 in the BPO industry. Such developments make it obvious that an understanding of gender issues becomes imperative for managers who lead BPO and call center operations in countries where growing numbers of women are employed. Successful managers are expected to be sensitive to gender-specific concerns and to take appropriate action to protect female employees from sexual harassment, a hostile work environment, and outright violence.

446

One issue that often intersects with gender is that of safety of women employees—an issue not to be ignored by managers developing an outsourcing blueprint. The most pressing issues regarding women who work in BPO firms in India deals with their physical safety following the end of their shifts. With close to 40% of women in BPO’s working during the night shift, the possibility of physical assaults and violence against them is high. In a particularly notorious case, a young woman working for HCL’s call center in Bangalore was brutally raped and murdered in 2005. As a result of public pressure, companies increased security and offered female employees guarded transportation that drops them at home. The ability and willingness of corporations to protect their female employees from violence will determine the future role women play in the BPO industry in many markets. Mainstream research on offshore outsourcing has often ignored the issues of employee wellness and health. It is interesting to note that employee health and wellness have been incorporated in western organizational philosophies. However, when such companies outsource their work to some of the cost-effective locations these issue are often compromised. In a post-modern organizational culture, wherein capital and labor are witnessing cross-border travel, so should the philosophies of health and wellness. Considerations related to the working environment ought to be of particular interest to managers keen on working with a highly motivated and energetic workforce. Managers must be concerned with social and ethical implications of outsourcing. Workers who experience inhumane working conditions such as poor air quality, a lack of air circulation and excessive heat, the absence of proper sanitary facilities and potable water will eventually commit acts of sabotage or direct their anger at someone within call center operations. As Weincek (2004) remarks, “one current ethical question with which managers must deal with is determining what

Understanding Global Information Technology and Outsourcing Dynamics

should be the company’s responsibility for outside workers, their work environment, and their community? …Should the outsourcing company ensure that the workers are treated fairly by the company’s standards? Should the outsourcing company be responsible for employee safety and working conditions?” (p. 149) Qualitative data collected for this research— primarily in the form of interviews from callcenter employees—brought the health issue to the forefront of the outsourcing debate. The criticality of health as an emerging consideration was one of the central themes generated by our respondents. One of the respondents for this study rightly remarks: Surely health problems. Your biological system is changed. You are awake at a time when your system is used to sleep. I have acidity problems and problems related to digestion. We skip many meals or eat them at odd times. That does not go well with the body clock. Managers need to ponder such employee concerns since motivated and loyal employees who work in a healthy atmosphere are crucial to maintain a long-term sustainable advantage. Several factors contribute to the lack of attention to environmental and labor issues in IT outsourcing. The first is a narrow understanding of IT outsourcing in developing countries, with a specific focus on core capabilities. Mitchell (2004) argues that outsourcing brokers, client representatives and third party project managers in the IT and BPO outsourcing arena do not wish to risk alienating their clients, colleagues and counterparts by raising issues of environmental responsibility and fair labor practices offshore. Industrial companies in India have opened software development and call center divisions to take advantage of the tax holidays provided to firms with export-oriented IT divisions. These tax holidays are being used to declare income from polluting industrial activities as having been de-

rived from IT operations. An industrial firm with an IT division can avoid high Indian tax rates on non-IT income by routing that income through a firm’s IT division. (Mitchell, 2004: 1) In response to such developments, social justice non-profit organizations propose ongoing training and education seminars for employees as a vehicle to empower workers to become leaders within their own societies. The aim is to protect not only labor standards, but also to improve environmental standards and conserve land and resources for future generations. Global environmental issues are very real and growing: a study released by environmental groups in China found that nearly two hundred of China’s largest cities had dangerously high pollution levels (Fishman, 2005). In countries with a high percentage of indigenous populations such as Guatemala for example, it is important to establish a flow of communication with local community leaders and activists to support the preservation of indigenous peoples’ traditional knowledge and to show respect for their relationship to their region’s natural resources (Spring, 2006).

cOnclusiOn Assessing political, organizational, economic, technological, educational, legal, and cultural considerations can turn a disappointing outsourcing experience into a successful partnership. Companies need to encourage their project managers to become intellectually curious about issues beyond the immediate technological and bottom-line questions at hand in order to maintain a high level of competitiveness in a globalized market. Many aspects of programming and accounting work are becoming a commodity. Flexibility and continued innovation are needed to “create value through leadership, relationships, and creativity.” Special attention should be paid to the dynamic of adding value with higher-end customer services such as systems analysis or financial services

447

Understanding Global Information Technology and Outsourcing Dynamics

rather than routine tasks (Kearney, 2005). In this era of globalization, BPO managers and executives need to prepare employees to develop skills that encourage team-building, cultural sensitivity, and political literacy. To be competitive in the modern workplace, decisionmakers need to develop a holistic approach to analyzing future opportunities, or they will find themselves ill-prepared to deal with unanticipated or surprising events. The multi-lens model provides managers with a tool that helps them anticipate potential obstacles to a successful outsourcing experience in newly industrialized countries. Decision-makers can utilize the lenses to gain valuable perspectives and insights into a world less familiar to them, and develop a holistic appreciation for the confluence of different, but tangential global dynamics that shape our lives and, inevitably, our future.

rEFErEncEs Andersen, D., & Dawes, S. (1991). Government information management: A primer and casebook. Upper Saddle River, NJ: Prentice-Hall. Baltzan, P., & Phillips, A. (2008). Business driven information systems. McGraw-Hill. Benn, I., & Pearcy J. (2003). Strategic outsourcing. Oxon, UK: Hodder & Stoughton. Bowman, R. (2005, March). Thinking strategically about outsourcing: 3PLs can do much more than cut costs. Retrieved August 12, 2006, from http://www.supplychainbrain.com Bhagwati, J. (2004). In defense of globalization. London: Oxford University Press. Brandel, M. (2007, March 12). Outsourcing 2.0: The business rationale for exporting your job. Computerworld.

448

Brennan, L., & Johnson, V. (2004). Social, ethical, and policy implications of information technology. London: Information Science Publishing. Castro, A. (2003, November 24). Amid complaints, Dell closes overseas call centers, USA Today. Retrieved April 27, 2007, from http:// www.usatoday.com/tech/news/2003-11-24-dellsupport-home_x.htm Couto, V., & Divakaran, A. (2006). How to be an outsourcing virtuoso. Strategy + Business. Retrieved September 10, 2006, from http://www. Strategy-business.com/resilience/rr00036 Deal, T., & Kennedy, A. (2000). The new corporate culture. Cambridge, MA: Perseus Books. Denning, P. J., & McGettrick, A. (2005, November). Recentering computer science. Communications of the ACM, 48, 15. ESRC (Economic and Social Research Council). Retrieved April 12, 2007, from http://www.esrc. ac.uk/ESRCInfoCentre/about/CI/CP/Our_Society_Today/globalisation/GloExp.aspx?Compon entId=15223&SourcePageId=16965 Fishman, T. (2005). China, Inc. New York: Scribner. Fitzgerald, M. (2003, November). At risk offshore. CIO Magazine, 17(4). Francis, D. (2004, October 14). Endangered species: US programmers. Christian Science Monitor, 17. Friedman, T. (2000). The Lexus and the olive tree: Understanding globalization. New York, NY: Anchor. Friedman, T. (2005a). The world is flat. New York: Farrar, Straus and Giroux. Friedman, T. (2005b, October 14). Science needs to top national conversation. The Times Union.

Understanding Global Information Technology and Outsourcing Dynamics

Friedman, T. (2005c, May 31), Globalization 3.0. Blueprint Magazine. Retrieved May 10, 2006, from http://www.dlc.org Gens, F. (2004, October). Offshoring U.S. IT services: It’s less and more than you may think. Retrieved July 10, 2006, from http://www.idc. com Hain, T., et al. (n.d.). e-Nations, The Internet for all. Retrieved April 10, 2007, from http://www.nav6tf. org/documents/e-Nations-Internet-For-All.pdf Hamm, S. (2006, June 5). IBM wakes ip to India’s skills. Business Week. Hoffman, T. (2005, March 7). EDS pushing massive IT retraining effort. Computerworld. Jana, R. (2007, March 12, p. 2). Inside innovation: Custom corporate games. BusinessWeek. Kearney, A. T. (2005, May/June). Measuring globalization, Foreign Policy, 52-59. Kobayashi-Hillary, M. (2005). Outsourcing to India: The offshore advantage. New York: Springer. Koch, C. (2005, October). Making it in China. CIO Magazine, 19(2).

Mitchell, A. (2004). Offshore environment, labor practices challenged. In E-Commerce Times, Retrieved April 12, 2007, from http://www.technewsworld.com/story/37586.html Mitchell, A. (2004). Environmental impacts of outsourcing. In E-Commerce Times. Retrieved April 12, 2007, from the World Wide Web http:// www.technewsworld.com/story/37421.html Neuhaus, M., & Kunze, F. (2006). Inshoring to Germany: Global networking is not a one-way street. Deutsche Bank Research. Retrieved on April 5, 2007, from http://www.dbresearch.com O’Brien, J., & Marakas, G. (2006). Management information systems. Columbus, OH: McGrawHill. O’Brien, T. (2005, November 13). Not invented here. New York Times, p. 21. Overby, S. (2005, October). Secrets of the outsourcing masters. CIO Magazine, 19(1). Overdorf, J. (January-February, 2005). Outsourcing jobs to … Europeans? Business 2.0, 6(1), 32.

Kripalani, M. (2006, August 7). Call center? That’s so 2004. Business Week.

Padmanabhan, P. (2006, March). Women and IT: Perfectly matched. CIOL. Retrieved September 10, 2006, from http://www.ciol.com/content/ search/showarticle1.asp?artid=81488

Mittelman, J. H. (Ed.). (1996).Globalization: Critical reflections. Boulder, CO: Lynne Rienner Publishers.

Pieterse, J. N. (2004). Globalization and culture: Global mélange. New York: Rowman and Littlefield Publishers.

Magnusson, P. (2004, December 6). How to level the playing field. BusinessWeek.

Pralahad, C. K. (2005, June 8). The art of outsourcing. The Wall Street Journal p. A14.

McCarthy, J. (2002, November). 3.3 million US services jobs to go offshore. Forrester Research. Retrieved on July 10, 2006, from http://www. forrester.com

Puliyenthuruthel, J. (2005, April 25). The soft underbelly of outsourcing. Business Week.

McKinsey Global Institute (2005). The emerging global labor market. Retrieved July 24, 2006, from http://www.mckinsey.com/knowledge/mgi

Ribeiro, J. (2003, December 1). India hits back on outsourcing job fears. InfoWorld. Retrieved April 28, 2007, from http://www.infoworld.com/ article/03/12/01/HNindiahitsback_1.html

449

Understanding Global Information Technology and Outsourcing Dynamics

Spring, J. (2006). The rise of the educational security state. Mahwah, NJ: Lawrence Erlbaum. Steger, M. (2003). Globalization: A very short introduction. New York: Oxford University Press. Stiglitz, J. (2003). Globalization and its discontents. New York: W.W. Norton and Company. Strategic Review 2004. The IT industry in India. New Delhi: NASSCOM. The Economist. (2006, June 17). The physical Internet: A survey of logistics, pp. 1-20. The Economist. (2006a, July 29). The future of globalization, p. 11. Thibodeau, P. (2006, April 24). IT inion head opposes H-1B increase, seeks aid for workers hit by offshoring. Computerworld, p. 20. U.S. Department of Commerce. (2003). Dispute avoidance and dispute resolution. Retrieved April 29, 2007, from http://www.export.gov/china/ exporting_to_china/disputeavoidanceandresolution.pdf Vijayan, J. (2004, August 30). A painfully slow process. Computerworld. Wharton School. What’s driving India’s rise as an R & D hub? Knowledge @ Wharton. Retrieved September 10, 2006, from http://knowledge.wharton.upenn. edu/index.cfm?fa=viewArticle&id=1274&spec ialId=40 Wiencek, D. (2004). Ethical challenges of information systems: The carnage of outsourcing and other technology–Enabled organizational imperatives. In L. Brennan & V. Johnson (Eds.), Social, ethical, and policy implications of information technology. London: Information Science Publishing. Wild, J., Wild, K., & Han, J. (2005). International business-The challenges of globalization. Upper Saddle River, NJ: Prentice Hall.

450

Woodard, C. (2007, March 9). Eastern Europe’s silicon rush. The Chronicle of Higher Education. World Bank Group. Retrieved April 12, 2007, from http://www1.worldbank.org/economicpolicy/globalization/index.html World Bank. (2006). Information and communication technologies (ICT’s) women’s enterprises and labor force participation. Worthen, B. (2004, November 15). A new glue or the old soft shoe? CIO Magazine, 18(4).

addiTiOnal rEadings Castells, M. (1996-1998). The information age: Economy, society, and culture. Oxford: Blackwell. Crothers, L. (2007). Globalization and American pop culture. New York: Rowman and Littlefield Publishers. Giddens, A. (1999). Runaway world: How globalization is reshaping our lives. London: Profile Books. Hafkin, N., & Taggart, N. (2001). Gender, information technology, and developing countries: An analytic study, for the Office of Women in Development Bureau for Global Programs, Field Support and Research, United States Agency for International Development (USAID). Retrieved April 12, 2007, from http://www.usaid.gov/wid/ pubs/hafnoph.pdf Hall, E. T., & Hall, M. R. (1990) Understanding cultural differences. Yarmouth, ME: Intercultural Press. Hawkesworth, M. E. (2006). Globalization and feminist activism. New York: Rowman and Littlefield Publishers.

Understanding Global Information Technology and Outsourcing Dynamics

Krieger, J. (Ed.) (2006). Globalization and state power. New York: Pearson Longman Publishers. Lechner, F., & Boli, J. (Eds.). (2000). The globalization reader. Malden, MA: Blackwell Publishing.

O’Meara, P., Mehlinger, H., & Krain, M. (Eds.). (2000) Globalization and the challenges of the new century: A reader. Bloomington, IN: Indiana University Press. Veseth, M. (2005). Globaloney: Unraveling the myths of globalization. New York: Roman and Littlefield Publishers.

This work was previously published in Handbook of Research on Global Information Technology Management in the Digital Economy, edited by M. Raisinghani, pp. 257-280, copyright 2008 by Information Science Reference (an imprint of IGI Global).

451

452

Chapter 2.5

Offshoring:

The Transition from Economic Drivers Toward Strategic Global Partnership and 24-Hour Knowledge Factory Amar Gupta University of Arizona , USA Satwik Seshasai International Business Machines (IBM) Corp., and Massachusetts Institute of Technology, USA Sourav Mukherji IIM Bangalore, India Auroop Ganguly Oak Ridge National Laboratory, USA

absTracT The changing economic and labor conditions have motivated firms to outsource professional services activities to skilled personnel in less expensive labor markets. This offshoring phenomenon is studied from a political, economic, technological and strategic perspective. Next, an analytical model is developed for achieving strategic advantage from offshoring based on global partnerships. The model studies the impact

of offshoring with respect to the complexity and strategic nature of the tasks and presents a decision strategy for obtaining value through offshoring of increasingly complex tasks. The result is an integrated “24-hour knowledge factory” that is based on a sustainable global model rather than a short term fiscal model. This 24-hour paradigm embodies the shift-style workforce that evolved for the manufacturing sector during the Industrial Revolution and relies on a set of critical success factors in the current environment. A case example

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Offshoring

is provided from IBM to illustrate these underlying critical success factors.

prOlOguE The idea of Citibank developing software in India makes no sense at all. Software needs to be developed by people who can meet frequently with the persons who will use the software, so that frequent interaction can occur among the concerned persons at all stages: prior to development, during development, and after development. Even if we assume that such interaction could occur without frequent face-to-face meetings (and I don’t agree with this at all), the time difference between India and the U.S. will make it impossible for the concerned persons to talk by phone. Further, Citibank has virtually no presence in India, and doing business in India is very difficult; so if computer software has to be developed in Asia, we would probably do it in the Philippines where we have significant business presence and there are trained programmers who can interact well in India. In the context of our banking business, the cost on computers is very small. We are not looking for reductions in cost; we are looking for ways to expand our banking business. The previous opinion was conveyed by the then vice president of Citibank, Korea, in a meeting at the corporate headquarters of Citibank in early 1980s to one of the authors (Gupta) of this article. At that time, the latter was completing his MBA at MIT Sloan School and his doctorate in computer science. Based on his prior experience of working in India, he was trying to convince multinational companies about establishing new business endeavors in non-traditional host environments. If U.S. is the ideal place to produce certain kinds of goods and Japan is the right place for others, then India should be a good place to develop software on the basis of its core competency of having inexpensive, highly educated, English-speaking

programmers. After the previous interaction with Citibank in New York, the concerned author met with the top executives of Citibank in India and the idea progressed further. While the particular author opted not to join Citibank as an employee, the idea eventually blossomed into Citibank Overseas Software Limited.

currEnT siTuaTiOn With a growing labor market abroad and a challenging economic situation in U.S. and several other developed countries, large and small firms are making the push to outsource professional services to highly skilled personnel in less expensive labor markets abroad. A Nasscom-McKinsey study cited a 34% increase in Indian software and services export from 2004 to 2005, from $12.8 billion to $17.2 billion (Nasscom-McKinsey, 2005). This study states that by 2010, the U.S. IT and BPO offshoring market will be $55 billion. The current situation of reduction in costs vs. loss of jobs, at least in the short-run, bears some similarity to the dilemma faced by the automotive industry in the early eighties when some of the parts began to be manufactured in lower cost countries such as Mexico. At the time, some observers perceived that too many U.S. jobs were being sent offshore, and that the impact to the U.S. economy would certainly be negative. However, a detailed analysis of that situation highlighted the danger of adopting a restrictive policy. This analysis revealed that increasing global competition required the United States automobile companies to outsource manufacturing to a certain degree, or to risk losing the world market to other countries that could produce cars cheaper and better. As Lester Thurow puts it: “There were only two long-term viable alternatives: either half the car is produced in Detroit and the other half in Mexico, or the whole car is produced in Japan. By attempting to use legislative measures to tilt the balance in favor of Detroit over Mexico, one

453

Offshoring

would in fact be tilting the balance in favor of Japan (Thurow, 2003).” The subsequent events have validated this assertion and the efficacy of the hybrid model. Professional services, especially IT services such as software development and technical support, are at a similar stage, with some constituencies of the society using cost and time considerations to encourage outsourcing while other segments of the society applying pressure to maintain jobs within the U.S. Reports from leading industry groups on offshoring contain a base assumption that offshoring is a cost-driven activity. A 2006 Association of Computing Machinery (ACM) report describes opportunities for nations to benefit from offshoring due to comparative advantage but does not discuss the potential of a global workforce (Asprey, Mayadas, & Vardi, 2006). The report does describe the opportunities for all nations to benefit due to economic theories of comparative advantage, however it does not discuss the opportunity to utilize a globally distributed workforce to transform the dynamic within which offshoring is conducted. Similar reports from the Institute of Electrical and Electronics Engineers (IEEE) and the National Society of Professional Engineers (NSPE) also describe offshoring in the context of cost-savings and advocate offshoring only when talent is not available in the U.S. as well as training programs to improve talent in the U.S. (IEEE, 2004). Of the approximately $1.45-$1.47 of value derived from every dollar spent offshore, U.S. firms receive $1.12-$1.14, while foreign firms receive only 33 cents of the value (McKinsey, 2003). Further, if income taxes paid by H1-B visa holders, and software and service imports by India are considered, outsourcing provides an aggregate benefit to the U.S. economy of $16.8 billion (Endleman, 2003). Another factor to be considered is that the average age of the U.S. working population is declining, and the U.S. Census figures indicate that the U.S. will require an additional 15.6 million workers to maintain the

454

current working population in 2015 (Economic Times, 2003). The 24-hour knowledge factory concept described at the end of this article broadens the view of offshoring from a cost-savings exercise to a strategic optimization of globally distributed workforce. We describe a framework for transforming to a strategic global partnership and employing a 24-hour model of continuous work on knowledge-based deliverables.

pOliTical pErspEcTivE In November 2003, Governor Joe Kernan of Indiana canceled a $15.2 million contract with Tata America International Corp., a New Yorkbased subsidiary of Tata Consultancy Services (TCS). The Tata entity had won the contract over competing bids from Accenture LLP and Deloitte Consulting LP; its own proposal was $8.1 million to $23.3 million less than those of its competitors. The late Governor Frank O’Bannon had approved the contract before his death in September 2003. Up to 65 contract employees were stipulated to work alongside 18 state workers. All work was to be done at the Indiana Government Center, but the selected vendor was free to bring in additional workers from anywhere and pay them as it deemed fit. No Indiana-based companies had submitted proposals. Governor Kernan stressed that his decision to cancel the contract did not reflect on the ability of TCS to complete the job or any other shortcomings. Stuart Anderson of the National Foundation for American Policy and Cesar V. Conda, former domestic policy adviser for Vice President Cheney, highlight the fact that the impact of this reversal on Indiana taxpayers will be very significant (Anderson & Conda, 2003). In this case, the next lowest bidder was $8.1 million more than Tata’s bid. Since the contract involved about 65 employees and since TCS was obligated to retain

Offshoring

the existing Indiana workers, choosing a U.S. firm would impact a maximum of about 50 jobs. Assuming the extreme scenario that all these 50 jobs would now go to residents of Indiana, this still implies that the taxpayers of Indiana will now bear a cost $162,500 per new employee-a cost that most taxpayers would probably be unwilling to pay. Furthermore, as Anderson and Conda point out, by limiting the bidding to instate contractors, policy-makers are ignoring the economic principle of comparative advantage, and increasing the cost of future contracts since there will be fewer competitors. Contrast this with a parallel development in the city of Springfield, Massachusetts. Its mayor decided that all drugs for city employees would henceforth be bought in Canada where the prevailing prices are between one-fifth to one-half of the comparable prices in the U.S. This would save the city millions of dollars each year. This aspect acquires special importance under the current economic conditions when many state and local governments are facing significant financial problems. Bills proposed over the recent years at the federal and state levels in the U.S. have attempted to use the government’s authority in granting H1-B and L1 visas to combat companies who had replaced American jobs with offshore workers (Nanda, 2003). These bills were considered even though a GAO report had stated that more study was required to determine the true effects of the H1-B visa program on the American workforce, and the impact cannot yet be fully understood (U.S. GAO, 2003). Several states in the U.S. have pending bills that would prevent the outsourcing of government IT jobs to abroad. Other bills would require call center employees to identify themselves by their real name and the location they are based in (thereby discouraging outsourcing of technical support and other types of customer support). Many of the pending bills seek to use the power of government contracts to curb outsourcing. The proposed

pieces of legislation usually fail to consider the long-term impact on citizens, shareholders, and taxpayers. For example, keeping IT jobs in the United States is likely to be more expensive, and these costs ultimately will be transferred to citizens, either in the form of increased taxes or reduced corporate dividends. The proposed legislative actions are gaining attention and are partially fueled by the desire to capture the attention of the unemployed persons. While these proposed laws might offer some shortterm benefits to some persons, they fail to consider the long-term impact on the broader population or present the full picture to the electorate. For example, if one asks the voters to choose between retaining 1000 jobs in a particular state or letting them go abroad, virtually all voters would opt for the former option. What happens if one asks a more relevant question—“Do you prefer that 1000 jobs stay in the state or do you prefer a tax reduction of $150 per year?”—the latter benefit would occur if these jobs are permitted to go outside the state.” In this case, many voters may opt for the reduction in their taxes, even if the two numbers were different from these hypothetical numbers for their respective states From a labor perspective, most professional service workers are not unionized, though several observers have cited this possibility as being a likely trend, especially in the software industry. Groups such as the IBM union and the Seattle union represent the rights of a subset of software workers and advocate leaving American jobs in America. If an increasing number of professional workers enroll in unions, the new labor unions may impact the larger political landscape and alter the existing balance between management and labor. In order to mitigate the types of pressures previously described, one needs to think of new hybrid work paradigms that yield the best cost performance ratios by having part of the work performed in the U.S. and other parts abroad.

455

Offshoring

TEchnOlOgical pErspEcTivE A survey of over 50 software executives participating in offshoring concluded that “offshoring will live or die based on the ability of everyone involved to communicate with each other.” (Sand Hill, 2003) Richer collaboration technologies need to become available in order to enable simultaneous use of video, audio, and other messaging capabilities to link geographically and temporally separated personnel. The outsourcing of professional services requires firms to transfer knowledge via formal and informal channels within their organizations, as well as to establish and preserve knowledge repositories both for offshore teams to come up to speed on new tasks and for onshore teams to learn what is being done offshore. Such efforts require deep understanding of evolving technology and business needs. A Merrill Lynch report concludes that India is the most preferred destination for outsourcing (Subramanian, 2002). The key is to educate the concerned individuals both on the opportunities as well as on the process, and to use technology to develop an understanding of what is best done in the U.S. and what is best done offshore. The delineation of what components of jobs should be performed in developed vs. developing environments requires an intimate appreciation of the cultural and social issues such as language and education; this also involves understanding the technical requirements of each type of job. Certain jobs that are communications intensive, or have significant hardware or infrastructure requirements, may be more suited for one location vs. another. As countries begin to appreciate this aspect, they may make critical investments in nurturing new technologies to support emerging market needs. Plambeck and Taylor’s (2005) model of original equipment manufacturers (OEMs) pooling capacity with other OEMs, as opposed to using contract manufacturers (CMs), in an effort to invest in innovation, could be used to demonstrate the importance of integrating the

456

various phases of the design and development process in industries such as software.

NATIONAL POLICY CHALLENGES in a glObal EcOnOmy The potential distribution of work across geographic and temporal boundaries requires careful delineation of the economic ramifications of alternative distribution models in order to elicit the optimal benefits from the outsourced model. While some lessons can be learned from the experiences of globalization in manufacturing industries, the inherent distributed nature of the new paradigm presents new challenges. In testimony before the U.S. House of Representatives Committee on Small Business, Assistant Secretary for Technology Policy Bruce Mehlman has cited the United States policy strategy to be based on an investment in education, infrastructure, innovation, and to highlight existing benefits such as intellectual property protection (Mehlman, 2003). Such a strategy suggests that the most sustainable model will be to prepare U.S. professional service workers to perform higher-level tasks and allow tasks, which require less education, training, and infrastructure to be performed abroad. Rather than use these strategies to build a legislative wall around the United States, tasks will be performed much more efficiently because the U.S. engineers will be equipped to handle the more specialized parts of the shared onshore-offshore projects. The benefits of onshore and offshore engagements, as reported by the U.S. Department of Commerce Office of Technology Policy after convening business, university, and government leaders, are summarized in Table 1(Mehlman, 2003). The report of the U.S. Department of Commerce entitled “Education and Training for the Information Technology Workforce” states that IT employers are looking for a specific blend of

Offshoring

Table 1. Comparative benefits of onshore versus offshore scenarios Onshore Benefits

Offshore Benefits

People

Talent pool is unmatched

Untapped talent pool

Business climate

Entrepreneurial, market-based, Less burdensome taxation, regueasy access to capital lation, litigation

Infrastructure

Telecom, energy, transport

New global clusters created

Market access

Innovation in largest market

Untapped markets

Intellectual property

Commitment to patents

Government

Political stability

Quality of life

Freedom, health care, security, environment

Cost

Talent, facilities cost less

Proximity to manufacturing

Plants are already offshore

technical and business skills, and that they prioritize a minimal amount of training (Meares & Sargent, 2003). This notion of flexible training that will allow workers to succeed in a changing marketplace for professional services is useful in determining the strategic direction for both onshore and offshore firms. In outsourcing of professional services, the set of relevant stakeholders involves include parties from both developed and developing nations. Now, companies in developing nations themselves are beginning to outsource to other markets to spread their labor costs. Another emerging issue relates to the digital divide created by enclaves of digitally enabled citizens benefiting from the outsourced opportunities living in close proximity to much poorer fellow citizens. The disparity in living standards creates potential political, social, and organizational risks. This is a matter of concern for governments of developing nations hosting the outsourced contracts; it is also a matter of concern for governments of nations such as the U.S. that are witnessing increasing investing in regions over which they have little control. Based on the latter concern, it may be in the interest of the U.S. government and industry to invest in the educational and economic improvement of developing nations. But this is a tough politically sustainable strategy since the apparent goal of such invest-

ment would be to provide more opportunities for foreign workers to acquire U.S. jobs. The relationship between these stakeholders is complex. On one side, we have the workers and the need to retain professional service jobs remain within the United States; on the other, we have significant cost savings accruing to the firms who are hiring the foreign labor. Long-term solutions such as better education, better infrastructure, and better intellectual property protection, as suggested by Mehlman, are irrelevant in the short-term in terms of their ability to resolve the issues faced by these stakeholders.

crEaTing nEw sTraTEgic glObal parTnErships The sustainability of offshore outsourcing practices depends critically on their ability to satisfy the needs of the stakeholders, from the dual perspectives of the offshorer and the offshoree. Emotive debates apart, dispassionate academic studies focusing on this global phenomenon have been limited. This article focuses on organization-level profitability resulting from offshoring activities, with respect to the complexity of the tasks that are offshored. Based on insights from the literature and real-world experiences, an analytical model is

457

Offshoring

Table 2. Summarizing the key stakeholders Outsourcing Nations

Host Nations

Professional service workers losing jobs Firms hiring foreign labor Legislators responsible for economy Regulators Government procurement Customers of professional services

Professional service workers being hired Firms providing outsourcing service Policy makers responsible for economy Citizens not being hired for professional services

created; the model demonstrates that offshoring of complex and strategic tasks can result in increased profitability and larger market share, compared to offshoring of simpler and more tactical tasks. The evolution of the business model and process capability is becoming of the mechanism for achieving strategic advantage in offshoring (Athreye, 2005). Indian firms especially are found to be moving up the value chain into strategic partnerships (Arora et al., 2001). These findings indicate that to reap the full benefits from offshoring and to develop sustainable models, one needs to treat offshore vendors as strategic partners rather than as mere low cost service providers.

building on the Foundation of Offshoring The global phenomenon of offshoring refers to “offshore in-sourcing” (where an organization moves parts of its operations to offshore locations) or “offshore outsourcing” (where an organization assigns specific jobs or projects to other offshore companies). Offshoring can be studied at three levels: micro or individual level, meso or organizational level, and macro or national and global level. While debates concerning micro and macro levels frequently garner significant visibility in the media, this section of the article focuses on the organization (meso) level and proposes an analytical model to understand how the complexity of the offshored tasks relates to the sustainability of the offshoring model. While there is a general understanding that organizations typically outsource non-core

458

activities in order to gain from labor arbitrage, evidence from research suggests that it is often more profitable, from the client perspective, to outsource projects that are more complex and strategic in nature (Gopal, Sivaramakrishnan, Krishnan, & Mukhopadhyay, 2003). As such, there is need to develop a long-term partnership between the client and the vendor/service provider, instead of maintaining an arms length contractual relationship between them (Choudhury & Sabherwal, 2003; Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). The performance of more strategic services translates into greater revenue and greater “customer-stickiness” for the vendor (and hence, lesser associated risks); in addition, there is evidence that more strategic projects yield greater profitability for the client, and results in a win-win relationship that is sustainable on a long-run basis (Plambeck et al., 2005). Cachon and Harker (2002) argue that by leveraging scale economies, outsourcing contracts can create economic value, both for the client and the vendor, even in the absence of other cost benefits. Accordingly, the outsourcing argument seems to be transiting from pure “cost savings from labor arbitrage” to that of “value creation through leveraging of resources”—a more sustainable proposition, only if clients and vendors are prepared to get into a strategic, long-term relationship. Our real-world experiences seem to validate the previous. One of the authors (Ganguly) was employed with a couple of companies in the U.S. where he witnessed offshoring of simple and tactical tasks as well as complex and strategic tasks. The first company was a giant software vendor

Offshoring

specializing in database and enterprise-scale applications development, and the author oversaw offshoring of simple, tactical tasks in the area of demand planning software to the company’s Indian subsidiary; the offshoring of relatively simpler tasks led to nominal returns on investments, and the offshore unit was treated as mere low-cost service provider. The second company was a venture-backed niche software vendor in demand planning and related areas, and the author oversaw offshoring of strategic, complex tasks to the company’s unit in Israel; the strategic relationship facilitated disparate skills to be leveraged almost round the clock in an efficient and cost-effective manner, and the employees of the offshore unit to be treated at par in terms of benefits and remunerations, after allowing for currency and living cost differentials. Oracle Corporation’s Indian subsidiary initially performed “low-end” routine tasks like maintenance of legacy applications; gradually, it became an integral part of team involved in developing Universal Server —Oracle’s flagship database product. The migration paths of “foreign factories” to higher strategic roles have been documented in cases of Motorola’s Singapore pager unit, Alcatel Bell’s unit in Shanghai, 3M’s operations in Bangalore, India, and HP subsidiary in Guadalajara, Mexico (Ferdows, 1997).

analyTical mOdEl TO guidE TransiTiOn TO sTraTEgic parTnErships In this section, an analytical model is developed based on previous work of two of the authors (Mukherji & Ganguly, 2004), to study the impact of offshoring specifically with respect to the complexity and strategic nature of the tasks offshored. This is done in two steps. First, the impact of project complexity on profitability is considered by developing a “two-country model.” This is followed with a “decision model” that in-

corporates project complexity and time duration of relationship as determinants of cost savings and risk-perception. The underlying assumptions in the analytical formulations are illustrated in Figures 1 and 2, and described in the following paragraphs. The traditional wisdom in offshoring is that vendors prefer to execute complex projects while clients prefer to offshore outsource simpler projects. The preference of the vendors stem from a desire to “move up the value chain” and to facilitate retention of employees with higher levels of core competence. The perspective of the clients is dominated by factors like the minimization of downside losses, the perception that cost benefits are maximal from offshoring simple tasks, possible compromise on product quality, and the lack of “end user” interactions of the vendors. The two-country model explores the traditional wisdom based on a grossly simplified, but nonetheless interesting, analytical formulation. Real life outsourcing decisions can be modeled as a trade-off between cost savings and enhanced risks. Both of these are functions of the strategic nature of the project or the project complexity and the duration of relationship between client and the vendor. The simplified decision model presented here rests on four key hypotheses about the nature of the offshoring processes: (i) Marginal costs savings from outsourcing increase with the complexity of tasks; the saving from simple tasks is small, it increases linearly with complexity and approaches a limit; (ii) Marginal cost savings from outsourcing for a given task decrease with time; (iii) The perceived risks of outsourcing increase rapidly with the complexity or strategic nature of the tasks; and (iv) The perceived risks of outsourcing for a given task decrease rapidly with time. Figure 1 depicts the two-country model. It considers a single task, of which x% is offshored, and for which a complexity index (z) can be defined depending upon the complex and strategic nature of the task. The costs of production are assumed

459

Offshoring

Figure 1. A two-country model

to be constantly proportional to an increasing function of complexity, f(z), with the constant of proportionality having a higher value in the country from where the project is offshored. The coordination task is assumed to be proportional to the percent of the task offshored. These lead to: η1=α1 f(z)

(1a)

η2=α2 f(z)

(1b)

C0=χχ

(1c)

η=α1 f(z)-αfx(z)+ χχ

(1d)

In (1d), η is the total unit production cost and α is the difference in the constants of proportionality, reflecting the currency and other cost differentials. An implicit assumption of the model is that the dependence of the coordination cost on the complexity of the tasks offshored is considerable weaker than the dependence of the production costs on complexity. For constant market size assumption, we obtain the following set of equations: Unit revenue ρ=γg(z)

460

(2a)

Profit P= (m1+m2){γg(z)–(α1 f(z)– αfx(z)+ χχ)}

(2b)

The unit revenue is also assumed to be proportional to an increasing function of the complexity (or strategic nature) of the product. Note that we assume for simplicity that the unit revenue is identical for the same task in the two markets (even though the market sizes for the task might differ), and obtain an expression for profit of the organization. Profit is differentiated with respect to the percent offshored x to understand the unit gain from offshoring, and differentiated once more with respect to the complexity index z to obtain the change in the unit gain as a function of the complexity of the task. Thus, we obtain: Px =∂P/∂x=(m1+m2)(αf(z)–χ)

(3a)

∂Px/∂x= (m1+m2)[αf'(z)]

(3b)

The right-hand side of 3a is positive as long as the cost reduction due to offshoring of a portion of the task from country 1 to country 2 exceeds the cost of coordination a pre-requisite for the offshoring to be initiated. The simple model results in increasing profits with the percent offshored. The change in the profit with change in

Offshoring

unit offshored is itself an increasing function of the complexity, as seen from (3b). Since f (z) is an increasing function of z, f / (z) is positive. Similar calculations can be made for constant margin and linear price elastic market assumptions. There, the first differential yields market share as an increasing function of percentage outsourced x, and the second differential shows market share per unit increase in percentage offshored as an increasing function of complexity. Decision Model: In real life decision-making situations, the benefits of cost saving is likely to be deflated by perceptions of risks. Thus, we develop a decision model outlined in Figure 2 that incorporates potential cost savings, as well as the risk potential from offshoring activities as a function of time. The model comprises of the following assumptions: 1.

2.

3.

The marginal cost saving potential due to offshoring, as a function of the degree of complexity (or strategic nature) of the tasks for a single time period, can be represented in the form of a logistic, as shown in the top

left of Figure 1. This implies that the cost saving potential from tactical and simple tasks is small (asymptotically approaching zero); then as tasks get more complex or strategic, the cost saving potential increases linearly with the degree of complexity, and finally beyond a certain level of complexity, the cost saving asymptotically approaches a limit. The enhanced risk from offshoring, as a function of the degree of complexity of the task offshored for a single time period, can be represented as an exponential function, as shown in the bottom left of Figure 2. This implies that risks increase exponentially with the complexity or strategic nature of the tasks offshored. The cost saving potential from offshoring for a given task decreases with time in a near linear fashion with a small slope as shown in the top right portion of Figure 2. The functional form used there is the exponential asymptotic function, which starts from an asymptotic limit, decays almost linearly, and then asymptotically approaches a smaller limit.

Figure 2. A decision model

Simple Tactical

Large Cost Saving

Complex Strategic

Start Time

Small Cost Saving

Small Cost Saving

Enhanced Risk Due to Offshoring

Task Complexity Strategic Requirements

Time Index High Risk

High Risk

Simple Tactical

Complex Strategic

Low Risk

Elapsed Time

Marginal Cost Saving Potential from Offshoring

Large Cost Saving

Start Time

Elapsed Time

Enhanced Risk Due to Offshoring

Marginal Cost Saving Potential from Offshoring

COMBINING COST SAVINGS WITH RISK PERCEPTIONS: GRAPHICAL REPRESENTATION

Low Risk

461

Offshoring

4.

The enhanced risk from offshoring, for a given task, decreases with time in an exponential fashion as shown in the bottom right portion of Figure 2.

The curves assumed in this formulation are based on dual considerations of intuitive business sense and ease of analytical manipulation. The basic shapes can be justified from the insights obtained earlier from the literature review section. However, the conclusions presented here are generalizable to more complex curves. Further,

the parameters of the curves can be changed to adjust the relative scales. The decision model considers two decision parameters that indicate the desirability, in terms of offshoring for the organization of any given type of task, as measured by the complexity index at any given time. The first decision parameter computes the decision function as a time-varying combination of the risk potential and the cost saving where the risk potential is weighed more heavily during initial stages (i.e., when the clientvendor experience is low, but getting less weight

Figure 3. Time-variant decision variable decision metric a Time-variant cost versus risk balance

optimal

More complex tasks gets low points since risks are high

Tactical points low since cost benefits are low

With time, more complex tasks become optimal

complexity of Tasks strategic for business

Time index

Figure 4. Time-invariant decision variable decision metric b Time-invariant cost versus risk balance

Even without weighing the risk dimensions more, the direction suggests better returns from more complex projects, over time

complexity of Tasks strategic for business

462

Time index

Offshoring

with time). The second computes the decision function as a time-invariant function of the cost savings and risks. Figures 3 and 4 show the decision variables (higher values of these variables indicate desirability of offshoring) as a function of the complexity of the tasks and the time elapsed. The decision model considers two decision parameters to arrive at desirability of outsourcing of a given task. Additive formulations have been used for the simulations after normalization. Higher values of decision variables indicate desirability of offshoring. Here the decision metric corresponding to a time-varying function has been displayed. This function allows the risk potential to have higher weights initially caused by managerial perceptions. The decision metric shows that during the initiation of the offshoring process, complex tasks are low in the list of priorities to be offshored since the perceived or real risks are higher. The extremely simple or tactical tasks have low values initially as well caused by the lower cost benefits. The presence of an optimal task complexity is therefore a possibility even during the early phases of offshoring. This is demonstrated through the decision metric at low values of the time index. However, as the time index moves forward and the offshoring processes mature, the decision metric clearly demonstrates that the desirability of offshoring the more complex or strategic tasks increases. Figure 4 is similar to Figure 3 with the exception that the decision metric corresponding to a time-invariant function has been displayed here. This function keeps the risk potential constant over time to emphasize the influence of other variables. The decision metric demonstrates that even without weighing the risk dimension more over time, the desirability of offshoring the more complex or strategic tasks increases. The results from our analytical model, as seen from Figures 3 and 4, indicate that with elapsed time (i.e., more client-vendor experience), offshoring more complex and strategic projects

become more desirable. Initially, the decision variable does not appear to optimally favor either the most strategic or the most tactical task, but a balance that is dictated by the nature of the curves (and parameters) selected. However, with time and experience, strategic tasks are increasingly favored.

completion of Transition to strategic partnership The simulations suggest the possibility that, contrary to common wisdom in some quarters, but perhaps in line with what some experts/ academicians have said, one might be able to get significant value out of offshoring tasks that are not just tactical or “simple” in nature. The possibility of an “optimal” level of complexity that maximizes the return from offshoring, at any given time period or experience level, under given situations is also suggested, within the constraint of our assumptions. In addition, the simulations indicate that the offshoring of more strategic tasks leads to higher profitability and sustainability. Accordingly, both the client and the vendor need to reinforce their efforts to explore how tasks of strategic nature can be identified and selected for offshoring, and how closer ties can be established over time between the vendor and the client. We emphasize that the managerial insights from this study are dependent on the validity of the assumptions. An interesting line of future research would be to explore the offshoring strategies from a game theoretic perspective, where clients and vendors, as well as offshoring and offshoree nations with their respective legislative bodies, are the key players. We hypothesize, without proof, the possibility of Nash-like equilibria where the equilibrium points shift from tactical to strategic partnerships as the offshoring processes mature. The maturity of the offshoring process needs to be modeled and quantified both in terms of the tactical client-vendor relationships and in terms of strategic perceptions among the stakehold-

463

Offshoring

ers. Advances in communication technologies and the ubiquity of the Internet, as well as the breaking of traditional cultural and linguistic barriers, are key issues influencing the maturity of the tactical client-vendor relationships. The maturity of strategic perceptions will depend on various geo-political, economic, cultural, and social considerations. The concept of the 24-hour knowledge factory has the potential of influencing both the tactical relationships and the strategic perceptions.

cOncEpT OF 24-hOur knOwlEdgE FacTOry The 24-hour knowledge factory attempts to establish a virtually seamless relationship between the vendor and the client; this may involve one organization in a developed country as one entity, and two or more organizational entities located in other continents. The paradigm includes situations where all the collaborating entities are part of one large organization, such as IBM or Oracle. In such a model, a global team is used to work on a project around the clock; each member of the team works the normal workday hours that pertain to his or her time zone and transfers work nightly

to others on the team. The 24-hour knowledge factory paradigm can be applied to a broad range of white-collar activities ranging from medical services to logistics planning, and from financial analysis to product design. The notion of the 24-hour knowledge factory builds on the shift-style factory model developed in the Industrial Revolution. Given limitations on equipment, shifts were used to optimize the productivity realized from a given set of machines. The advent of the Internet led to a similar notion that individuals working at different times could operate on the same work product--call centers are an early example. Now, it is possible to extend this model to any environment where work is primarily knowledge-based and can be passed among team members on a nightly basis. The 24-hour knowledge factory will involve “offshoring” of part of the endeavor. Today, offshoring is done mainly to reduce costs as discussed in preceding sections of this article. Over time, the growth in offshoring will be fueled more by the potential to achieve drastic reductions in turnaround times for major endeavors, as depicted in Figure 5. In a “24-hour development environment” that encompasses three or more development centers located around the world, the distributed team is

Figure 5. 24-hour global knowledge factory California

Singapore

17:00-01:00 GMT

01:00-09:00 GMT

London 09:00-17:00 GMT

464

Offshoring

envisaged to concentrate on the same problem and to perform the same function (whether it be development of code or testing of subsystem) on a successive basis, with each collaborating center retaining ownership of the endeavor for 8-hour periods in every 24-hour cycle. A large number of industries, including the software industry, are characterized by a development cycle that relies heavily on sequential performance of specific functions such as development, testing, and verification. In a traditional software development environment where all parties are located in the same geographic area, a code developer typically waits until a fully functional portion of the product is available before passing it on to an engineer to test it. However, with the potential for receiving testing feedback overnight, the developer now has the unprecedented opportunity to build portions of the product on an incremental basis.

term factors must be assessed in their individual context, as well as in context of relationship to each other. Some of the key factors are discussed in the following paragraphs.

demand management A 24-hour knowledge factory model allows for better management of customer demand, faster time to market for products, and superior ability to adapt quickly to changing market conditions; this is because of the lower labor costs, the greater flexibility to reallocate and reassign resources, and the ability to provide customers with access to skills that they may not already have (Srinivasan, 2004). As offshore knowledge workers gain experience and move up the learning curve, their experience interacting with customers will allow them to broaden the scope in which they serve customer demand and provide for 24-hour availability of high value resources (Suh, 2004). One example of the latter phenomenon is a company that employs home-based workers in India to perform medical transcription. As these workers move up the value chain, their home-based work environment continues to allow them to be readily accessible. Accordingly, these workers

critical success Factors for the 24-hour knowledge Factory Based on discussions with experts in a number of relevant areas, a number of critical success factors (CSFs) were identified. These CSFs are depicted in Figure 6. The array of short- and long-

Figure 6. Critical success factors for 24-hour knowledge factory National education system

Labor Language

Onshore Labor skills

National Labor markets

Internal Buy-in

Cultural differences Organzational model

Labor costs Communication Technology Geopolitical stability

Long-term productivity

Demand Management Diversifying investments

Political barriers

Knowledge Product

Dynamic task re-allocation

Location Choice Offshore Labor skills

Location Time zone

Offshore value chain

465

Offshoring

can work longer hours, as necessary, concurrently with family obligations at home, thereby serving as “agile” knowledge workers in the knowledge factory in real-time (Malhotra, 2004).

long-Term productivity The use of hybrid work models can provide access to higher skilled labor for tasks that previously only were done by lower skilled workers. For example, highly skilled radiologists in the United States are much less likely to prefer reading X-ray results while in India, a highly skilled radiologist will see employment by a U.S. hospital as a high-value position regardless of the task. When moving toward a 24-hour knowledge factory model, factors such as ability to grow in size, quality management, and the added communication and coordination costs must be incorporated into the calculation of the improved productivity (Shah, 2004).

integrated value chain The application of the 24-hour knowledge factory paradigm explicitly implies partial offshoring. While the initial effects of such offshoring will be an increase in productivity, the offshore workers will gradually move up the value-chain and provide a great deal of higher-value services. According to Accenture, for IT offshoring, 51.9% is in IT services such as maintaining computer networks, 36.7% is in solutions development such as building Web sites, and 11.4% is in leadership and managing projects (Christensen, 2001). The general progression can be characterized as a movement from efficiency to innovation to growth, with production moving from commodities to services to solutions, as vendors begin to do similar work for multiple customers (Barney, 1999). The movement up the value chain is not reserved simply for the offshore workers, as in the example of radiology, U.S. doctors can move to higher value tasks if X-Ray reading is done offshore.

466

Organizational models In order to maintain flexibility, one needs dynamic models that can evolve as market conditions change and learning curves impact skill levels. In choosing a model, it is important to judge the complexity of the work required and determine the right locations for each particular skill required (Christensen, 2001). This may lead to a model where the same function or skill is located in multiple geographic locations; this may involve higher management overhead but may lead to greater returns especially when taken in the context of the 24-hour knowledge factory. Two matrices upon which the organizational models can be judged are coordination vs. effort, and complexity vs. project size (Barney, 1999).

barriers within Firm Significant barriers to employing the 24-hour knowledge factory concept exist within typical firms; several of them need to be addressed as part of the initial decision process rather than as a corrective measure at a subsequent stage. Internal resistance, especially due to a loss of control, may hinder a proposed project. Furthermore, cultural, language, and trust issues need to be approached in an upfront manner, recognizing the impact with respect to the interaction required between knowledge workers in the 24-hour knowledge factory. Even if the desire exists at all levels to pursue the globally collaborative engagement, the firm should plan on process changes such as longer project planning cycles, more explicit definition of requirements and communication methods and the effects of ill-informed hiring decisions.

location choice Different geopolitical locations possess their own characteristics that impact their current and future place on the value chain. For example, China has lagged behind India in knowledge-based

Offshoring

offshoring because of a lack of English speaking citizens, but as English becomes a more common language in China, the vast size of the labor pool will allow it to rapidly move up the value chain (Baxter, 2004). In Russia, highly skilled scientists and engineers saw a dramatic drop in high skill tasks after the Cold War; these domain experts are now making a dramatic transition into highvalue services such as optics design at a much lower cost to outsourcing firms (DiRomualdo, 1998). The hiring process is a major factor in moving firms up the value chain, as a constant reevaluation is required of whether the foreign employees are indeed the highest skilled in their area (Andre, 2004). Regardless of the locations being considered, factors to consider include the geopolitical stability of the country, the investment in education, labor and skill set of citizens, and the business environment in the country, including levels of corruption and ease of setting up businesses (Lacity, Willcocks, & Feeny 1995).

•

•

•

casE sTudy aT ibm invOlving TwO parallEl wOrk TEams Two teams of workers at IBM were studied to provide an example of the relative pros and cons of the 24-hour knowledge factory model. While the two teams were equal in all relevant structural and technical respects, one team was geographically separated between the U.S. and India while the other was collocated on the same hallway in the U.S. A one-year timeframe was used to cover the entire lifecycle of the teams’ software deliverable. Whereas the overall performance was found to be very similar in the two cases, there were interesting differences at the micro level. Specific forms of data were collected and analyzed, as follows: •

Personal interviews were conducted with each of the developers on each team, for

•

both qualitative and quantitative insight. Developers were asked about frequency of informal vs. formal interaction, percent time spent in various communication vehicles (phone, instant messaging, and face to face), the number of tactical vs. strategic decisions made informally, and which specific developers involved interactions. Software Problem Reports (SPR) were process forms used to track fixes or requests to change the code. Weekly analysis of these SPRs provided insight into the reliance on structured forms for knowledge tracking and daily communication, average time to resolution of issues, and the number of developers handling each issue. Weekly Meeting Minutes were analyzed with a coding system for strategic vs. tactical task assignments and status requests. This provided insight into formal knowledge sharing on a group-wide basis for each team. The Source Code Control System was used by each team to log the modifications made to each element of the source code for the team’s product. The source control system stores the date, the time, the name of the developer making the change, and a comment regarding the particular change. The data provide a representation of the technical dependencies between developers on the teams by looking at number of developers interacting with each code element, and the rate of technical collaboration within the teams by looking at the number of logged modifications. Group E-mail Exchanges were analyzed with a software tool that calculated statistics on individual messages and “threads” containing a set of messages written in response to an initial message. The data collected involved frequency of messages, number of messages per thread, and number of developers per thread.

467

Offshoring

use of Electronic mail for asynchronous discussion The data revealed that the distributed team made much greater use of electronic mail (e-mail) as a forum for discussion. This usage peaked during the time periods following project deadlines and was relatively constant in the periods of steady work well before the milestone. The collocated team relied on e-mail as an announcement mechanism for broadcasting a message to the general set of developers, but relied on other means for back and forth discussion. The e-mails, which were tabulated for each week of the year, and only those e-mails which were sent to the entire group were tabulated. Overall, e-mail was used as a means for extended discussion on the distributed team, while it is primarily used for one-message announcements on the collocated team. A developer on the collocated team stated that many of the onemessage announcements from the collocated team are announcements that a particular individual is heading out of the office, even for a period of just an hour. This demonstrates a significant difference in team culture on both teams. On the collocated team, face-to-face discussion is so important that team members feel the need to inform each other if they are going to be unavailable for a short period of time. On the distributed team, long discussions are done over e-mail and often last days because of the time zone differences. A developer on the distributed team cited one of the benefits of having discussions done over e-mail is that team members can take the time to think about their responses and often provide more detailed input into the discussion. The members of the distributed team also stated that when discussions reach a significant length, they are moved to a discussion forum database where responses can be better tracked and archived. When reviewing the design of a feature to be included in a product release, it was common for the U.S. portion of the team to hold a meeting

468

with a presentation to discuss the design. Later that day, after the U.S. workday was complete, the Indian portion of the team would review the slides from the presentation and provide feedback in an organized and written manner. Both forms of feedback--immediate face-to-face and asynchronous written--were useful in the end product and neither would have been achieved if operating in the other framework. The setting of ground rules was acknowledged by all team members as an important factor in both overcoming cultural differences and encouraging uses of the different technologies discussed in this study. The manager of both teams stated that the discussion forum database is common to both teams; however, the distributed team is more prone to use it. This is a likely result of the distributed team's familiarity with having to carry out discussions by typing their responses in e-mail format. The collocated team had more e-mail threads created, but many of these threads had just one contributor. The distributed team had less number of threads, but with a high degree of collaboration on each thread. This confirmed the anecdotal evidence from the interviews that the nature of e-mail use and the nature of knowledge based discussions on both teams is profoundly different.

Technical collaboration through shared source code Detailed analysis of the data showed that the two teams reacted differently to project deadlines; the level of activity in the collocated team was more controlled before the feature freeze date, but increased afterwards. The collocated team was found to have a higher degree of collaboration with respect to specific code elements; while the distributed team kept the code they modified separate from each other. The weekly averages for code changes for different time periods of the project were calculated to provide a picture of how each team reacted to different parts of the project. Both

Offshoring

teams handled the steady state before a deadline in the same manner. However, before a deadline, the collocated team was able to handle the collaboration in a steadier manner--the interviews with the collocated team speculated that this was due to questions being resolved face to face with individual developers consulting others before submitting a code modification. Multiple team members on the distributed team cited the fact that they had drawn clear lines between code elements and make an explicit attempt to only modify certain elements of the code. In contrast, when the collocated team assigned particular functional areas of the product to different developers, they often reassigned particular SPRs based on workload and felt comfortable with any developer modifying any part of the product. While the data suggested greater technical collaboration on the collocated team, there were code elements on the distributed team that involved more than one developer. Thus, even when distributed, the software developers did reach out to others for help when certain threshold barriers for requiring higher levels of collaboration were reached.

nature of Team meetings The team meetings held by the distributed team were found to be more tactical and task oriented than the collocated teams, further demonstrating that each team had adapted similar processes in different ways to their own geographic structure. The two team’s meeting minutes were controlled by many factors that allowed data collection to proceed with confidence. All meetings on both teams were held by the same project manager, who kept detailed minutes of each meeting in the same format. The categories for the agenda changed over the year to fit the stage of the project schedule, but were generally found to be consistent between the teams. The distributed team devoted a larger number of items in the meeting minutes to tactical issues.

Items were designated as tactical if they were short term in nature and all knowledge related to completion of the item was already acquired. The meeting minutes were analyzed by inspection, and all items in the meeting minutes were designated as strategic or tactical; no other categories were used. Examples of tactical items found in both teams’ meetings included issues related to the “build” (a compilation of source code into an intermediate internal product release to be sent for testing), issues related to a particular SPR, or issues related to scheduling. Examples of strategic items found in both teams’ meetings included discussion of feature plans for the next release, discussion of major customer issues, and discussion of cross-team collaboration with other teams in the company. The collocated team found ways of handling the tactical issues outside of the formal meeting structure, because opportunities for synchronous communication were available.

using Technology to update work item status Data from the software problem report database were useful in demonstrating how technology was used to update work item status. SPRs represent the core work items for these software development teams, outside of feature level work. When any work is required on the source code—either a bug found by the testing team, an enhancement requested by a customer, or a feature—an SPR is logged and is used to track the status of the work. Each team was found to use the SPR system in a unique manner. While e-mail data described the social network on both teams and source control data described the technical network on both teams, these SPR data acted as a bridge between the social and technical networks. Both teams shipped a final product release in the first quarter of the year, and thus this high period of activity in the early part of the year represents the SPR “clean-up” activity, which occurred for the distributed team as they were

469

Offshoring

updating status on all of the work which had been done for the release. The outliers in the data highlighted that the collocated team required a major focused one-time cleanup immediately preceding the product release, and immediately preceding the feature freeze date. When team members were not available to consult with immediately, they added updates to SPRs in the context of the particular issue and waited for a reply in the form of another action taken on the SPR. With the collocated team, since answers were available immediately, it was not useful for them to take the time to update the formal SPR system when sharing knowledge around a particular SPR. This demonstration of adapting available technologies in different ways has positive and negative points. The positive aspects are that the team has naturally innovated and found new uses for an existing infrastructure. However, with this innovative use comes the caveat for managers that tracking results on a system such as the SPR system will not yield similar reports for teams, which use the system differently. The collocated team had more individuals modifying particular elements of the source control system while the distributed team had more individuals modifying particular elements of the SPR system. This suggests that there are certain thresholds for collaboration and different geographic structures can lead to different levels of social and technical collaboration.

24-hOur knOwlEdgE FacTOry: impacT assEssmEnT The variance in the data between the two teams encourages discussion of the impacts of geographic distribution of knowledge-based teams at various levels--individual, team, organizational, institutional, and national. •

470

Individuals: Individuals who work in a knowledge-based industry have the power

•

•

to make choices about the global working environment. They possess the potential to use software tools similar to those used in this study to educate themselves on the work of their own teams and to become more capable in terms of the ability to work in a distributed work environment. Individuals in such environments may need to alter their work hours to spend a few minutes in their off-hours to use the telephone or instant messaging to communicate with colleagues working in a different time zone. A change in work styles may require more effort to be placed in explicit informal communication on a distributed team, or in more formal documentation of informal decisions on a collocated team. Teams: At the team level, an understanding of the socio-technical forces, which impact knowledge sharing on a software team can impact the success of both the project and the product. Software tools that continually collect and display information can be useful in attaining optimal productivity in a decentralized environments. Building and implementing such tools would provide access to data, which resides in distributed and heterogeneous sources and is not currently used by managers to guide decisions. One example of the utility of such a “dash board” is in assessing the technical dependencies between members of a team by looking at the SPR and source control data. Organizations: At the organizational level, the data collected in this study demonstrates the potential for organizations to assess the tacit knowledge capital that is not readily quantifiable. Organizations currently assess knowledge capital by counting the number of patents filed or tabulating features on existing products. With new data capture tools, organizations can assess knowledge capital at a much more granular level. One can now assess the dependency on one development

Offshoring

•

•

site or another, and on one developer or another. This is especially important in a domain such as software engineering where knowledge flows so dynamically between geographic locations. Institutions: A number of institutions are impacted by the introduction of granular knowledge sharing data analysis in globally dispersed teams. The laws and regulations that govern labor and trade are not yet built to handle redefinitions in work requirements and intellectual property sharing, which occur instantly and across geographic borders. Unions and professional associations, which represent one region of technical knowledge workers can act as both enabling and threatened institutions. They can enable the success of global software teams by training their members to build the capabilities necessary to operate in a geographically distributed environment, and also by expanding their regional scope so that their incentives are aligned with those of the multi-national firms which employ them. However they can also act as a threatened institution by deciding that the work models, regional job opportunities, and technical expertise requirements will be negatively impacted by the distribution of work. In all of these cases, the notion that knowledge sharing can be analyzed and leveraged is important in assuring that institutions impacted are able to adapt appropriately to the changing realities of the workplace. Nations: New national policies need to be developed for training and preparing workers for globally distributed work, and also for dealing with issues related to sharing of intellectual property. In the case of the 24-hour knowledge factory, intellectual property will be imported, leveraged, and exported on a daily basis. As public policy evolves to valuate and regulate exports at this level of granularity, the ability of nations to exploit

wage differences would be significantly limited. This reinforces our pivotal theme that future offshoring endeavors will be fueled, not by considerations of cost savings, but by strategic considerations.

cOnclusiOn From an analytic viewpoint, the authors believe that significant opportunity exists for developing theoretical and analytical models for offshoring practices. By rising above the emotive arguments based on anecdotal evidences that currently tend to dominate debates and discussions on IS outsourcing, we can take a more comprehensive view of the situation. So far, analytical models focusing on offshoring practices have been few in number. A new generation of comprehensive analytical model needs to be created to investigate the emergent phenomenon of offshoring at a global scale. From a business viewpoint, the concept of offshoring was originally fueled primarily by considerations of reduction of labor costs. Companies continue to proceed with plans to outsource with the benefits accruing primarily to their shareholders and their customers; however, government agencies have adopted diverse practices primarily because of concern for feelings of the voting population. Based on a variety of reasons, decisions made by companies on the issue of outsourcing of professional services will increasingly be driven by strategic considerations than by considerations of cost savings. This hypothesis has been validated in this article using a mathematical model. In practical terms, the need to bring new products and services earlier to the market may outweigh the considerations of cost and where the work will be performed. Over time, workers will be retrained and will acquire new jobs that are more suitable for their respective background and location, both in developed and developing countries. One now has the opportunity to move

471

Offshoring

towards the “24-hour global knowledge factory” where outsourcing means active engagement on knowledge intensive tasks for 24 hours a day. Already, an increasing number of companies are using the notion of two geographically work centers to improve the pace and the quality of the work; these serve as harbingers of paradigms involving three work centers configured as a 24-hour knowledge factory. A detailed case study was conducted at IBM to study the relative performance of distributed and co-located work teams. The results of the case study reinforce the main points raised in this article. As firms, governments, and individual workers gradually embrace the growing realities of the marketplace, offshoring could become a “win-win” situation for all, leading to the globalized world of 24-hour knowledge factories.

rEFErEncEs Anderson, S., & Cesar, C. V. (2003, November). The cost of canceling a state contract. Indianapolis Star. Andre, D. (2004, April). Case study: Technology offshoring at upromise. Presentation to Massachusetts Software Council. Arora, A., Arunachalam, V. S., Asundi, J., & Fernandes, R. (2001). The Indian software industry. Research Policy, 30, 1267-1287. Asprey, W., Mayadas, F., & Vardi, M. (2006). Globalization and the offshoring of services: A report of the ACM job migration task force. Association of Computing Machinery. Athreye, S. (2005, March). The Indian software industry and its evolving service capability. Industrial and Corporate Change. Barney, J. (1999). How a firms capabilities affect boundary decisions. Sloan Management Review, 137-145.

472

Baxter, S. P. (2004, April). A business primer: how to expand into China. Presentation to MIT Special Seminar on International Management— Offshoring. “Better Tracking Needed to Help Determine H1-B Program’s Effects on U.S. Workforce.” U.S. General Accounting Office, 2003. Cachon, G. P., & Harker, P. T. (2002). Competition and outsourcing with scale economies. Management Science, (48) 10. Christensen, C. (2001). The past and future of competitive advantage. Sloan Management Review, 105-109. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, (14) 3. DiRomualdo, A., & Gurbaxani, V. (1998). Strategic intent for IT outsourcing. Sloan Management Review, 67-80. Endleman, G. (2003, September). Fall guy: U.S. Immigration and the myth of offshoring. National Association of Software and Service Companies (NASSCOM) Media Room Retrieved from http:// www.nasscom.org Ferdows, K. (1997, March-April). Making the most of Foreign factories. Harvard Business Review. Gopal, A., Sivaramakrishnan, K., Krishnan, M. S., & Mukhopadhyay, T. (2003). Contracts in offshore software development: An empirical analysis. Management Science, (49) 12. “IEEE Position Statement on Offshore Outsourcing.” IEEE-USA Career and Workforce Policy Committee. Mar. 2004. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing: Insights from a longitudinal study. Communications of the ACM, (46) 12.

Offshoring

Lacity, M., Willcocks, D., & Feeny, D. (1995, MayJune). IT outsourcing: Maximize flexibility and control. Harvard Business Review, 84-93. Malhotra, R. (2004, April). Unique business model. Presentation to MIT Special Seminar on International Management. Meares, C. A., & Sargent, J. F. (2003, June). Education and training for the information technology workforce. Report to Congress from the Secretary of Commerce. Mehlman, B. C. (2003, June). Testimony before the U.S. House of Representatives Committee on Small Business. United States Department of Commerce. Mukherji, S., & Ganguly, A.R. (July 2004). Sustaining the offshore outsourcing boom for software development: Transitioning from low cost service provider to strategic partners for information systems. In Proceedings of the 9th International Symposium on Logistics, 559-564. Bangalore, India. Nanda, T. K. (2003, September). Bills galore to check outsourcing. India Abroad. Nanda, T. K. (2003, September). India top outsourcing destination for U.S. firms. India Abroad “Nasscom-McKinsey Study 2005”, McKinsey Associates and National Association of Software and Services Companies, Nov. 2005. “Offshoring: Is it a Win-Win Game?” McKinsey Global Institute, San Francisco, August 2003. Orlikowski, W., & Yates, J. (2002, NovemberDecember). It’s about time: Temporal structuring in organizations. Organization Science, 13(6), 684-700.

Plambeck, E.P. & Taylor. T.A. (January 2005). Sell the Plant? The Impact of contract manufacturing on innovation, capacity and profitability. Management Science, 51(1), 133-150. Sambamurthy, V., Bharadwhaj, A., & Grover, V. (2003, June). Shaping Agility through digital options: Reconceptualizing the role of information technology in contemporary firms. MIS Quarterly, 27(2), 237-263. Shah, S. (2004, April). Offshore development. Presentation to Massachusetts Software Council. Srinivasan, V. (2004, February). Outsourcing and offshoring. Presentation to MIT Special Seminar on International Management—Offshoring. Subramanian, A. (2002, November). Outsourcing consultants have India bias: Merrill Lynch report. Business Standard. Suh, B. (2004, February). Perspectives on global delivery. Presentation to MIT Special Seminar on International Management—Offshoring. “The Roadmap to Offshore Success”. The Sand Hill Group, 2003. Thurow, L. (2003). Interview at Massachusetts Institute of Technology. Cambridge MA. “U.S. may be forced to get across age bar, outsource jobs.” Economic Times, September 17, 2003. Venkatraman, N., & Subramaniam, M. (2002). Theorizing the future of strategy: questions for shaping strategy research in the knowledge economy. The handbook of strategy and management (pp. 461-474), Sage Publications. Venkatraman, N. (2004). Offshoring without guilt. Sloan Management Review, 45(3), 14-16.

This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 1-23, copyright 2007 by IGI Publishing (an imprint of IGI Global).

473

474

Chapter 2.6

Planning for Information Systems Outsourcing Vijay K. Agrawal University of Nebraska–Kearney, USA Donald A. Carpenter Mesa State College, USA

absTracT

inTrOducTiOn

This chapter presents an overview of the pertinent aspects of planning for the outsourcing of information systems projects. The first major section of the chapter presents a historical perspective on the evolution of information systems outsourcing practices so the reader can understand subsequent sections of the chapter in context. The next major portion of the chapter deals with the need to examine goals, strategies, core competencies, and critical success factors as well as presenting all the functional areas of information systems that are candidates to be outsourced. Also included are discussions of the need to perform cost/benefits analysis and to consider cultural and other factors. The concluding section deals with all the factors that should be examined in preparing and administering outsourcing contracts.

No industry has been affected more by outsourcing than the information sector! That has been both a boon and a challenge to information technology firms. For decades, as businesses in all industries have realized their lack of internal expertise to develop or manage their own information systems, they have outsourced portions or all of their IT departments to firms that specialize in that expertise. Yet, as salaries escalated for those with that needed IT expertise, general businesses as well as the IT firms themselves have turned to developing countries to provide the expertise at a lower cost. Thus, off shore outsourcing, or offshoring, is exploding. During the time of the amazing growth of the information sector of developed countries, there was an arrogant claim that is was natural to lose

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Planning for Information Systems Outsourcing

manufacturing jobs to foreign countries because that job loss would be exceeded by information technology companies which were said to have some form of exclusive hold on IT expertise. Reality is expressed more appropriately as:

the chapter presents an extensive examination of IS functions that are logical choices to outsource. Last is a discussion of how to contract for outsourcing and how to manage such contracts.

Our labor force is not better trained, harder working or more innovative than our foreign competitors. The argument that we will create jobs in highly paying fields is simply not true. We have no comparative advantage or superiority in innovation. To assume that we are inherently more creative than our foreign competitors is both arrogant and naive. We are currently empowering our competition with the resources to innovate equally as well as we. (Warren, 2005, www. computerworld.com)

EvOluTiOn OF inFOrmaTiOn sysTEms OuTsOurcing paTTErns

Rather, leaders in the IT field now see outsourcing as a natural evolutionary step in IT (McNurlin & Sprague, 2006, p. 304). Global competition affected only 10% of the U.S. economy in the 1960s, but rose to 70% in the 1970s and is arguably 100% today, as no businesses escape the impact of the global economy. In order to compete in that global economy — especially when the gap in the costs of local vs. off-shore labor looms so large — a majority of businesses must turn over some business functions outsourcing and offshoring to be competitive. Due to their technical nature, IT functions are logical candidates for such outsourcing for a significant percentage of businesses. Consequently, outsourcing and offshoring of IT functions is not just an IT issue, it is a primary business issue. The purpose of this chapter is to provide a planning framework for the outsourcing of IT functions. First a brief historical perspective is presented in order for the reader to appreciate what has worked in the past as a predictor of what might work in the future. That is followed by a description of factors to consider prior to outsourcing information systems projects. Next

Outsourcing has been an important information systems practice since the beginning of the computer industry in 1951. When a firm purchases prewritten software, it in effect has outsourced the processes of design and construction of programs. When a company retains a consultant to help identify information requirements, it has outsourced. When an enterprise hires a company to maintain its computer systems, it has outsourced. When a user organization acquires services from a value added network provider, it has outsourced (Singhal, & Singhal, 2002, p. 290). The specific reasons for such outsourcing vary from one organization to the next. However, in general, the reasons boil down to one factor. It is less costly for the purchasing company to turn outside rather than do the work in-house (Niccolai, 2005). Perhaps it does not have the expertise and it is less costly to buy the expertise than build it. Perhaps it does not have the time to pull off a project. Perhaps it can take advantage of the economy of scale that the supplier has and which the purchasing company does not. Regardless of specific reasons, the host firm turns to outsourcing to save money. Gradually, that gave rise to the growth of huge outsourcing firms such as Electronic Data Systems (EDS), to software giants such as Microsoft, and to consulting divisions within other companies such as in all the major accounting firms. It spawned the growth of the computer communications portion of the telecommunication industry. Furthermore, it provided myriads

475

Planning for Information Systems Outsourcing

of opportunities for smaller firms such as one can find in the business listings of telephone books in any small, medium or large city. The mid-1970s saw the beginning of outsourcing: … megadeals, which consisted of outsourcing all of a company’s data center operations for up to 10 years. These deals involved selling existing equipment to the outsourcer, transferring all software licenses, moving significant numbers of in-house IS personnel to the outsourcer’s payroll, negotiating how the outsourcer would help in the transition and which party would carry which costs, establishing desired service levels and ways to measure performance, and specifying every single service to be provided — because if it was not in the contract, it would be an added cost. (McNurlin & Sprague, 2006, p. 306) Again the motivation of the host companies was to save costs — which usually occurred right away — and to guard against unpredictable expenses, by shifting the expertise and expenses to the supplier. For the suppliers, the deals were often money losers in the first year or more, but yielded large profits as start-up costs ended, operations stabilized, and the price of technology dropped. The sweetness of such deals could be soured by disagreements in the ambiguous wording of contracts, which often could lead to additional charges, or by culture clashes between the companies. The latter often occurred when former employees of the host company were transferred to the payroll of the supplier, yet former coworkers and supervisors maintained conflicting expectations. Changes in information technology itself and changes in user organizations’ needs led to corresponding changes in the nature of IT outsourcing. The impact of such changes was most noticeable as companies began to adopt clientserver computing in the 1980s, then in the 1990s

476

as industry began its efforts to solve their Y2K problems, to preadjust their information systems to accommodate the new euro currency, and to get on the dotcom bandwagon. In the latter three cases, the workload of IT departments in user enterprises increased beyond the level that could be handled in-house. Outsourcing was a logical solution as the Y2K and euro-conversion problems were both seen as temporary and the creation of corporate Web presences was seen as a new task that would require new investments whether it was outsourced or kept in-house. This gave rise to the concept of project-based outsourcing for specific, often short-term tasks. The client-server phenomenon was another story, however, as companies chose to move to that environment in order to save costs associated with their mainframe computer systems. Some companies felt the switch to client-server computing had the potential to end their use of outsourcing. However, the reality for other companies was the need to engage in outsourcing due to their lack of internal expertise with the new paradigm. In many instances, the host firm used project-based outsourcing to install and launch their new systems. But another variation on outsourcing was also created, that of the help-desk functions both for end users within the host company but also for the IT staff as they dealt with multiple vendors and ever-changing protocol and systems software. Such major shifts resulted in the availability of a smorgasbord of outsourcing services from which a host organization can choose. Termed “best-ofbreed outsourcing” (McNurlin & Sprague, 2006, p. 307), it allows a user organization to pick and choose which specific IT functions they would like to outsource. It also allows them to choose how they go about outsourcing. One company might choose to outsource all its data center operations to a single vendor, while another might chose to contract with multiple vendors each for a specific function such as software development or Web site hosting. Still another company might choose

Planning for Information Systems Outsourcing

to outsource specific IT processes or IT-based business processes such as order fulfillment or customer care, while another might choose to outsource functions that transcend functional areas, “such as e-mail, security, or redundancy” (Thickins, 2003). Other growing trends relate to the nature of the outsourcing arrangement. Today, there is a spectrum of possibilities when a company chooses not to insource business functions in general or information systems functions specifically. Whereas traditional outsourcing contracts are alive and well, there are growing fields of opportunities for joint-venture partnerships and strategic alliances (McNurlin & Sprague, 2006, p. 308). Traditional contracts specify a structured relationship with the vendor supplying services to the host company. Conversely, joint ventures and alliances are trustbased with each party sharing risks and responsibilities. The rapidly growing e-commerce sector provides incredible and previously unachievable opportunities for such arrangements. Hence the business-to-business (B2B) e-commerce sector is growing at an incredible rate. Another byproduct of project-based outsourcing that gained in popularity with the Y2K and euro-conversion projects is off-shore outsourcing, or off-shoring. White-collar off-shoring was most-likely inevitable as the service sector follows the footsteps of the U.S. manufacturing sector in which productivity grew by 330% in 50 years from the early 1950s largely due to taking advantage of lower labor costs in developing countries. In the same time, U.S. service sector productivity has only grown 47% (Altman, 2004, p. 39). Project-based outsourcing gave the service sector, which is largely centered on IT, the boost it needed to explode to the point it is today. The sheer cost of the Y2K and euro-conversion problems and the lack of sufficient manpower in the U.S., forced many outsourcing contracts off-shore, especially to India. Today, that has expanded to other countries, many in Asia, including China (McNurlin & Sprague, 2006, p. 307).

Off-shore outsourcing has become a favorite political discussion point. Loss of U.S. jobs is seen as a negative issue. Some argue that off-shoring might actually be good because the living standards in developed countries increase as products and services produced in developing countries can be purchased at lower prices. Regardless, the reality is that off-shoring of services is inevitable. Rather than focusing on loss of jobs, the bigger concern is the loss of competitiveness of service firms, which need to “industrialization” themselves by applying strategies such as off-shoring, automation, and self-service (Karmarkar, 2004).

idEnTiFying inFOrmaTiOn sysTEms prOcEssEs TO bE OuTsOurcEd consider goals and strategies As stated previously, the primary reason to outsource is to minimize costs (Niccolai, 2005). That is a worthy goal. There may be other reasons or goals. All goals should be formally stated and articulated with business strategies. Other criteria that might be included in goal statements for outsourcing projects are: • • • • • •

If the process has a large cost base If the process is labor intensive If it has interlinkages that would be violated by relocation If the skills to complete the process are available off-shore If a significant wage level differential can be created by off-shoring If the process is not a source of competitive advantage (Robinson & Kalakota, 2005, p. 214)

Beyond that, a company needs to determine and formally state the scope of its outsourcing intentions Of course, it order to do that, the

477

Planning for Information Systems Outsourcing

company must identify what functions it intends to outsource. Prior to that, the company must understand what is possible to outsource. The remainder of this section intends to provide a method to follow in that process.

consider core competencies and critical success Factors Decisions as to what and whether to outsource should be tied to an identification and understanding of an organization’s core competencies and its critical success factors (Luftman, Bullen, Liao, Nash & Neumann, 2004, p. 320). Such an identification and understanding can be a lengthy process. However, it is the one true way to determine whether a project should be or should not be outsourced. While that recommendation was first applied to IT projects, it can be generalized to all business functions. If a task is a both a core competency and a critical success factor, it should not be considered for outsourcing. Such tasks are at the heart of the company. Success or failure of such functions is directly tied to success or failure of the company as a whole. In general, such functions are critical to an organization’s day-to-day operations, ability to competitively differentiate itself, ability to deliver value to customers and partners, and ability to innovate (Luftman et al., 2004, p. 322). Tasks that are core competencies but not a critical success should be reassessed. Why engage in such tasks if they are not critical? Often the answer to that is “because we can.” It is typically not a good business decision to continue to engage in such tasks. Those tasks which are not core competencies are the most likely candidates for outsourcing. The question is how to go about it. If such as task is a critical success factor, it might be wise to establish a strategic alliance; otherwise, a transaction partnership might suffice. The former is a more tightly-coupled arrangement than the latter. Strategic partnerships might even establish some

478

form of mutual ownership or revenue sharing, whereas transaction partnerships are more typical outsourcing arrangements where a company simply contracts with a vendor to provide the service or product. There is another consideration that lies outside the core competency–critical success factor matrix. If an organization intends to bring an outsourced task back in-house at some future time, managers should be cautious. There is overwhelming evidence that certain outsourced activities cannot be reversed, particularly in the IT arena (Luftman et al., 2004, p. 323). Once expertise has been released to the outsourcer, it is difficult — if not impossible — to regain such expertise in-house.

consider Functional aspects of is and the Future of the is department As an organization considers outsourcing for its information systems functions, it should recognize that the IS department really performs four interrelated major functions (Cox, 1994): 1. 2. 3. 4.

Running computer and communications operations Developing and maintaining systems Developing the strategies and overall architecture for both IT and information Identifying business requirements in conjunction with users

Each of those four areas requires a different knowledge set, varying skills, and distinctly different tools. Each should be managed from its own appropriate strategy. As the company looks to outsource IS, it should consider that each of those four areas should be considered differently in terms of core competencies and critical success factors. As a result, it might make sense to outsource some of those four functions but not others.

Planning for Information Systems Outsourcing

The roles of running computer-communications systems and developing/maintaining systems tend to be those that are more logically outsourced than the more strategic roles of developing architecture plans and defining business requirements. To outsource the first two and not the latter two might lead to what is becoming known as “IS lite” (Woolfe, 2000) and reduce budgets for in-house IS functions by 90% (McNurlin & Sprague, 2006, p. 300). As a firm decides to make a major shift in the IS department that will result from extensive outsourcing, it should consider the long-term impact. Trends indicate two elements that cry out for consideration: (1) how IS will be coordinated in the future and (2) how corporate data and content will be controlled (Markus, 1996). The argument is strong that there still needs to be corporate coordination of IS functions. The argument is also strong that the organization should continue to control its own data and content rather than contract externally for another firm to control them (Hickey, 2005). For these, there is a continued need for an IS staff.

Consider Specific Information Systems processes The discussion immediately above identified four general information systems functional areas that might be subject to being outsourced. This section takes a different tack as it presents a listing of 38 information technology management processes (Luftman et al., 2004, p. 119), each of which is subject to being outsourced. The 38 processes are grouped according to a familiar scheme: the three levels of management decision making, long-term strategic, shorter-term tactical, and day-to-day operational. The descriptions of the 38 items are summarized below. For each of the functions, there is an indication as to whether the function should be kept in-house, be considered further for outsourcing, or be considered as a

joint responsibility shared between in-house and outsourcing staff.

consider Costs vs. Benefits Successful managers recognize that a cost/benefit analysis should be included as part of any major financial decision. Both tangible and intangible benefits, plus both direct and indirect costs should be included. The challenges for most information systems projects traditionally have been quantifying benefits and identifying all of the costs. For many outsourcing projects, especially off-shore outsourcing, the complexity of determining costs and benefits “will increase further because of off-shore arrangements where many variables may be unknown till the project is completed” (Robinson & Kalakota, 2005, p. 215). The temptation is to jump into an off-shoring project simply on the basis of cost savings as such projects can offer great reductions in capital requirements and long-term operating expenses. Initial cost differentials can be as much as 40% (Hickey, 2005). For example, a software application maintenance worker in India earns about $25 per hour, compared with $87 per hour in the U.S., according to Gartner (Wolfe, 2000). However, the potential cost saving can erode rapidly. There are costs associated with establishing and administering the outsourcing contract. There might be costs associated with receiving a lower-quality product or service than had been anticipated. This differential can be significantly eroded, however, as companies incur additional costs to manage and administer these outsourced functions. As wages in developing countries catch up with those in the country of origin of the host company, there might be less cost savings over the long run. Most businesses push work overseas in the hope of cutting labor costs. Furthermore, there might be hidden expenses for communications, travel, and cultural training. Off-shore deals that last a relatively short time might not pay off in as big a manner as anticipated (Niccolai, 2005).

479

Planning for Information Systems Outsourcing

Table 1. Categorized IS functions to consider for outsourcing (Modified from Luftman, 2004, p. 119) Long Term, Strategic Planning and Control

Day-To-Day, Operational Planning and Control

1. Business strategic planning

In-house

2. IT architecture–data, apps, computer, network–planning/definition.

Outsource

3. IT strategic planning and control

Joint

Short Term, Tactical Planning and Control Developmental planning functions 4. Application portfolio planning and scheduling

Outsource

5. Data needs planning

Outsource

6. Network planning

Outsource

7. System planning

Joint

8. Project planning

Joint

Service planning functions 9. Service level planning and management

In-house

10. Recovery planning and management

Outsource

11. Security planning and management

Outsource

12. Audit planning and management

Outsource

Resource planning functions 13. Capacity planning and management

Joint

14. Skills planning and management.

Outsource

15. Budget planning and management

In-house

16. Vendor planning and management

In-house

18. Project assignment

Joint

19. Project scheduling

Joint

20. Project controlling

In-house

21. Project requirement control

Joint

22. Project evaluating

In-house

Resource control functions 23. Change control

Joint

24. Asset management

Outsource

Service control functions 25. Production and distribution scheduling

Outsource

26. Problem control

Joint

27. Service evaluating (keep in-house.

In-house

Development and maintenance functions 28. Software development and upgrade

Outsource

29. Software procurement and upgrade contracts

In-house

30. Hardware procurement and upgrade contracts

In-house

31. Systems maintenance

Outsource

32. Tuning and system balancing

Outsource

Administration services functions

Management planning functions 17. Management systems planning & management

Project management functions

Joint

33. Financial performance

In-house

34. Staff performance

In-house

35. Education and training

Outsource

36. Recruiting, hiring, and retention

Outsource

Information services functions

Such challenges emphasize the need to perform a thorough cost/benefits analysis. The details as to how to perform such a task go beyond the scope of this chapter, but can be found elsewhere.

consider cultural and Other Factors The cultural differences inherent in off-shore outsourcing can be overcome with cultural training. Such training has become more prevalent in recent years to familiarize employees of both client and

480

37. Production

Outsource

38. Service marketing

Outsource

provider with information about both country and company cultures. Including an arbitrator who is familiar with both cultures is advisable. Languages differences might or might not exist. For example, a U.S. company dealing with an Indian outsourcer will benefit in that English is the official language of each. However, regional dialects and accents still can present a challenge, as can colloquialisms. Parties in such an outsourcing arrangement would be wise to avoid such nuances and potential conflicts. As rules of thumb, parties

Planning for Information Systems Outsourcing

should use short, concise terms and phraseology and should place all agreements in writing. Differences in legal, regulatory and ethical issues can also provide stumbling blocks in offshore arrangements. Particularly troublesome are laws pertaining to privacy and intellectual property rights. Retaining legal representation that is familiar with laws and requirements of both countries is costly but invaluable. One additional consideration bears noting. An outsourcing arrangement can result in atrophy of knowledge and skills in the client organization. To avoid that, the parties might enter into a “cosourcing” arrangement in which “the vendor and client collaborate so closely that the vendor can replace or augment the client’s IT competencies” (Kaiser, & Hawk, 2004). Usually that results in employees from each party working together on the same project team. Similar a mechanism can prove essential in communicating initial requirements as well.

managing OuTsOurcing Outsourcing adds complexity to already complex information systems projects and functions. As was discussed in the Evolution of Information Systems Outsourcing Practices section above, the issue of how to outsource can require managers to decide between creating software or buying a prewritten package, hiring a consultant for a short term or executing a long term contract for ongoing advice, farming out projects or forging a “megadeal,” entering into a joint venture partnership or a strategic alliance, outsourcing locally, or going off-shore. Furthermore, as was discussed in the previous section on Identifying Information Systems Processes to be outsourced, before an enterprise engages in outsourcing, managers should consider the firm’s goals and strategies, its core competencies and critical success factors, the present nature and future of its

information systems functions, the wide range of specific information systems functions that can be outsourced, costs vs. benefits of candidate outsourcing ventures, as well as cultural, language, political, and ethical factors. Once all that consideration has taken place and the decisions have been made as to what and how to outsource, there is still more work to do to insure the outsourcing adventure is managed properly. Managers have more decisions to make related to the management structure and control, the selection of the vendor, the nature of the outsourcing contract, the launching and implementation of the project, and the monitoring, evaluation and renegotiation of the contract. This section of the chapter discussed those additional topics in greater detail.

management structure and control Regardless of the management structure, management style and span of control within the companies that are party to an outsourcing contract, the contracted activities must be managed jointly. “Jointly” usually translates to “differently than the firm is accustomed to managing noncontracted activities.” For example, a manager, who might be used to making internal decisions individually and quickly, will encounter the need to make decisions relating to the outsourcing contract cooperatively and probably more slowly. Another manager might be challenged as he adjusts to managing expectations rather than staff. High quality communications between parties to an outsourcing project is the key to success of the outsourcing endeavor (Niccolai, 2005). However, the customary communications structure and procedures change from what managers usually experience within their respective organizations. Both formal and informal communications channels change when dealing with outside workers.

481

Planning for Information Systems Outsourcing

Interestingly, adjusting to new communications channels can yield unexpected positive results. As managers and employees adjust to the new communication processes, they encounter more formality than what typically exists within their own company. Increased formality demands more rigorous planning and more thoroughness in execution. Those, in turn, can result in improved quality. To handle such decision-making, parties typically establish layers of joint teams (Robinson & Kalakota, 2005, p. 225). There should be a team of strategic managers from each contract party, a team of tactical managers, and a team of operational managers. The members of each team are responsible to their team but also responsible to the manager within their own company at the higher team level. Robinson and Kalakota (2005, p. 223) also advocate the use of service level agreements (SLA) as a means to govern outsourcing projects and to monitor performance. “For every contracted service, its SLA spells out responsibilities, performance requirements, penalties, bonuses, and so on. Completeness is an important attribute of good SLAs; generally everything should be detailed, perhaps even with times of deliveries, who will deliver what to whom, and so on.” An SLA should also include rules that parties follow when making decisions as well as metrics to be able to measure compliance and rules.

vendor selection criteria When selecting a vendor for outsourcing projects, managers in the client company should follow the same tried and true methods that are prescribed for all similarly complex purchases. After determining how and what to outsource, as discussed in the previous sections of this chapter, the firm needs to spell out in great detail all its expectations regarding the project. Those detailed explanations should be provided to vendors who have expressed

482

an interest in the project. That should take the form of a formal request for proposal (RFP) to which the potential vendors should be required to respond with detailed formal proposals. In addition to detailed explanations about the project, the RFP should include extensive discussions as to the vendor’s required qualifications and how the project will be managed, monitored and evaluated. The information asked about the vendor should include topics of size, longevity, financial stability, management style and infrastructure, retention experience with its employees, training and educational levels of its employees, experience and procedures with security and privacy, experience and procedures with protecting data and intellectual property, quality management such as IS9000 and Six Sigma compliance, experience with reporting and meeting deadlines, and references from other clients (Robinson & Kalakota, 2005, pp. 230-242). Once vendors’ proposals have been received, the evaluation process begins. Of course, the client company should examine the proposals in depth to be certain that all its requirements can and will be met. Moreover, each vendor should be evaluated as to how well it fits with the client company in light of the future need for communications between the parties as they cooperatively manage the outsourced project. After narrowing the set of potential vendors to a short list, the client company should schedule reciprocal site visitations to verity capabilities. It should also require demonstrations of capabilities by means of visits to other clients of each vendor or even prototype projects. Performance guarantees should also be worked out prior to deciding on the final vendor. It might turn out that more than one vendor is required to fulfill all the requirements of the outsourcing project. The RFP should require prospective vendors to explain their plans for and experience with interfacing among multiple vendors. In a related vein, the client company might choose

Planning for Information Systems Outsourcing

to divide the project among multiple vendors and even among multiple countries in order to minimize risks. In that light, the RFP should include questions that relate to the prospective vendor’s location. Those include assessment of the current political climate and cultural differences, as well as disaster recovery and business continuity plans and experiences (Hickey, 2005). The complexity of the RPF process might seem overwhelming to managers in a client firm and especially if the managers have not been through such a process previously. However, failure to consider thoroughly all the details will predict problems later. Consequently, the client firm might choose to retain the services of an experienced consulting firm. Engaging such a neutral “informed buyer” (Feeny, 1998) might be costly but it most certainly will be worthwhile. Whether or not an external consultant is used, the final selection of outsourcing vendor(s) should be handled by a vendor selection committee. The magnitude of potential risk of an outsourcing project decision should dictate the managerial level of the members of such a committee. The decision should be reviewed prior to implementation by the client company’s top management team, legal advisors, and pertinent stakeholders (Luftman et al., 2004, p. 317). Additional approval should occur prior to, during, and following contract negotiations.

Outsourcing contracts Outsourcing contracts can be complex due to the level of detail that needs to be included to insure that all parties understand each others’ expectations. Robinson and Kalakota (2005, pp. 219-236) present a general framework for what should be included in outsourcing contracts. That framework is summarized in the following list: • •

Price structure Billing and payment arrangements

• • • • • • • • • • • • • • • • • • • • • • • •

Price stability Payment terms Treatment of hidden costs Flexibility and tolerances Change management Conflict resolution Term expiration and renewal Work to be accomplished Vendor’s responsibilities Define scope and objectives Time line and deadlines Deliverables Performance measurement criteria Service level agreements (SLA) Communications mechanisms Warranties, liabilities, confidentiality Protecting of intellectual property Security and privacy of data Ownership of data or source code Compliance with local regulations Failure to perform duties Terminating the relationship Enforcement of contract rights Recovery of damages

Many of the items in the above list have been discussed previously in this chapter. Most of the remaining items in the list are fairly straightforward and do not require elaboration. However, the concept of performance measurement does bear expansion. Measuring performance of information systems is always a challenge. Putting expectations for performance measurement in contractual terms for an outsourcing project can be a greater challenge. The following paragraphs are intended to shed some light on that. According to Bruton (2004, p. 179) the four main measurements for outsourcing projects are: quantity, performance, quality, and value. Measuring quantity is the easiest of the four — determine how much work was accomplished: how many invoices were processed, how many lines of program

483

Planning for Information Systems Outsourcing

code were written, how many workstations were installed. Once quantity is known, performance can be determined by comparing quantity against preset targets or standards. Value of information systems is a little trickier to measure unless it is defined tightly as to whether the project made business sense, whether it advanced the company, or whether it saved the company from higher costs or other losses. The goals of quantity, performance, and value can be relatively easily be put into words in an outsourcing contract. Quality of information systems is the difficult one to measure and to put in contractual terms. Robinson and Kalakota (2005, p. 81) note that quality of information systems can be tied to customer satisfaction. Turney (1992) writes that “quality is doing it right the first time.” Both of those help the reader to understand the nature of quality, but there would be obvious challenges in writing either of those approaches into outsourcing terms. Parasuraman, Zeithaml, and Berry (1985) provide a little more help with their list of “determinants” of service quality, which are in essence: • • • • • • • • • •

Reliability (consistency/dependability) Responsiveness (timeliness/promptness) Competence Access (approachability/convenience) Courtesy Communications ease Credibility (trustworthiness/honesty) Security Understanding customers and their needs Tangible evidence of service (including facilities, personnel appearance, tools, and equipment)

While those are more definitive, and can be used as critical success factors (Luftman et al., 2004, p. 361), they do not necessarily lend themselves easily to contractual terminology. Myers, Kappelman, and Prybutok (1997) list eight IS suc-

484

cess dimensions that can be more easily worded into an outsourcing contract: (1) service quality, (2) system quality, (3) information quality, (4) use, (5) user satisfaction, (6) individual impact, (7) work group impact, and (8) organizational impact. The contractual wording would depend on the specific nature of the outsourcing project.

implementing, monitoring, Evaluating, and renewing Outsourced projects Robinson and Kalakota (2005, pp. 224-229) strongly emphasize the need to develop plans to implement outsourced processes and encourages the early formation of teams to oversee (1) knowledge transfer between client and supplier organizations, (2) facilitation of initial and ongoing communications at all levels of the participating firms, (3) management of employees, especially those transferred from one firm to the other, and (4) management of the quality of the fulfillment of the project. Hayes (2003) agrees that setting up the management of outsourcing implementation needs to happen as quickly as possible. Luftman et al. (2004, pp. 319-320) reinforces the need to develop vendor relationships and partnerships and advocates use of steering committees to build those through frequent meetings with vendor councils. For long-term, complex engagements, Robinson and Kalakota (2005, p. 230) even go to the point of prescribing relationship managers for each of the parties to the outsourcing contract to serve as the folks that resolve conflicts at a high level. Regarding monitoring of outsourcing contracts, evaluating performance and conducting periodic reviews, Feeny (1998) writes that those should be considered critical success factors and should become core competencies of the IS staff. In other words, the success of the outsourcing project resides in the monitoring, evaluation, and reviewing of the parties’ performances. Service

Planning for Information Systems Outsourcing

level agreements (SLA), coupled with incentives and penalties, can be excellent tools to measure quality of the project against predetermined metrics (Luftman et al., 2004, p. 319) such as the vendor’s performance against the service level agreement and accepted industry benchmarks of quality. There might be an infinite number of questions that could be asked regarding whether SLAs are being adhered to, for example: Are SLA deadlines being met and adhered to? Is reporting timely and accurate? Is the quality of work consistent with the defined SLAs? Is the number of people on the projects accurate? Does the vendor have valid software licenses in place? (Robinson & Kalakota, 2005, p. 235). Other critical factors in contract management are assessment of risks and appropriate adjustments. Robinson and Kalakota (2005, p. 234) note that things change during the course of a contract and risks change as a result. Both parties in an outsourcing arrangement need to keep their fingers on the pulse of those factors that can produce risks. This is especially true in a global economy where factors change very rapidly and in a world of unstable political environments. “To insure business continuity, companies must engineer availability, security, and reliability into every offshore process” (Robinson & Kalakota, 2005, p. 234). Monitoring the activities of an outsourcing project helps to identify problem areas and opportunities to improve performance. There are times when contract monitoring can identify changes that result in a need to renegotiate the contract. Examples of such changes are: • Expiration of the contract at its logical and predetermined end • Material contract breach by vendor, for example, poor performance, security lapses, criminal activity • A major change in the organization’s management or industry, for example, bankruptcy, merger

• •

Significant change in price for the same service by the same or other vendor Advent of new technology that could improve the project (Luftman et al., 2004, p. 319)

Robinson and Kalakota (2005, pp. 232-233) point out a rule of thumb is that process designs become obsolete every five years. This can be due to any number of causes, but points to the potential need to renegotiate contracts.

summary This chapter has provided an overview of the processes and considerations for planning for outsourcing of information systems functions. It began by framing the present state of IS outsourcing processed in a historical context. The nature of IS outsourcing has evolved through the years for several reasons. Each of the evolutionary processes is available for use today. There are many factors that should be considered prior to outsourcing information systems functions. Managers should consider the firm’s goals and strategies, its core competencies and critical success factors, the present nature and future of its information systems functions, the wide range of specific information systems functions that can be outsourced, costs vs. benefits of candidate outsourcing ventures, as well as cultural, language, political, and ethical factors. Similarly there are many IS functions which might be candidates to be outsourced After deciding how and what to outsource, managers begin the process of restructuring the organization to accommodate outsourcing. Then there are the elaborate processes of selecting the right vendor and negotiating the outsourcing contract. The work does not end with the signing of the contract. Indeed some of the most critical tasks lie ahead with the monitoring, evaluation, and possible renegotiation of the contract.

485

Planning for Information Systems Outsourcing

rEFErEncEs Altman, D. (2004, May 1). A more productive outsourcing debate. Business. Retrieved March 13, 2005, from http://money.cnn.com/magazines/ business2/business2_archive/2004/ 05/01/368257/ index.htm Bruton, N. (2004). Managing the IT ServicesPprocesses. Burlington, MA: Butterworth-Heinemann. Cox, G. (1994, June). Time to reshape the IS department? Wentworth Research Program (part of Gartner Executive Program). Retrieved March 13, 2005, from http://www.gartner.com Feeny, D. (1998, Spring). Core IS capabilities for exploiting information technology. Sloan Management Review, 39(3), 9-21. Hayes, M. (2003, August 4). Doing offshore right. InformationWeek, 77-78. Hickey, T. (2005, January 31). Outsourcing decisions: They’re strategic. Computerworld. Retrieved March 13, 2005, from http://www.computer world.com/printthis/2005/0,4814,99316,00. html Kaiser, K., & Hawk, S. (2004). Evolution of offshore software development: From outsourcing to cosourcing. MIS Quarterly Executive, 3(2), 69-81. Karmakar, U. (2004, June). Will you survive the services revolution? Harvard Business Review, 101-107. Luftman, J. N., Bullen, C. V., Liao, D., Nash, E., & Neumann, C. (2004). Managing the information technology resources: Leadership in the information age. Upper Saddle River, NJ: Pearson Education, Inc. Markus, M. L. (1996). The future of IT management. Database for Advances in Information Systems, 27(4), 68-84.

486

McNurlin, B. C., & Sprague, R. H. Jr. (2006). Information systems management in practice. Upper Saddle River, NJ: Pearson Prentice Hall. Mearian, L. (2005, April 8). Feds force tighter oversight of outsourcers. Computerworld. Retrieved June 15, 2005, from http://www.computerwor ld.com/printthis/2005/ 0,4814,100962,00.html Myers, B. L., Kappelman, L. A., & Prybutok, V. R. (1997). Comprehensive model for assessing quality & productivity of information systems function: Toward theory for information systems assessment. Information Resource Management Journal, 10(1), 6-25. Niccolai, J. (2005, June 22). Gartner: Five reasons why offshore deals go bust. Computerworld. Retrieved July 13, 2005, from http://www.computerworld. com/printthis/2005/ 0,4814,102677,00. html Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implications for future research. Journal for Marketing, 49(4), 41-50. Robinson, M., & Kalakota, R. (2005). Offshore outsourcing: Business models, ROI and best practices. Alpharetta, GA: Mivar Press. Singhal, J., & Singhal, K. (2002). Supply chains and compatibility among components in product design. Journal of Operations Management, 20, 289-302. Thickins, G. (2003, April). Utility computing: The next new IT model. Darwin Magazine. Retrieved April 15, 2005, from www.darwinmag. com/read/040103/utility.html. Turney, P. B. B. (1992, January). Activity-based management. Management Accounting, 20-25. Warren, S. (2005, May 23). Eye on offshoring: Aligning IT strategy with the business strategy. Computerworld. Retrieved March 13, 2005,

Planning for Information Systems Outsourcing

from http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,101896,00. html

Woolfe, R. (2000, July). IS lite. Gartner EXP. Retrieved March 14, 2006, from http://www. gartner.com.

This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans, D. Schniederjans, & M. Schniederjans, pp. 42-61, copyright 2007 by IGI Publishing (an imprint of IGI Global).

487

488

Chapter 2.7

The Journey to New Lands: Utilizing the Global IT Workforce through Offshore-Insourcing Subrata Chakrabarty Texas A&M University, USA

absTracT

inTrOducTiOn

This chapter introduces a prescriptive conceptual framework from the practitioner’s perspective for the “offshore-insourcing” journey. In the decision phase of offshore-insourcing, we answer the questions “Why to insource from offshore?” “What to insource from offshore?,” and “Where to offshore?” In the implementation phase we answer the question “How to insource from offshore?” and describe the importance of evaluating outcomes. In the process of answering these questions, we discuss insourcing vs. outsourcing and the possible need for offshoring. We think of ways to select the IT functions that can be insourced from offshore, and also look at the popular offshore destinations. We discuss process of managing change, setting up the offshore center, recruiting IT professionals at offshore, and managing the IT professionals at onshore and offshore within the ambit of the global delivery model. Throughout the decision and implementation phases of offshoreinsourcing, the focus is on the challenges related to managing IT personnel.

The pressure to lower information technology (IT) costs is high on companies worldwide. The cost of IT, a major component of which is the cost of IT professionals, is sometimes a stumbling block in the decision to upgrade to newer and better technology alternatives. The internet provides new opportunities for offshoring of IT or IT enabled work. When a service is made available on-line, all the user knows is what they see on the screen. If they type in an internet address and access a service, they do not need to know about the nationality or race of the IT professionals that have actually developed the Web site. Companies in advanced economies are being driven to look across the horizon by the lure of low costs of IT professionals in other countries and the desire for high software quality. Dibbern, Goles, Hirschheim, and Jayatilaka (2004) note the following: Even the popular press (Business Week, 2003; USA Today, 2003) have reported on this issue

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

The Journey to New Lands

noting that as much as 50% of IT jobs will be offshored to India and other off- and near-shore destinations in the next 10 years. Such change it is argued is nothing more than the natural progression of first moving blue-collar work (manufacturing, textile production, etc.) overseas followed by white-collar work. By offshore-insourcing of IT work, a company sets up its own IT department or subsidiary in another country (that is, it insources IT work from its own IT department or subsidiary located in an offshore country). However, there are also some concerns regarding the larger impacts of offshoring by a nation on its job market and its knowledge centric competitiveness. Process and operations knowledge may get leaked to local entrepreneurs and competing companies at offshore locations (Karamouzis et al., 2004). The other major concern that is often highlighted by the popular media is that of job losses. Offshoring is sometimes regarded as a reason for the slackness in growth of employment opportunities in developed economies. However, Karamouzis et al. (2004) of Gartner Research interestingly note the following about job losses:

downturn or pressure on companies to improve productivity without new hires.” Karamouzis et al. (2004) go on to state that concern should not be the number of jobs displaced which is a cyclical trend, but rather the “potential loss of critical competencies and knowledge-centric roles.” Hence, offshore-insourcing is an option to gain access to low-cost & high-quality skills of offshore IT professionals, and also to retain critical competencies and knowledge centric roles within the company, but not necessarily within a nation. This chapter will explore the offshore-insourcing process by asking the questions “Why?,” “What?,” “Where?,” and “How?” in a prescriptive conceptual framework. It will analyze the forces that are driving offshoring in the internet age, and how various organizations can respond to this demand. The process of implementing a decision to insource from offshore is studied by discussing the process of recruiting IT professionals at offshore, understanding the need for change management, and discussing the management of IT professionals at onshore and offshore within the ambit of the global delivery model.

The Terminologies According to U.S. labor statistics and several academic studies, less than 5% of jobs lost in the United States are attributed to offshoring IT services. A study commissioned by the Information Technology Association of America and developed by Global Insight put the estimate at 2.8%. U.S. government statistics for the last 15 years show that most job losses have occurred due to automation, changes in industry dynamics and process re-engineering. Many proponents of the above logic face criticism that job growth at onshore may be slower due to offshoring of new projects. Karamouzis et al. (2004) however state that “new job creation has decelerated in the past three years, perhaps due to greater efficiencies, automation, the economic

Before we delve deep into this chapter, a quick brush up on the basic terminologies will help. We broadly define a “client” as anyone in need of services. The terms “client” “customer,” and “buyer” imply a firm (or even an individual) that is seeking services, from either internal service providers (like the client’s own internal IT department, or its subsidiary) or from external service providers (a vendor/supplier). The term “client-entity” implies any entity that is owned by the client, such as the client’s internal IT department or its subsidiary. In the same vein, the terms “vendor,” “supplier,” “third party,” and external “consultant” imply an “external service provider” or a “non-client entity” whose business is to provide services to the client.

489

The Journey to New Lands

The two cross-organizational terminologies that deal with transfer of work within or across organizations are “insourcing” and “outsourcing.” A company “insources” work from its own IT personnel and “outsources” work to the IT personnel in an external company (vendor). In other words, insourcing implies that the service providers are client employees (who work for its subsidiary or internal IT department); whereas outsourcing implies that the service providers are external IT personnel (such as employees of vendor/supplier firms or external consultants). The two cross-border terminologies that deal with transfer of work within or across countries (or geographical borders) are “onshoring” and “offshoring.” A company “onshores” work to IT personnel residing in its own country, and “offshores” work to IT personnel some other country. In other words, onshoring implies that the service providers are IT personnel located in the same country as the client; this is also known as domestic-sourcing or onshore-sourcing. On the Figure 1. (In/out) sourcing from (on/off) shore

490

other hand, offshoring implies that the service providers are IT personnel located in a country, which is different from the client’s country; this is also known as global-sourcing or offshoresourcing. For example, both China and India may be considered as “offshore” countries with respect to the United Kingdom or USA. As shown in Figure 1, these basic cross organizational and cross border terminologies can lead to four combinations: (1) onshore-insourcing (or domestic-insourcing) implies that both the client and its internal IT department (or subsidiary) that provides IT services is located in the same country, (2) offshore-insourcing (or global-insourcing) implies that the its IT department (or subsidiary) that provides IT services is located in a country that is different from the client’s country, (3) onshore-outsourcing (or domestic-outsourcing) implies that both the client and the vendor personnel are located in the same country, and (4) offshore-outsourcing (or global-outsourcing) implies that the vendor personnel are located in

The Journey to New Lands

a country that is different from the client’s country. In this chapter, we will be discussing about offshore-insourcing or (global-insourcing).

The conceptual Framework/model for Offshore-insourcing Figure 2 gives the proposed conceptual framework/model for offshore-insourcing that will be used in this chapter. Simon (1960, as cited in Dibbern et al., 2004, pp. 14-17) had proposed a fourstage model for decision making that comprised of the stages (1) intelligence, (2) design, (3) choice, and (4) implementation. Dibbern et al. (2004) had adapted Simon’s model in their literature survey of information systems outsourcing. Similarly, Simon’s model is adapted here for offshoreinsourcing, by modifying Simon’s intelligence, design and choice stages into the why, what, and Figure 2. Conceptual framework/model for offshore-insourcing

where stages respectively and clubbing these three stages into the decision phase. Furthermore, we break down the final implementation phase into the two stages of “how” and “outcomes.” Hence, the offshore-insourcing process has been assumed to have two distinct phases, namely the decision phase and the implementation phase. In the decision phase a company asks the following three questions: • • •

Why to insource from offshore What to insource from offshore Where to offshore

These three decision-phase questions (or stages) can be combined into the single decision question, that is: “‘Why’ to insource ‘what’ from ‘where’ in offshore?” Furthermore, the implementation phase comprises of two stages that asks the “how” question and finally evaluates the outcomes: • •

How to insource from offshore Evaluate outcomes

In the “Why to insource from offshore?” stage we ask the question of whether a company needs to insource from within or outsource to a vendor, and whether the company needs to go offshore to another country? If the company does decide go offshore to another country, then, should it look at an offshore-based vendor (for offshoreoutsourcing) or should it set up its own offshore subsidiary (for offshore-insourcing)? Moreover, given that there are so many concerns about offshoring in the media and in the public, how should the company filter out the realities from the myths and make a knowledgeable decision? In the “What to insource from offshore?” stage we ask the question on how a company can select the IT functions that it should insource from offshore? In the “Where to offshore?” stage we look at the criteria for choosing an offshore destination, and also survey some of the popular

491

The Journey to New Lands

offshore countries and cities (see Appendix I of this chapter). In the “How to insource from offshore?” stage we discuss and prescribe the processes for creating the team that will be implementing the decision to offshore, managing change, getting the offshore office ready, analyzing options for recruiting at offshore, and the setting up onshore-offshore coordination for recruitment and induction training. We also discuss the global delivery model and the management of the IT professionals at onshore and offshore. Finally, we evaluate the outcome of the entire offshore-insourcing process, and use the feedback to further improve the decision making and implementation phases.

dEcisiOn: why TO insOurcE FrOm OFFshOrE? The decision question “why to insource from offshore?” can be broken down into the questions “why to insource?” and “why to offshore?”

why to insource? Hirschheim and Lacity (2000) conducted fourteen case studies that assess the experiences of companies with outsourcing. They provide evidence that companies need not necessarily turn to outsourcing to improve IT performance, and believe that IT managers can often times replicate a vendor’s cost reduction tactics, provided they get the much needed support from their upper management. In many of the case studies it was found that large scale outsourcing, often led to lower than expected flexibility and lower than expected service levels from the vendor’s IT personnel. Furthermore, a number of contracts are either being renegotiated or being terminated; and some companies are considering pulling their IT functions back in-house once an outsourcing contract is terminated. Outsourcing is not the panacea for all ills. At shown in Table 1, both insourcing and outsourcing have their pros and cons (Ang & Straub, 1998; Aubert, Rivard, & Patry, 1996; Currie &

Table 1. Insourcing vs. outsourcing Insourcing

Outsourcing

 More suitable when it is difficult to define requirements (uncertainty)

 Enables organization’s personnel to focus on its core business, by outsourcing the non-core activities

 More control over strategic assets, resources and IT personnel

 Assists in major reorganizations by making transitions smoother & quicker

 In the absence of competent vendor personnel in the market, insourcing is the only option

 Frees up in-house resources and IT personnel for new and innovative business/technology development, by turning over legacy systems to vendors

 Lower risk of intellectual property rights violation by internal IT personnel (in comparison to difficulty in negotiating IP rights with external vendors)

 Quality and service improvements from established service providers

 Better when a very high degree of firm specific business knowledge is required by IT personnel (since knowledge transfer to external vendor personnel would be difficult)

 Access to technical expertise of external IT personnel, when the same is not available internally.

 No threat of opportunistic behavior by external vendor personnel

 Financial advantages: • Cost reduction (possible reduction in IT personnel costs) • Costs are predictable (determined while negotiating outsourcing deal) • Reduction in Capital expenditure (for IT infrastructure)  Flexibility and control in increase/decrease of IT manpower as needed

492

The Journey to New Lands

Willcocks, 1998; Earl, 1996; Jurison, 1995; Loh & Venkatraman, 1992, 1995; Nam, Rajagopalan, Rao, & Chaudhury, 1996; Nelson, Richmond, & Seidmann, 1996; Poppo & Zenger, 1998).

why to Offshore? Why is there such great excitement about offshoring work to IT personnel in the other countries? Is offshoring sustainable over the long-term or is it just a passing fancy? Literature suggests that offshoring of IT work will continue to grow for the following reasons: •

•

•

•

Access to large markets with high growth potential: The favorite locations for offshoring like China and India (see Appendix I) are also large and growing markets. It is strategically important to establish an early presence in such developing countries which have a higher growth potential than the relatively mature developed countries (Apte & Mason, 1995, p. 1252). Cost savings: The offshoring option offers lower cost advantages (primarily due to lower salary levels of offshore IT personnel) and is probably biggest driver behind the offshoring trend (Apte & Mason, 1995, p. 1252; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002; Sobol & Apte, 1995). Fastest time to market by working round the clock: Potentially all 24 hours of the day can be devoted to any task by globally distributing the work to IT personnel across multiple time zones. This for example can lead to a faster cycle time for software production (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002), and allow continuous 24x7 operations and monitoring of critical IT functions and infrastructure by IT personnel (needed for customer service, network management, production support, etc.). Latest technologies and the Internet: The latest technologies allow collaboration

•

•

•

among globally distributed IT professionals (Carmel & Agarwal, 2002, p. 66). The internet has greatly helped the phenomenon of IT sourcing by allowing personnel across the work to easily share information. Communication technologies such as e-mailing, teleconferencing, videoconferencing, and instant-messaging allow for better coordination in spite of the geographic distances. Modular design of IT tasks: Certain IT tasks (for e.g., in IT production or support) can be designed in a modular fashion (i.e., they can be broken down into smaller and relatively independent modules) that makes it easier to distribute the work globally among IT personnel with reduced transactions costs (cost of coordinating work activities among the personnel), and allows for easier synchronization, communication, supervision, and feedback mechanisms among the IT personnel (Carmel & Agarwal, 2002, p. 66). Skilled pool of IT professionals: There is large supply of qualified IT professionals in many offshore destinations like India (Apte & Mason, 1995, p. 1252; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002). Scalability and bench-strength: The sizable supplies of qualified low-cost IT personnel at offshore allows companies to have a certain number of IT personnel in the “waiting mode” i.e. waiting to be assigned to projects, and are used to quickly ramp-up projects with IT personnel when the need arises. Having a small number of low-cost but highly skilled personnel in the “waiting mode” for being assigned to projects is also known as “bench strength,” and allows the firm to respond rapidly to sudden requirements. Alternatively, companies can also hire IT personnel rapidly from the job market, thanks to the huge availability of qualified low-cost IT professionals in many of the offshore destinations (like China and India).

493

The Journey to New Lands

Concerns About Offshoring However there are some valid concerns about offshoring work to IT personnel in other countries, which include: (1) problems of communication and coordination, (2) cultural differences, (3) lack of trust, (4) difficulties in arranging visas/workpermits, (5) offshore unit’s lack of company/ industry specific domain knowledge (both business & technical), (6) lack of control over quality and schedule, (7) possible violation of intellectual property rights, (8) unclear government attitude towards cross border data flow and trade-in services, (7) unsatisfactory infrastructure in the offshore destination, (8) possibility of an unstable economic, political, or social environment, (9) security of physical assets and intellectual capital, and privacy, (10) knowledge transfer, and (11) managing uncertainty in IT requirements and unanticipated changes in scope of offshored work (Apte & Mason, 1995, pp. 1252-1253; Carmel & Agarwal, 2002, p. 68; Sinha & Terdiman, 2002; Sobol & Apte, 1995, p. 271). Some of the reasons that motivate companies to insource their IT needs from their offshore subsidiary (or offshore IT department) rather than to outsource them to an offshore (external) vendor are: (1) greater information & data security, and intellectual property (IP) protection, (2) absence of some specific expertise in the offshore vendors, and (3) possibility of gaining greater low-cost benefits by running one’s own subsidiary, rather than pay high margins to vendors (Karamouzis et al., 2004). However, some of these offshore subsidiaries may be short-lived due to several factors that make it challenging to sustain it as a competitive option. We categorize the contributing factors as follows: •

494

Difficulty in achieving economies of scale: “Economies of scale” will be difficult to

•

achieve since a company has a finite limit to its internal needs. An alternative is to convert the internal IT department (or subsidiary) to a “spin-off.” A spin-off is a company, which was originally an internal IT department (or subsidiary) of its parent company, but is now independently selling its services to the market. This would help in expanding the spin-off’s revenue base and number of IT personnel, and thereby achieve greater economies of scale, but this will also involve additional investments/costs. (Karamouzis et al., 2004; Willcocks and Lacity, 1998, p. 26, pp. 31-32) Costs of technology infrastructure and human resource management: The recurring investment costs required for staying updated with the latest technology and infrastructure can cause the offshore subsidiaries to be less cost-efficient. Also, costs for recruiting and managing IT personnel in a new and increasingly competitive labor market can grow. Additionally, management time and effort spent to manage one’s own offshore subsidiary or IT department would be higher than when the IT work is outsourced to vendor personnel (Karamouzis et al., 2004)

dEcisiOn: whaT TO insOurcE FrOm OFFshOrE? A two step approach might be helpful to answer the question “What to insource from offshore?” The first step would be to “look inside” and select the IT functions can be insourced from offshore IT personnel, starting with the “easiest first”. The second step would be to “look outside” and find out about the skills of the IT personnel available at offshore.

The Journey to New Lands

step 1: look inside—select the iT Functions that can be insourced from Offshore, starting with the “Easiest First” How does a company decide what IT functions are suitable for insourcing from offshore? IT functions are easiest to offshore when a company is confident about the following (Apte et al., 1997; Hotle & Iyengar, 2003; Iyengar & Terdiman, 2003; Sobol & Apte, 1995): 1.

2.

3.

4.

5.

Maturity of associated processes is high; processes are well defined and documented • For example, a company with a higher CMM rating will be better at insourcing of software development from offshore, since its processes are of the higher quality and its IT personnel are educated about the best quality processes Project management skills of IT managers and professionals are good at both and onshore and offshore Requires lesser degree of interaction (communication and coordination) with onshore management or onshore users, and face-to-face interaction between onshore and offshore IT personnel is not necessary • Activities that require higher degree of user interaction should not be carried out at offshore. The extent of user interaction is inversely proportional to possibility of carrying out an activity remotely. Hence, initial requirements gathering, analysis and design phases are generally conducted at onshore by IT professionals High availability of offshore IT professionals who have high levels of skills required for the IT function Ease of knowledge transfer of both business domain knowledge and special technology skills to IT personnel at offshore

6.

Requirements can be well defined and documented by IT personnel, and there is less uncertainty • Documentation & prioritization: Requirements-gathering and management is best handled face-to-face. The gathered requirements must be well documented and prioritized by IT personnel at onshore, before sending them to offshore IT personnel • Requirements change management: Often users of IT systems don’t know what they want, or are unable to define them satisfactorily. Hence changes to requirements over time are common. If the frequency of these changes can be controlled, and brought down then the IT function can be more comfortably offshored

Based on the above considerations suitable IT functions should be chosen for insourcing from offshore IT personnel.

step 2: look Outside—Find Out about the skills available at Offshore A suitable investigation would be required to find out more about the skills of IT professionals at the prospective offshore destination. But how does one find out the skills of the IT professionals in a prospective offshore destination? One option may be to survey “what services the offshore based software service providers (vendors) have to offer?” For example, if India is a prospective offshore destination, and if some large India based software service providers can provide certain IT services for certain industries, then, there is a good probability that skilled IT professionals are available in India for those IT functions (Marriott & Wiggins, 2002). Though a company that is attempting offshore-insourcing of IT will not actually outsource to any of these vendors, these

495

The Journey to New Lands

kinds of surveys can provide valuable information about the skills available in the offshore destination. As an example, we have listed the services offered and the industries targeted by a large India based software services provider named “Infosys” (http://www.infosys.com) in Appendix II at the end of this chapter, which would give an idea about the capabilities of the IT personnel at the respective offshore location (Infosys, 2005b, 2005c).

•

dEcisiOn: whErE TO OFFshOrE? Kempf, Scholl, and Sinha (2001) reported the evaluation of competitiveness of various countries as preferred destinations of offshoring, based on studying factors like infrastructure, IT personnel availability, capital and entrepreneurship. The characteristic of the labor pool of IT professionals was used to filter an initial list of 33 countries to a short list of 17 countries, namely: China, India, South Korea, Malaysia, Philippines, the three Baltic States, the Czech Republic, Hungary, Poland, Russia, South Africa, Argentina, Brazil, Chile, and Mexico. For further short listing, infrastructure, capital, and risk ratings of countries were then used by Kempf et al. (2001) to identify the following key regions for offshoring:

•

•

496

Brazil is possibly the best suited for crossborder collaboration opportunities among the four countries short-listed from the Americas (Argentina, Brazil, Chile and Mexico). Though currently below a lot of radar screens, Brazil displays some strong fundamental characteristics that make it a potentially attractive country to consider. One of Brazil’s key attributes is the level of telecommunication and Internet infrastructure deployed. China has created an environment supportive of cross-border collaboration. The labor

•

force appears to be strong in high technology and data from other industry sources indicate that China offers very competitive charge rates in the IT sector. Measures of China’s infrastructure are also positive, though, like India, China does not seem to be spending as much on investments in telecommunications. In fact between 1995 and 1999, China spent a total of $5.9 billion—only slightly more than the Philippines’ $5.1 billion. The Baltic states of Estonia, Latvia and Lithuania offer some interesting opportunities for cross-border collaboration. While data on wages for these three countries is unavailable, each of these countries has some of the highest numbers of scientists and engineers in research and development per million people of all the countries studied. India continues to be the predominant offshore player with software and services. India has a large, technologically advanced labor pool. In fact, the U.S. Immigration and Naturalization Service (INS) reports that Indian nationals received 42.6% of the H1-B temporary skilled worker visas issued between October 1999 and February 2000. Also, government support of its tertiary education systems and private IT training institutions, along with a low-wage-rate environment, continues to make India attractive as a source of skilled technologists. However, the economic data collected in our research reflects a dichotomy between the growth of demand for IT services and the development of telecommunication and information technology infrastructure that may cause concern in the future.

Going by reports in the media and various other sources, as of now China and India are among the topmost players in offshore-insourcing arena (Cohen, 2005; Karamouzis & Young, 2004; Kempf et al., 2001; Wiggins, Datar, & Liu, 2002a; Wiggins, Datar, Leskela, & Kumar, 2002b).

The Journey to New Lands

The offshore-insourcing scenarios of these two countries have been discussed in Appendix I of this chapter. However, it is important to note that these are not necessarily the only countries that can successfully offer the advantages of offshoreinsourcing. Though China and India seem to be among most “popular” destinations at present, this can change in the future. The countries that offer the optimum balance in terms of cost, infrastructure, accessibility, skilled IT personnel, political climate and social acceptability would be “right” destinations in the future, depending on the needs of relevant company. The following factors need to be considered while considering an offshoring location (Iyengar, 2005; Karamouzis & Young, 2004): 1. 2. 3. 4.

5. 6.

7.

8.

9.

Cost of IT personnel: Salaries for IT personnel vary from location to location Infrastructure: Telecommunications, roads, real estate, water, and power Access: International access and quality accommodation Talent pool/skills: Availability and diversity of skilled IT personnel, and academic institutions that can continuously generate such skilled IT personnel with diverse skills Cost of living Political climate and support: National and state/local governments, political ideology, and religious tolerance Quality of life: Housing rates, cosmopolitan feel, religious tolerance, transportation, crime rate, climate and public infrastructure Expatriate friendliness: A job posting at the chosen location should not be considered a hardship assignment by the expatriates Service-line capabilities: Some locations may be specialized hubs for particular types of industries and services

implEmEnTaTiOn: hOw TO insOurcE FrOm OFFshOrE? Various issues related to offshore-insourcing were discussed in the earlier sections (i.e., decision making phase), namely “why to insource from offshore?,” “what to insource from offshore?”, and “where to offshore?” We find that there is a scarcity of literature on “how” to insource from offshore. Therefore, a conceptual approach is adopted in this section where the author utilizes his experience of working in the Indian software industry to come up with a possible conceptual framework that attempts to answer the “how” question1.

how to create the Offshore implementation Team? An “Offshore Implementation Team,” which is the “core” team with the responsibility of overseeing the implementation of the offshoring operation, can be created. This core team may comprise of the company’s onshore employees and/or external consultants. The offshore implementation team can use the assistance of the onshore company’s high-level management and various external entities such as legal consultants, HR consultants, telecommunications/network consultants and facilities/infrastructure consultants. Visas/permits will need to be processed and issued for all offshore implementation team members and other people that will be traveling to offshore. For example as shown in Figure 3, the offshore implementation team may consist of a project manager, human resource coordinators, technology and infrastructure coordinators, and an offshore-insourcing process coordinator. The “project manager” (of this offshore implementation project) will have general managerial responsibilities towards setting the offshore

497

The Journey to New Lands

Figure 3. Creating an offshore implementation team

facility, will interact with the company’s top level management, and will have the various coordinators reporting to him or her. The “HR coordinators” will take up responsibilities of organizing training, staffing and related scheduling and management activities. The “technology and infrastructure coordinators” will take up the responsibility of network/system infrastructure management, which involves procurement and setting up of equipment for the offshore facility, and related scheduling and management activities. The “offshore-insourcing process coordinators” should ideally be people with prior experience in setting up such offshore facilities, in advising and coordinating the offshoring process, in change management, in addressing challenges of the offshoring process, and in related risk mitigation activities. The offshore implementation team will interact with various other groups like the company’s top level management, the offshore telecommunica-

498

tions and networking group, the offshore facilities infrastructure management group, the legal consultants, and the offshore HR consultancy firms. The company’s top level management will have the responsibilities of sanctioning funds for the offshore implementation project, monitoring the business value of the offshore implementation exercise, getting the go-ahead from the firm’s shareholders, championing change management, reviewing the status at identified milestones, and making relevant decisions and approvals for future phases (Kobyashi-Hillary, 2004, pp. 231-248). The offshore telecommunications and networking group will be responsible for designing the core network that will be required to set up offshore operations, shipping/installing/configuring of the core network infrastructure in the new offshore office, setting up connectivity (wide area network or WAN) among the onshore and offshore offices for secure data communication, and setting up of telecommunication networks such as phone lines and internet service (CMIS, 2004). The offshore facilities infrastructure management group can help, for example, in either setting up the offshore office in a previously established IT Park which houses other international companies, or actually hiring contractors to build a new offshore facility building. The facilities should include office furniture, power systems, cooling systems, and network cabling (CMIS, 2004). The legal consultants would provide counseling on labor laws, offshore telecom regulations, data privacy and cross-border information transfer, offshore intellectual property laws, taxation, software copyright and license laws, etc.… (Kobyashi-Hillary, 2004, pp. 177-190) The HR consultancy firms will be responsible for advertising, creating brand awareness in the offshore labor market, and assisting the offshore implementation team’s HR coordinators with staffing activities like executive search, recruitment, training and temporary staffing (Cerebrus Consultants, n.d.; Ma Foi, n.d.).

The Journey to New Lands

By benchmarking against companies that have successfully set up offshore-insourcing operations (see Appendix I), the offshore implementation team must plan and then compare its offshore implementation performance. Appendix-I, which addresses the question “Where to offshore?” provides a list of the 15 biggest InfoTech companies in the world, most of which have an offshore presence in China or India. These companies may be used as benchmarks of successful offshoreinsourcing.

how to manage change among Onshore iT personnel? Iyengar and Morello (2004) suggest that the questions listed in Table 2 are asked by the onshore business unit staff and onshore IT professionals whenever they hear the dreaded “offshore” word in their organization. IT professionals at onshore share the concerns of the business unit, and also have additional concerns since they are the primary individuals affected by any offshoring decision. Staff members in the business/administrative units are primarily concerned about changes in work procedures, loss of expertise, personal benefits, and risks and the need for a cautious approach. IT professionals are additionally concerned about the possibility of loss of their own jobs and those of

their friends, their perpetually uncertain future, and their own capabilities to handle such a change. Companies may face non-cooperation and lack of initiative from unmotivated employees while offshoring. Iyengar and Morello (2004) further suggest three kinds of challenges that companies encounter in early stages of offshoring, namely: emotional, communications and execution challenges, which are explained in Table 3. Emotional challenges are often triggered by emotion rather than reason; communication challenges involve misinformation and distortion; and execution challenges represent practical concerns in performing successful offshoring. Hence, a communication strategy should be created to introduce the concept of an offshore IT team and to address the fears of the existing onshore IT professionals about offshoring. Communication can be affected through periodic staff briefings, weekly newsletters, increased notice board activity, etc. The company moving offshore might want to undertake awareness training sessions for the company’s onshore employees to familiarize them with their proposed offshoring plans and processes, and hence lead to better mutual understanding. Managers should communicate offshoring plans with maximum details and honesty to the onshore IT personnel. Failure

Table 2. Business unit and IT staff concerns on offshoring (Compiled from Gartner Research, Iyengar and Morello (2004)) Business Unit Staff concerns on offshoring

IT Staff concerns on offshoring (in addition to concerns shared by Business staff)

• “How will my business unit get the work done now?”

• “Will I lose my job?”

• “Won't we lose our subject matter expertise?”

• “Will my friends lose their jobs?”

• “Why should I support this effort? What's in it for me?”

• “Even if I make it through the first round of layoffs, what happens next?”

• “Isn't this initiative risky?”

• “They're only keeping me through the transition, so why should I help out?”

• “Shouldn’t we take things slowly--one step at a time?”

• “How can I possibly perform in my new role—one that I don't like and am not trained to handle” • “Will I need to work additional hours or shifts so that I will be able to communicate with my offshore counterparts?”

499

The Journey to New Lands

Table 3. Change management challenges (Compiled from Gartner Research, Iyengar and Morello (2004)) Emotional challenges

Communications challenges

Execution challenges

• Emotions: disbelief, anxiety, fear, denial, shock, resentment, anger, stress, resistance, disengagement and a desire to leave the organization. As a result, productivity falls

• Information accuracy: Delays, secondhand information, distortion

• Tolerance: Lower initial tolerance for offshoring by normal employees

• Fear: employees wonder if they will lose their jobs next

• The Media: Misinformation from media stories causing panic and resentment

• Processes: IT process need to be redesigned for more complex global delivery

• Management communication: Conflicting information from managers

• Knowledge Transfer: Business & IT knowledge transfer to offshore • Control: Power & control of onshore management/staff over offshore • Transition: Long transition time and employee attrition during this time

to do so effectively might result in a backlash and lower productivity from onshore IT personnel, and can adversely affect the employer’s image in the job market (Morello & Terdiman, 2004). The communication strategy can include the following rules (Morello & Terdiman, 2004): 1.

2.

3.

4.

500

Make a communication plan for onshore IT personnel, and communicate transparently all that is known and not known Convey the truth to onshore IT personnel about the intentions and reasons for offshore sourcing Analyze the strengths, weaknesses, opportunities, and threats for the departments/ projects and IT personnel most closely affected Clearly state the jobs to be retained at onshore, and state if the affected IT professionals would be retrained for other roles by identifying new opportunities, career options and transition periods for the affected IT professionals

How to Get the Offshore Office ready for iT personnel? The offshore implementation team will need to get certain important things in place (KobyashiHillary, 2004, pp. 123-248) before staffing the offshore office:

• • •

Getting the Facilities Infrastructure ready Getting the Technical Infrastructure ready Other tasks would include: ○ Establishing a banking relationship ○ Selecting legal representation ○ Setting up an accounting system ○ Obtaining required licenses/permits ○ Obtaining insurance and establishing a security plan

One of the major tasks for a company moving offshore is to get the Facilities Infrastructure ready (CMIS, 2004). The offshore office can be located in a previously established offshore development

The Journey to New Lands

park with other international companies, or can be purchased or built in a suitable location. In case the facility is leased, general maintenance and janitorial services need to be included in the lease agreement. The facilities should feature all of the basic elements for establishing a working office for IT professionals that includes office furniture, power, cooling, initial telecomm, and network cabling. Appropriate power and cooling will need to be provided for any technical equipment required. Another major task would be to get the Technical Infrastructure ready (CMIS, 2004). The offshore office will need to be highly self-sufficient, and yet remain connected with the onshore corporate location for productive collaboration between IT professionals at offshore and onshore. The technical infrastructure that would be needed by offshore IT personnel include e-mail servers, file servers, Web servers, application servers, database servers, personal computers, printers, software and also the network infrastructure. Licenses for the software should allow its usage in the offshore location. A network operation team has to design the core network required to support the IT personnel’s offshore operations. Time should be allocated to ship, install, and configure the core network infrastructure in the new offshore office. For example, a private MPLS (Multi-protocol Label Switching) wide area network (WAN) between the offshore office and the onshore facilities may be set up for secure, inter-corporate data communication. Telecommunications networking (phones, PBX (private branch exchange) equipment, Telco, ISP (Internet service provider) setup) will also need to be done.

How to Plan Staffing at Offshore? An organization chart, staffing projection, and staffing budget will have to be made (CMIS, 2004):

•

•

•

An organization chart for the offshore staff and IT personnel should be developed. It should also explain how the offshore office should report into the onshore office. An offshore staffing projection describing the skill set of each staff member and IT professional, complete with approximate salary bands appropriate for the offshore region will be needed. A staffing budget will need to be prepared, and this will include costs for legal procedures, consultants, training, travel, communication, accommodation and various infrastructure facilities.

how to make use of the recruiting Options at Offshore? The options for recruiting at offshore possibly include (1) direct/permanent hiring, (2) contract hiring, and (3) contract-to-permanent hiring (Moses Associates, n.d.; Schweyer, n.d). The pros and cons for each option should be studied. Also, the labor laws of the offshore region need to be studied in great detail (Kobyashi-Hillary, 2004, pp. 177-190). Permanent hiring is highly recommended if the position requires the IT professional to have access to highly critical information systems, have security rights/privileges, or if the position requires a managerial role. If a company can groom and retain its offshore managerial and IT talent, then there is greater knowledge retention within the company, and there is a lesser threat of leakage of the company’s proprietary or sensitive information. Since there is a greater dependence on the knowledge possessed by the permanent IT personnel on key processes/tools/functions, if a key skilled employee quits, it is harder to find a replacement that can be equally knowledgeable and productive (however, strict emphasis on documentation of processes/tools/functions across the organization can help new hires to learn quickly). Permanent IT personnel also increase

501

The Journey to New Lands

the companies’ benefits costs, they may become lackadaisical and may take their job for granted, and during business slumps it is expensive and difficult to manage the surplus manpower. Contract hiring involves hiring IT personnel temporarily on projects (such as for project work involving programming or engineering services) and the contracted IT personnel may be released by the company at any point. Contract hires can be more responsive to their responsibilities since they don’t take their job for granted. They try to stay updated with the latest technology and retrain on their skills. This is a more cost-effective approach because during business slowdowns the contracted IT personnel can be easily released. However, contract employees have very low job-security and this may lead to high attrition; also there is significant knowledge loss when the contract hire is released (there is scope for intellectual capital theft, and sensitive data may leave the company). When the economy is booming, it is difficult to find quality IT personnel in the competitive job market and getting good employees as contract hires will be a tough call. In Contract-to-permanent hiring, the IT professional is hired on a contract basis for a fixed period of time, beyond which there is an expectation that they could be converted into permanent employees based on performance. The company can groom, and test the technical knowledge and team skills of the IT professionals before deciding to retain them full-time. This ensures quality staffing. If business declines during the “term-of-contract,” the IT professional can be easily released. Offshore managers must be ideally hired on a permanent basis, because continually changing managers will significantly effect and slowdown the effective execution of IT and administrative functions. Moreover, managerial skills are rather hard to come by, and managers need to build a long-term rapport with their counterparts at onshore to better coordinate the operations of the two

502

offices and develop a good working atmosphere in the offshore facility. Non-managerial staff at offshore can be hired on a contract-to-permanent basis, that is they will be on a contract basis for a limited period (say a year), beyond which they will either be made permanent or released (based on their performance). This allows the management to observe their work before making a permanent hiring decision. It is necessary to groom and build managerial and IT talent at offshore. To reduce the effects of attrition, there needs to be a strict enforcement of documentation of key processes, tools and functions, which in turn leads to better knowledge management. During temporary labor spikes, the company can step up the hiring of contract personnel on a project to project basis and release the temporary hires when demand declines. This will help the offshore company to be flexible and agile in terms of meeting business and staffing needs while keeping costs down.

how to use Expatriates for Offshore? Companies can bridge the gap of time zones, interaction styles and flawed communications by using the talents of individuals with multicultural fluency that is often found in expatriates who have been immersed in the customs, language and workplace rhythms that are essential in the diffusion of new offshoring processes with the overall enterprise (Bittinger, 2003). Some personnel from onshore may be deputed at offshore, and some personnel from offshore may be deputed at onshore, to bridge the onshore-offshore divide. Bittinger (2003) reports from a study by Hilary Harris (Cranfield School of Management, Cranfield University, UK) that organizations are using four types of international work assignments: •

Long-term: The expatriate and his or her family move to the host country for more than one year

The Journey to New Lands

• • •

Short-term: Assignments are less than a year, and may involve family accompaniment International commuter: The employee commutes on a regular basis, while the family remains at home Frequent flyer: The employee takes frequent trips abroad, but does not relocate

Candidates selected for expatriate roles should preferably have work experience abroad for better cultural sensitivity and adaptability, language/ communication/interpersonal skills, leadership skills, ability to work and collaborate from remote locations, understanding of parent companies mission, vision and culture, and most importantly the person’s and the person’s family’s willingness to travel (Bittinger, 2003). Bittinger (2003) states that the biggest reason why the expatriate strategy sometimes fail is due to soft family related issues like resistance from spouse due to various personal and career related reasons, inability to adapt to foreign culture, or plain homesickness.

how to carry Out the recruitment and induction Training process? Will a company’s current structure be able to support the offshore recruitment process or will the company need to employ the services of a local HR consultant at offshore? The task of selecting the right staff and IT professionals and creating the right organization structure may require localized experience. A company moving offshore might want to maintain authority over the entire advertising, hiring and training process to gain greater control over the skill level and service quality of new employees. Figure 4 shows a possible example of how the recruitment and induction training may be conducted.

Recruitment Hiring of staff and IT professionals at offshore will involve many tasks (see Figure 4). Brand awareness should be created by advertising the recruitment program in the media (such as leading newspapers) and ensure that the job postings and advertisements have been posted on the company Web site and others job-search Web sites. Most HR consultants provide two types of selection services: database selection and advertised recruitment (Ma Foi, n.d.). Database selection uses an automated Web enabled database that allows for speedy matching of candidate profiles with recruiting company’s needs. Advertised recruitment can be used for tasks like “head-hunting” to attract specific segments of personnel such as senior managers, and also for skill specific recruitment. Interviews with short listed candidates need to be arranged. Interviews at offshore may be conducted by managers at onshore through videoconferencing; and in such a scenario, the difference in time-zones between onshore and offshore need to be taken into account. Access to facilities such as rooms, computers, internetconnectivity, projectors, printers, teleconferencing, videoconferencing, etc… should be available at interview sites.

Induction Training The newly hired managers from offshore may need to travel to the onshore offices to acquaint themselves with the company’s business, work culture, policies, practices, and people (see Figure 4). During this time, managers from offshore can study the onshore company’s business and IT work. Information gathered at onshore needs to be clearly documented so that the entire organization, including new employees, may benefit from it.

503

The Journey to New Lands

Figure 4. Staffing at offshore (A possible recruitment and induction training process)

All the other offshore hires can be trained on the same matters by their offshore managers (when the managers return to offshore from onshore after their training), or by the onshore managers (by videoconferencing, or they can fly down from onshore to offshore). The knowledge transfer process for

504

the new employees who haven’t traveled onshore may be limited by a lack of face-to-face contact. Though it might be advisable to send several of the offshore employees to onshore for training, this may involve a huge cost burden (temporary relocation, compensation, and travel needs).

The Journey to New Lands

how to manage the iT personnel at Onshore and Offshore? How does a company overcome issues of communication, coordination, culture, language, trust, distance, time-zones, and knowledge transfer among IT professionals at onshore and offshore? These issues can be managed with the effective and intelligent implementation of the global delivery model. The global delivery model has been used by offshore based vendors like TCS (http://www. tcs.com), Infosys (http://www.infosys.com), and Wipro (http://www.wipro.com) to successfully provide services to its onshore clients. The same global delivery model can be adopted when a company decides to insource it’s IT needs from its own offshore subsidiary. In global delivery, a company’s offshore delivery centers are located worldwide and are comprehensively networked with collaborative systems and technologies that allow the seamless integration of projects being delivered from multiple locations, and thereby provide economies of scale & scope (Tata Consultancy Services, n.d.).

The “global delivery model” is an offshoring model that takes advantage of the global talent pool to give the best value to a company in terms of cost and quality. As illustrated in Figure 5, the work is broken down into logical components, which are then distributed to suitable global locations such that the company gets access to the global talents (of IT professionals from various countries) and also creates maximum value in terms of cost and quality (Infosys, 2005a). The procedure of narrowing down on the IT functions that can be insourced from offshore has been explained in the earlier section “What to insource from offshore?” In the example shown in Figure 5 where custom development of software is selectively offshored, the onshore IT professionals can be involved in user/customer interaction & coordination, systems planning & selection, systems analysis, requirements determination, high level design, acceptance testing, implementation, and rapid maintenance support; while the offshore IT professionals can be involved in project management, requirements analysis, detailed design, coding, testing and integration, documentation, and maintenance.

Figure 5. Global delivery in offshore-insourcing of custom software development

505

The Journey to New Lands

The global delivery model (GDM) allows a company to make best use of low-cost and skilled IT professionals from across the world. This geographical and psychological distance between onshore and offshore IT personnel creates unique challenges that need to be managed. Bell (2003) proposes five steps to succeed in the implementing the GDM: (1) integrate levels of leadership, (2) focus on processes, (3) invest in cross-team training, (4) deploy collaborative tools, and (5) track success to team goals.

how to integrate levels of management at Onshore and Offshore to build a relationship? In the first step, leadership at both onshore and offshore must flow from “functional” managers (and not just the CIO/senior IT leadership), which is inclusive of various IT professionals such as application developers, infrastructure managers and project managers (Bell, 2003). The goal should be to develop a sense of team purpose and an understanding of the overall mission and vision of the onshore-offshore relationship. As discussed earlier, IT managers need not turn to offshore-outsourcing of work to external vendors for gaining access to low cost skills. Hirschheim and Lacity (2000) believe that with the support of upper management, IT managers can take the lead in replicating a vendor’s cost reduction strategies even with insourcing. The offshore-insourcing option offers lower cost advantages (primarily due to lower salary levels of offshore IT personnel) and this low cost advantage is probably biggest driver behind the offshoring trend (Apte & Mason, 1995; Carmel & Agarwal, 2002; Sobol & Apte, 1995). However, for achieving the kind of efficiency that established offshore vendors have attained, the IT managers should strive to integrate its own onshore and offshore units towards a common goal and purpose. A culture of collaboration, transparency, and accountability among the IT profession-

506

als, coupled with clearly delineated roles and responsibilities would enhance cooperation and communication between onshore and offshore (Bell, 2003; Murphy, 2003). Personal relationships should be developed between the onshore and offshore IT professionals by encouraging regular videoconferencing and by actually visiting each other’s countries to better understand the cultural and social aspects of their counterparts.

how to Focus on processes to coordinate activities of Onshore and Offshore iT professionals? In the second step, IT managers must clearly define the work processes such as workflows and scheduling. Offshoring can lead to problems of communication, coordination, and lack of control over schedule and quality (Apte & Mason, 1995, pp. 1252-1253; Carmel & Agarwal, 2002, p. 68; Sobol & Apte, 1995, p. 271). Protocols should be established for coordinating across time zones, efficiently using resources, reporting expenses, resolving open issues, and managing risk (Bell, 2003). IT tasks can be designed in a modular fashion (by breaking down the larger tasks into smaller and relatively independent modules), which makes it easier to distribute the work globally. This also reduces transaction costs (the cost of coordinating work activities between onshore and offshore), improves synchronization, and simplifies the supervision and feedback processes (Carmel & Agarwal, 2002, p. 66). Processes should be established to coordinate activities between IT professionals at offshore and onshore. 24x7 operations (needed for faster cycle time for software production, customer service, network management, production support, etc…) can be potentially achieved by globally distributing the work across time zones, and this would need effective coordination processes among the onshore and offshore IT professionals (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002).

The Journey to New Lands

The transition of IT processes from old to new state should be managed by creating a new onshore-offshore model of IT management, and establishing the new procedures and relationships with the cooperation of both onshore and offshore IT professionals. A variation of the Lewin’s “unfreeze-change-refreeze” change-management model may be used: • • •

Unfreeze: Prepare for change by unfreezing processes that are affected by offshoring Change: Implement the change by introducing new procedures and processes for effective offshoring Refreeze: Strive to regain stability by practicing and documenting the new procedures and processes. Proactively improve the onshore-offshore coordination, communication, and management processes for successful offshoring

how to invest in Training and relationship building to Overcome diversity between Onshore and Offshore iT professionals? In the third step, the firm should invest in an ongoing onshore-offshore training programs, where the main challenges to overcome are: distance, issues of trust, cultural and language differences. Training sessions should focus on improved team collaboration, planning, interpersonal skills, negotiation skills, dispute resolution skills, work processes, and knowledge transfer; all of which may be done through online self paced trainings, virtual classrooms (Web-casts, videoconferencing), or even traveling of onshore and offshore IT professionals to each other’s locations for face-to-face training (Bell, 2003). This can help in overcoming the barriers like cultural differences, lack of trust, distance, and language (Apte & Mason, 1995; Carmel & Agarwal, 2002; Sinha & Terdiman, 2002; Sobol & Apte, 1995).

Also, the earlier section in this chapter titled “How to manage change among onshore IT personnel?” gave a detailed account on managing change and addressing such issues at onshore early on; and the earlier section “how to use expatriates for offshore?” elaborated on how expatriates may be used to bridge the onshore-offshore divide.

how to deploy collaborative Tools to manage projects across distance and Time-zones? In the fourth step, challenges of communication between onshore and offshore IT professionals, and time-zones should be continually mitigated using the best of collaboration technologies. Deployment of software applications/tools for online collaboration and synchronous meetings (audio/video), e-mail, calendar functions, scheduling, assigning tasks, time accounting, process and workflow management should be considered (Bell, 2003). Effective execution of the globally distributed work across time zones would need the latest collaboration tools and technologies, which can lead to successful 24x7 operations for faster cycle time for software production (Apte & Mason, 1995, p. 1252; Sinha & Terdiman, 2002), for continuous monitoring of critical IT functions and infrastructure, and for 24x7 customer service. The internet and the latest communication technologies such as e-mailing, teleconferencing, videoconferencing and instant-messaging allow collaboration among globally distributed teams in spite of the geographic distances (Carmel & Agarwal, 2002, p. 66). Pauleen and Yoong (2001) suggest that some electronic communication channels are more effective than others in building relationships. At the same time, Compeau, Higgins, and Huff (1999) state that self-efficacy with respect to information technology use is a factor in our choices about what technologies to adopt, how to use them (if we have a choice), and

507

The Journey to New Lands

how much to persist in the face of obstacles to successful use of such technologies. Pauleen and Yoong (2001) suggest that while e-mail is a basic communication channel between distant teams, it is more suitable for communicating information and coordinating projects than for building relationships. The telephone on the on other hand is regarded as a reliable means for building relationships. Furthermore, desktop videoconferencing is seen to be an affordable alternative to face-to-face meetings, which can enhance relationships by putting face to a name; however internet based videoconferencing is taking time to catch on as it requires access to greater bandwidth. Also, Chat programs were found to set up opportunities for informal and spontaneous communication that facilitates socialization and allow participation of activities happening “backstage” where feelings and emotions can be exchanged. This seems to be in line with the findings of Compeau et al. (1999), from the perspective of an IT professional’s capacity or power to produce the desired effect (self-efficacy) of building better relationships.

how to Track individual and Team successes of Onshore and Offshore iT professionals? In the fifth and final step, using effective measures/ metrics and periodic appraisals, individual and group performance should be tracked based on an established set of achievement criteria. The links between company and project goals, team behavior, onshore-offshore collaboration, and individual contributions should be continually reinforced (Bell, 2003).

implEmEnTaTiOn: EvaluaTing OuTcOmEs While evaluating outcomes, the company should examine the open issues and develop risk mitiga-

508

tion strategies to continually improve its chances of success in the future (Currie & Willcocks, 1998). Some of the possible frustrating experiences are: (1) lower than expected service quality of the offshored work, (2) the communication/coordination/collaboration issues between the onshore and offshore IT professionals, and (3) hidden costs that were not estimated earlier. On the other hand there may be many positive outcomes too, like: (1) satisfaction with skills and quality of work by offshore IT professionals, (2) the significant cost savings, (3) faster time to market and 24x7 hour support from IT professionals worldwide, and (4) the possibility of new business at the emerging offshore markets. To evaluate the outcomes, some of the key considerations are (Murphy, 2003): • •

•

•

•

•

Onshore-offshore rapport: Do the onshore and offshore IT professionals share good rapport? Allocation of roles and responsibilities: Are the roles and responsibilities understood and agreed? Is there confidence that each party will live up to its promises and is trustworthy in its actions? Measurement of employee performance: Is there a process for measuring success achieved by offshore and onshore IT teams and professionals? Do processes exist for providing performance based feedback? Measurement of work quality and financial performance: Can satisfaction with quality and costs be accurately assessed relative to estimated expectations from offshore IT work? Business process risks: Is the business at onshore and offshore being managed right? What changes in process and governance are required to improve the success rate? Technology/Infrastructure risks: Have the right technology, infrastructure and collaborative tools been deployed?

The Journey to New Lands

•

Financial/Economic risks: Are the financials as per expectation? Are we realizing the expected economic benefits of offshoring?

Once outcomes have been evaluated, the next step is documenting the best practices and risk mitigation plans. These “lessons learned” should be analyzed in depth and the resultant feedback should be used to further improve the procedures in the decision and implementation phases of offshore-insourcing.

•

By 2008, labor rates for application-related services in India will rise by 40 to 60 %age points over 2004 rates (0.7 probability).

The previous predictions by Gartner Research point out that offshoring will continue to rise phenomenally, but the rise will be tempered by possible increase in labor rates, and security and privacy concerns. Iyengar and Terdiman (2003) interestingly note how strict immigration policies by certain governments can actually have the unintended of effect of encouraging offshoring:

Future Trends Is the trend of sourcing IT work from offshore sustainable? Or is it just a fancy paradigm that is over-hyped? Karamouzis et al. (2004) of Gartner Research list the following predictions: •

•

•

•

Gartner estimates that less than 3% of companies’ global IT services spending ($606 billion) will be on globally sourced services in 2004. By 2007, Gartner forecasts that the globally sourced component (external labor as billed to the client) of IT services spending will be about $50 billion, or about 7% of the $728 billion total. India will continue to dominate as a supplier of globally sourced services. By 2006, infrastructure services delivered in a global delivery model from India to U.S. companies will surpass $1 billion (0.8 probability). Gartner estimates that the BPO market will grow to $173 billion by 2007; of which, 14 % of labor costs will be delivered by offshore resources, with India accounting for more than half of that activity. By 2005, security and privacy concerns will replace human capital issues (such as job loss and displacement) as the No. 1 offshorerelated backlash issue (0.7 probability).

Some countries are tightening immigration rules and policies to limit the temporary or permanent migration of overseas staff into a country. This may have the unintended consequence of causing more work to be moved offshore. This is particularly the case in countries such as the United States, where business decisions are strongly driven by the need to deliver good returns to shareholders. Hence, the trend of offshoring would continue. Companies worldwide are realizing the benefits of offshore-insourcing, and at the same time managing various challenges that come with such bold initiatives (especially with regard to setting up the offshore facility for IT professionals, and thereafter managing the IT professionals).

cOnclusiOn This chapter introduced a prescriptive conceptual framework for the offshore-insourcing journey. The question “Why to insource from offshore?” was answered by discussing how a company should decide whether it needs to insource or outsource, and whether it needs to go offshore. Furthermore, the relevant challenges and issues were discussed, so that a company can make knowledgeable decisions towards making the best

509

The Journey to New Lands

use of IT professionals worldwide. The question “What to insource from offshore?” was addressed by describing how a company can select the IT functions that it should insource from the offshore IT personnel. The question “Where to offshore?” was answered stage by looking at the criteria for choosing an offshore destination and by surveying some popular offshore countries. The question “How to insource from offshore?” was addressed by describing the process of creating the team that will implement the decision to offshore, process of managing change at onshore, getting the offshore office ready, and the process of recruitment and induction training. We discussed the management of the IT professionals at the offshore center using the global delivery model. Finally, we stated the importance of continuously evaluating the outcomes of the entire offshoreinsourcing process, and of using the feedback to further improve the decision making and implementation phases. The prescriptive conceptual framework for decision making and implementation of offshoreinsourcing presented in this chapter will hopefully serve as a guide to those who are curious about the journey of IT companies to new lands.

nOTE The author may be contacted at schakrabarty@ tamu.edu or chakrabartys @yahoo.com.

rEFErEncEs Ang, S., & Straub, D. W. (1998). Production and transaction economies and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(4), 535-552. Apte, U. M., & Mason, R. O. (1995). Global disaggregation of information-intensive services. Management Science, 41(7), 1250-1262.

510

Apte, U. M., Sobol, M. G., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T., & Vepsalainen, A. P. J. (1997). IS outsourcing practices in the USA, Japan, and Finland: A comparative study. Journal of Information Technology, 12(4), 289-304. Aubert, B. A., Rivard, S., & Patry, M. (1996). A transaction cost approach to outsourcing behavior: Some empirical evidence. Information & Management, 30(2), 51-64. Bell, M. A. (2003). Virtual teams tackle the global sourcing challenge. Gartner Research Note (Publication Date: 30 September 2003, ID Number: TG-21-0414). Retrieved July 4, 2005, from http:// www.gartner.com/ Bittinger, S. (2003). Expatriates help reduce risks in offshore outsourcing. Gartner Research Note (Publication Date: 23 October 2003, ID Number: TU-21-2151). Retrieved July 4, 2005, from http:// www.gartner.com/ BusinessWeek. (2004, June 21). The InfoTech 100 (pp. 63-101). Retrieved March 14, 2005, from http:// www.businessweek.com/pdfs/2004/0425_it100. pdf Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2), 65-78. Cerebrus Consultants. (n.d.). Services. Retrieved March 14, 2005, from http://www.cerebrusconsultants.com/ Chakrabarty, S. (2006a). Making sense of the sourcing and shoring maze—The various outsourcing & offshoring alternatives. In H. S. Kehal & V. P. Singh (Eds.), Outsourcing & offshoring in the 21st century: A socio economic perspective. Hershey, PA: Idea Group Publishing. Chakrabarty, S. (2006b). Real life case studies of offshore outsourced is projects: Analysis of issues and socio-economic paradigms. In H. S. Kehal & V. P. Singh (Eds.), Outsourcing & offshoring in

The Journey to New Lands

the 21st century: A socio economic perspective. Hershey, PA: Idea Group Publishing.

Number: TG-18-9789). Retrieved July 4, 2005, from http://www.gartner.com/

CMIS. (2004). Apollo chemicals offshore development center—request for proposal. Retrieved March 14, 2005, from http://cmis.tamu.edu/web/ case-web/case2004.doc, http://cmis.tamu.edu/ web/case-web/caserules.asp

Infosys. (2005a). Global delivery model. Retrieved January 27, 2005, from http://www.infosys.com/ gdm/default.asp

Cohen, D. (2005, February 19). India special: The silicon subcontinent. NewScientist. Retrieved February 20, 2005, from http://www.newscientist. com/special/india/ Compeau, D., Higgins, C. A., & Huff, S. (1999). Social cognitive theory and individual reactions to computing technology: A longitudinal study. MIS Quarterly, 23(2), 145-158. Currie, W. L., & Willcocks, L. P. (1998). Analyzing four types of it sourcing decisions in the context of scale, client/supplier interdependency, and risk mitigation. Information Systems Journal, 8(2), 119-143. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. Hayward, B. M., Iyengar, P., Karamouzis, F., Marriott, I., Terdiman, R., Young, A., et al. (2004). The myths and realities of offshore services. Gartner Research Note (Publication Date: 24 June 2004, ID Number: G00121546). Retrieved July 4, 2005, from http://www.gartner.com/

Infosys. (2005b). Service offerings. Retrieved March 13, 2005, from http://www.infosys.com/ bpo/services.asp Infosys. (2005c). Services listing. Retrieved March 13, 2005, from http://www.infosys.com/services/ default.asp Iyengar, P. (2005). How to assess cities in India for your IT outsourcing needs. Gartner Research Note (Publication Date: 11 March 2005, ID Number: G00126067). Retrieved July 4, 2005, from http:// www.gartner.com/ Iyengar, P., & Morello, D. (2004). Ease global sourcing stress with a change management program. Gartner Research Note (Publication Date: 22 September 2004, ID Number: G00123099). Retrieved July 4, 2005, from http://www.gartner. com/ Iyengar, P., & Terdiman, R. (2003). Decide where to do application work with global delivery. Gartner Research Note (Publication Date: 28 January 2003, ID Number: DF-18-9786). Retrieved July 4, 2005, from http://www.gartner.com/ Jurison, J. (1995). The role of risk and return in information technology outsourcing decisions. Journal of Information Technology, 10(4), 239247.

Hirschheim, R. A., & Lacity, M. C. (2000). The myths and realities of information technology insourcing. Communications of the ACM, 43(2), 99-107.

Karamouzis, F., & Young, A. (2004). India maintains its offshore leadership position. Gartner Research Note (Publication Date: 30 June 2004, ID Number: G00121630). Retrieved July 4, 2005, from http://www.gartner.com/

Hotle, M., & Iyengar, P. (2003). Offshore application sourcing and the CMM. Gartner Research Note (Publication Date: 28 January 2003 ID

Karamouzis, F., Young, A., Iyengar, P., Terdiman, R., Marriott, I., & Brown, R. H. (2004). Gartner’s global offshore sourcing predictions. Gartner Re-

511

The Journey to New Lands

search Note (Publication Date: 28 June 2004, ID Number: COM-22-9634). Retrieved July 4, 2005, from http://www.gartner.com/ Kempf, T., Scholl, R. S., & Sinha, D. (2001). Cross-border collaboration: a service aggregator model for offshore IT services (Executive Summary). Gartner Research Note (Publication Date: 5 October 2001, ID Number: ITSV-WWEX-0037). Retrieved July 4, 2005, from http:// www.gartner.com/ Kobyashi-Hillary, M. (2004). Outsourcing to India: The offshore advantage. Berlin, Germany: Springer-Verlag. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the kodak effect. Information Systems Research, 3(4), 334-358. Loh, L., & Venkatraman, N. (1995). An empirical study of information technology outsourcing: Benefits, risks, and performance implications. Proceedings of the 16th International Conference on Information Systems (pp. 277-288). Amsterdam, The Netherlands. Ma Foi. (n.d.). Staffing solutions. Retrieved July 04, 2005, from http://www.mafoi.com/ Marriott, I., & Wiggins, D. (2002). Factors in choosing a Chinese or Indian software company. Gartner Research Note (Publication Date: 7 June 2002, ID Number: SPA-16-6344). Retrieved July 4, 2005, from http://www.gartner.com/ Morello, D., & Terdiman, R. (2004). Seven rules for effective communication when going offshore. Gartner Research Note (Publication Date: 20 July 2004 ID Number: DF-23-2873). Retrieved July 4, 2005, from http://www.gartner.com/ Moses Associates. (n.d.). Solutions and services. Retrieved July 4, 2005, from http://www.mosesassociates.com/solutions.htm

512

Murphy, J. (2003). Management update: Evaluating and mitigating outsourcing risk. Gartner Research Note (Publication Date: 6 August 2003, ID Number: IGG-08062003-02). Retrieved July 4, 2005, from http://www.gartner.com/ Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 36-44. Nelson, P., Richmond, W., & Seidmann, A. (1996). Two dimensions of software acquisition. Communications of the ACM, 39(7), 29-35. Pauleen, D. J., & Yoong, P. (2001). Facilitating virtual team relationships via Internet and conventional communication channels. Internet Research: Electronic Networking Applications and Policy, 11(3), 190-202. Poppo, L., & Zenger, T. (1998). Testing alternative theories of the firm: transaction cost, knowledgebased, and measurement explanations for makeor-buy decisions in information services. Strategic Management Journal, 19(9), 853-877. Schweyer, A. (n.d). The case for “total workforce management” solutions. Retrieved July 4, 2005, from http://www.peopleclick.com/knowledge/ ind_schweyer1.asp Sinha, D., & Terdiman, R. (2002). Potential risks in offshore sourcing. Gartner Research Note (Publication Date: 5 September 2002, ID Number: ITSV-WW-DP-0360). Retrieved July 4, 2005, from http://www.gartner.com/ Sobol, M. G., & Apte, U. M. (1995). Domestic and global outsourcing practices of America‘s most effective IS users. Journal of Information Technology, 10(4), 269-280. Tata Consultancy Services. (n.d.). Flexible global delivery. Retrieved March 14, 2005, from http:// www.tcs.com/investors/BusinessOverview/ FlexibleGlobalDelivery.aspx

The Journey to New Lands

Wiggins, D., Datar, R., & Liu, L. (2002a). Comparison: Indian and Chinese software services markets. Gartner Research Note (Publication Date: 31 May 2002, ID Number: M-16-1762). Retrieved July 4, 2005, from http://www.gartner. com/ Wiggins, D., Datar, R., Leskela, L., & Kumar, P. (2002b). Trends for the Indian and Chinese software industries. Gartner Research Note (Publication Date: 7 June 2002, ID Number: SPA-16-6118). Retrieved July 4, 2005, from http:// www.gartner.com/ Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester, UK: Wiley.

EndnOTEs 1

2

Acknowledgements to Ms. Swetha Rao, and Mr. Vidyaranya M. Devigere (both have graduated from Mays Business School, Texas A&M University, USA, and both have previous work experience in the Indian software services industry) for their valuable suggestions on “how” offshore-insourcing can possibly be carried out. A survey of Web sites of the world’s 15 biggest IT companies for their presence in China and India was done by the author and Ms. Jun Wang. Acknowledgements to Ms. Jun Wang, a Chinese graduate student at Mays Business School, Texas A&M University, USA, with previous work experience in the Chinese software industry, for compiling information related to China.

513

The Journey to New Lands

appEndix i: survEying ThE OFFshOrE-insOurcing in china and india Let us compare the two big offshore insourcing players, namely China and India (Cohen, 2005; Karamouzis & Young, 2004; Kempf et al., 2001; Wiggins et al., 2002a; Wiggins et al., 2002b). Some of the relevant comparative statistics between India and China are presented in Table 4 (Wiggins et al., 2002a). India seems to have a clear advantage in terms of its software exports and number of IT professionals, while China seems to have an advantage in terms of Internet Bandwidth, number of software companies and marginally lower costs of IT professionals. Let us consider the case of India in more detail. It is sometimes difficult to speak about information systems “offshoring” without using the word “India.” Debates on offshoring often target India, earning it both ire and admiration. Karamouzis and Young (2004) state that India continues to hold the undisputed leadership position as an offshore destination for IT firms in developed countries such as US and Western Europe. They attribute India’s competitiveness to abundance of resources, significant cost of labor differential, proven execution capacity, and also its English speaking capabilities, and predict the following: Through 2008, India will remain the dominant offshore service provider, with no other nation achieving a double-digit share of the global offshore service revenue (0.8 probability). By 2008, Indian labor rates for application-related services will rise by 40% to 60% beyond 2004 rates (0.7 probability).

Table 4. India’s and China’s IT statistics (Compiled from Wiggins et al., 2002a) (Source: Gartner Research/Gartner Dataquest) Attribute

India

China

Total Exports

$ 43.75 billion (+5.77%)

$ 265.1 billion (+6.8%)

Software Exports

$ 6.2 billion (+37.78%)

$ 0.85 billion (+112.5%)

Software as a % of Total exports

14.17%

0.37%

IT professional graduating each year

73,218

50, 000

Current IT Professionals

522,000

150,000

Demand for IT Professionals

400,000

350,000

Number of software companies

3000+

6000+

Internet Bandwidth

1.4 Gbps

7.6 Gbps

Hourly rate for Developer (2 years experience)

$24

$12 - $25

Hourly rate for Project Manager

$30 ($50 for top end)

$50

Annual Salary for Entry Level Developer

$2,555 - $4,913

$2,423 - $4,846

Annual Salary for Developer (2 years experience)

$4,913 - $9,212

$4,486 - $6,057

Annual Salary for Project Manager

$9,580 - $26,529

$6,057 - $28,992

Legend: All numbers are for 2001, unless specified. Percentage increase/decrease figures are for a one year period.

514

The Journey to New Lands

India graduates a total of 300,000 to 400,000 engineering and computer/IT majors every year (of which graduating IT majors are more than 73,000 per year, however, many of remaining non-IT majors are already skilled or re-skill themselves on IT); at the same time, hiring and managing growth is challenging in India since it is witnessing unprecedented growth in demand for skilled human resources and the largest India based vendors plan to hire several hundred to thousand employees each month (Karamouzis & Young, 2004; Wiggins et al., 2002a). Furthermore, though there is ample supply of fresh graduates, “middle managers” are currently scarce in India, and the eagerness of expatriates of nonIndian decent to assume these scarce “middle manager” positions are low, thereby increasing effort is focused on tapping Indian repatriates from U.S. or Western Europe, or to build on local talent. Choosing a nation for offshoring is not an end in itself. Cities within nations have their own advantages and disadvantages. Choosing the right city to match your needs is crucial. To find out the extent to which top IT companies have offshore offices in Chinese and Indian cities, we2 first short listed the Top 15 Information Technology companies from BusinessWeek’s list of ‘The InfoTech 100’ based on Sales Revenues (BusinessWeek, 2004). We then decided to find out the cities in China and India in which these companies have set up offices by searching their respective Web sites. Attempt has been made to provide only the locations where information systems related work (R&D, software development, support, etc.) is probably performed, and explicit sales offices were omitted. See Figure 6 for each of the top 15 companies’ names, country of origin, rank, sales revenues, Chinese cities, Indian cities, and the Web site address. Most of the top 15 companies have set up offshore bases in China and India, the only exceptions being the Spanish Telefonica and the Japanese KDDI. While searching the Web sites it was found that most of these companies carry out high end R&D activities in China and India, which is contrary to the popular perception that these companies move offshore only for the low-cost advantage. A premier science and technology magazine “NewScientist” recently had a cover story titled “India: The next knowledge superpower,” and one article named “India special: The silicon subcontinent” (Cohen, 2005) stated: Some of the biggest names in IT are heading towards Bangalore once more, and this time round it’s not cheap labour they are looking for. They are hunting down the brightest, most inventive minds in India to populate a swathe of cutting-edge research facilities. The work being done in these labs rivals any in the U.S. and Europe. The article lists companies like Microsoft, General Electric, Hewlett-Packard, Texas Instruments, Google, and IBM that have set up research labs in India to take advantage of its skilled professionals. This realization of the value of offshore-insourcing is not just for the cities like Bangalore, but this optimism isseen across many emerging offshore-insourcing destinations across the world.

515

The Journey to New Lands

Figure 6. World’s 15 biggest info tech companies (Presence in Chinese and Indian cities)

516

The Journey to New Lands

appEndix ii: survEying FOr iT skills in OFFshOrE dEsTinaTiOns As an example, we have listed the services offered and the industries targeted by a large India based software services provider named Infosys (http://www.infosys.com) in Table 5 (Infosys, 2005b, 2005c). Such a survey might help a company to decide about the skill set availability of the IT professionals in the respective offshore destination, and hence aid in addressing the decision question “where to offshore?” Table 5. Services offered and industries targeted by Infosys Technologies Ltd. Services offered by Infosys (http://www.infosys.com) Application and Infrastructure Services: Custom Application Development, Application Maintenance, Application Re-engineering, Infrastructure Management, Independent Testing and Validation, Application Portfolio Management Enterprise Services (1) Packaged Applications: Supply Chain Management (SCM), Customer Relationship Management (CRM), Enterprise Application Integration (EAI), Enterprise Resource Planning (ERP) (2) Business Intelligence and Data Warehousing (3) Systems Integration: Strategic Technology and Architecture Consulting, Enterprise Content Management, Identity Management, Migration and Deployment, Enterprise Information Portal, Enterprise Mobility (4) Business Continuity (5) Platform Services Product R&D Services: Product Design & Development, Product Sustenance, Testing & Automation, Offshore Product Development Center, Additional Product Services, Product Consulting & Professional Services Consulting Services: Corporate Performance Management, Balanced Scorecard Business Process Outsourcing (1) Banking: Credit cards, retail lending, mortgage processing, retail banking and account management, cash management, trade services, lease and loan processing, investment banking, (2) Securities Industry: Custodians and Fund Administrators, Investment Managers, Investment Banking and Brokerage firms, Market Data and Analytics providers, (3) Insurance: Life, non-life, intermediaries, re-insurers, (4) Finance & Accounting: Accounts payable, accounts receivable, GL and fixed asset accounting, reporting and regulatory filings, (5) Telecom: Operators, OEMs and value service providers

Industries targeted • Aerospace and Defense • Automotive • Banking and Capital Markets • Communication Services • Discrete Manufacturing • Energy • Healthcare • High Technology • Insurance • Life Sciences • Media and Entertainment • Resources • Retail & Consumer • Packaged Goods • Transportation • Services • Utilities

This work was previously published in Managing IT Professionals in the Internet Age, edited by P. Yoong, pp. 277-318, copyright 2007 by IGI Publishing (an imprint of IGI Global).

517

518

Chapter 2.8

Client-Vendor Relationships in Offshore Applications Development: An Evolutionary Framework Rajesh Mirani University of Baltimore, USA

absTracT This article presents an evolutionary framework for the establishment and progression of clientvendor relationships in the context of offshore applications development. It is argued that such a relationship typically begins as a cost-reduction exercise, with the client contracting out simple, structured applications to one or more offshore vendors. Over time, the client assigns increasingly complex applications to selected vendors and cultivates loose, trust-based, networklike relationships with them. As offshore applications continue to evolve and become business-critical, the client may seek to regain control by establishing a command-based hierarchy. This may be achieved through part or full ownership of a vendor organization or by starting a captive offshore subsidiary. Thus, the initial client objective of cost reduction ultimately is displaced by one

pertaining to risk control. Pertinent prior research is used to justify the proposed framework. This is followed by a case study that describes how a specialty telecommunications company is pursuing just such an evolutionary path.

inTrOducTiOn Strategic-level managers such as CEOs, CIOs, and CTOs lately have been under great pressure to seek out fresh approaches to control information technology (IT) costs and to demonstrate higher returns on technology investments. One increasingly popular response from decision makers is offshoring, or the shift of IT work to low-wage, offshore locations. Some offshore work tends to be project-oriented with specific completion criteria that were entailed in the design and development of applications. Other work comprises ongoing

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Client-Vendor Relationships in Offshore Applications Development

operations such as technology maintenance, or help desk support conducted out of call centers. This article focuses on the offshoring of applications development and how its attributes shape the evolution of relationships between client and vendor organizations. Much has been written about the management of IT outsourcing and offshoring. Proponents of various approaches have based their arguments on literature ranging from transaction cost economics to resource dependency, strategic choice, stakeholder theory, organizational learning, and institutional theory (Barringer & Harrison, 2000). Some of these suggested approaches also have been tested empirically. However, these management prescriptions neither have been presented nor tested in the specific context of offshore applications development. The implicit assumption underlying this omission appears to be that valid arguments in the general IT outsourcing or offshoring context also must apply to application development, regardless of task attributes. Most theories also embody static views of vendor-client relationships. They emphasize either vendor partnerships/alliances (a network-oriented, trustbased perspective) (Lander, Purvis, & McCray, 2004; Willcocks & Choi, 1995), contracts and transactions (a market-oriented, enforcementbased perspective) (Aubert, Rivard, & Patry, 2004; Richmond & Seidmann, 1993), or a mix of both (Koh, Ang, & Straub, 2004; Sabherwal, 1999). The few that offer evolutionary offshoring perspectives are focused either on client drivers and general industry trends (Carmel & Agarwal, 2002) or on vendor points of view (Rajkumar & Mani, 2001). It is the contention of this article that for offshore application development, these ostensibly disparate management approaches in fact may represent progressive stages for the client in the evolution of its relationships with one or more vendors. While several alternative evolutionary paths may be feasible, each with its own set of antecedents, process dynamics, and consequences,

the discussion here makes the case for one likely path. In this path, a given client organization evolves through successive offshoring stages, not all necessarily with the same application development vendor. Specifically, a client’s experimentation with offshoring begins with reduced development costs as the desired goal. Over time, interplay between the intrinsic task characteristics of application development and the unique attributes of offshoring broaden and evolve the client’s goals. These evolving goals, in turn, successively alter the nature of the vendor-client relationship in distinct stages. The rationale for this path is supported with logical argument, evidence from the published literature, and an original case study for illustration.

sTagEs in OFFshOrE applicaTiOns dEvElOpmEnT Like all buyers and suppliers, offshore vendors and clients essentially interact in one of two ways: transactional/market exchanges or relational exchanges. A transactional exchange is usually a short-term contract characterized by free market price mechanisms and the need for enforcement. A relational exchange implies a longer-term relationship with ongoing interactions. Relational options include long-term contracts, networks, and hierarchies. Long-term contracts resemble the short-term variety, except that they address many more contingencies and consequences. Networks emphasize interorganizational trust, association, and solidarity. Hierarchies refer to rather rigid structural relationships based on formal authority and command, usually stemming from ownership of one organization by another. As mentioned earlier, the published literature has focused almost exclusively on contracts and networks as mutually exclusive types of clientvendor relationships in the offshoring/outsourcing context. This article will show that applications

519

Client-Vendor Relationships in Offshore Applications Development

development offshoring initiatives usually begin as transactional exchanges but end up in the relational realm. The evolutionary path that clientvendor relationships tend to follow consists of three stages. In the first stage, a client contracts out some application development to an offshore vendor with the objective of reduced costs. Success at this experimental stage may result in short-term contracts being replaced by fewer, long-term ones. Stage two arrives when the changing nature of tasks, together with the relationship attributes, makes it difficult for both client and vendor to continue in a purely contractual vein. The need for closer working ties and greater trust brings about a networklike relationship. With the increasing vendor dependence that this engenders, the importance of the client’s original cost-reduction objective gradually is displaced by a strong desire to manage vendor risk. Paradoxically, therefore, the very success of a network-style relationship causes the original success criteria to give way to new ones. This ushers in stage three. In an effort to regain tighter vendor oversight and control, the client seeks to establish a structural hierarchy with the vendor. Doing so may be impractical if there are multiple vendors or if a structural relationship is infeasible for other reasons, so one option in the third stage is for the client to establish a new captive offshore subsidiary.

stage 1: contracts Labor costs constitute the single major source of applications development expenses. The abundant availability of qualified software engineers in lowwage countries typically drive a client organization’s exploratory efforts to seek out an overseas vendor, with the objective of vastly reduced development costs (Matloff, 2004). Preliminary contact with a prospective offshore vendor has the attributes of a highly efficient, classic free market exchange. Both parties, unconstrained by prior contact experiences or future relationship expectations, are focused fully on negotiating the

520

current transaction, with a view to maximizing their respective short-term utilities. Such an exchange tends to yield the best possible outcomes for both client and vendor but only in the presence of perfect information (i.e., complete knowledge about each other’s objectives, strengths, and weaknesses). All information services markets, however, are beset by the presence of information monopoly or asymmetry (Park, 1996), which is the exact opposite of perfect information or complete knowledge. Geographical, cultural, business, and regulatory differences that are inherent to the offshoring context exacerbate this asymmetry (Ramarapu, Parzinger, & Lado, 1997). The vendor faces a rather limited amount of risk from this asymmetry. Depending on its past experience with other clients, the vendor may or may not possess an understanding of this client’s application context or its industry’s business processes. The vendor also may have concerns regarding its interactions with the client or the latter’s financial stability. However, the client’s lack of familiarity with the vendor’s business environment exposes it to many more risks, including shoddy development processes and practices, poor product quality, poor documentation, incomplete or inappropriate solutions, and business process integration issues. The lack of information transparency thus affects the client more severely than the vendor. The larger and more complex the application is, the higher the development risks are (Barros, Werner, & Travassos, 2004). Therefore, in order to reduce these risks and to minimize the impacts of any detrimental outcomes, the client organization follows a cautious approach in identifying initial work to send offshore. This implies small applications or components of low complexity, for which specifications can be communicated completely and whose development process is highly structured. Such applications call for little vendor supervision and no need for a window into the vendor’s internal processes. A transactionoriented, contractual relationship between client

Client-Vendor Relationships in Offshore Applications Development

and vendor suffices as the control mechanism, thereby keeping interorganizational coordination costs incurred by the client to a minimum. Unpleasant experiences with these initial applications quickly can end the client’s experimentation with offshore development. On the other hand, successful initiatives not only result in reduced costs but also make the client aware that offshoring can sustain or even raise software quality (Khan & Fitzgerald, 2004). This emboldens the client to outsource more applications to the same vendor or even to new vendors (Benamati & Rajkumar, 2002). Heightened client awareness, though, is accompanied by the expectation that vendors will put the effort into acquiring a deeper understanding of its business processes and informational needs. In turn, vendors rationalize the extra effort required from these fresh expectations with their own long-term goals of being assigned progressively higher-level work or serving larger markets. Successful outcomes that result from these mutual commitments serve to supplant the client’s original objective of reduced costs with the realization that it may be able to reap collaborative synergies with vendors by moving beyond the scope of simple applications into higher-end development (King, 2005). Collaborative efforts on more complex tasks can yield innovative outcomes, including new solutions; new approaches to problems; unique value added propositions; and, ultimately, original sources of competitive advantage for the client (Dyer & Singh, 1998). Accordingly, the client entrusts more complex applications to selected vendors, with less structure and more room for creativity and innovation. As enhanced complexity necessitates a closer working relationship, the client may move to the middle by replacing several short-term contracts with a handful of long-term contracts (Clemons, Reddi, & Row, 1993), essentially substituting transactional interactions with fewer relational mechanisms. However, long-term contracts increase interorganizational coordination costs by placing greater

collaborative and enforcement burdens on the client. They also hinder collaborative innovation, because both client and vendor may be reluctant to share valuable, firm-specific resources with unfettered, autonomous, distant partners (Goes & Park, 1997). Their mutual independence and freedom of action outside the limited terms of the contract, even a long-term one, causes both organizations to continue to be wary of each other’s intentions and actions. Thus, beyond the simplest applications, the continued use of purely contractual arrangements is ineffective, because contracts merely replace the traditional in-house project risks with a different set of more perilous vendor risks. Despite initial successes, therefore, the probability of eventual failure remains significantly high (Natovich, 2003). Ongoing offshore relationships also bring into play asset specificity, dependence, measurement difficulty, and uncertainty. Asset specificity refers to investments by relationship partners in informational or physical assets that have little value outside the context of that specific relationship. With higher application complexity, both vendor and client invest more time and energy into understanding each other’s unique processes, and increasing asset specificity is inevitable. Asset specificity and the resultant dependence give rise to opportunism, the tendency of one partner (usually the vendor) to take advantage of the fact that the other partner has invested too much in the relationship to walk away from it (Lonsdale, 2001). The awareness of such an exit barrier for the client may tempt the vendor to exhibit opportunism in the form of cost escalation, unreasonably high charges for services not explicitly mentioned in the contract, inexperienced staff assigned to the project, reduced quality and service levels, or holding the client captive to obsolete or inappropriate technologies. Measurement difficulty translates into inscrutability of the vendor’s work processes. Since both short-term and long-term contracts are much more conducive to the measurement of outcomes

521

Client-Vendor Relationships in Offshore Applications Development

than processes, the vendor’s internal practices remain largely hidden from the client. This may trigger not just opportunism of the kinds already discussed but also vendor manipulation of internal project management data to deflect culpability in problem situations. Finally, uncertainty refers to the prospect of unanticipated developments in the technological, business, or political environments, which are of particular concern, given the global nature of offshoring relationships. Client organizations are aware of these pitfalls. In efforts to preempt problems that might stem from asset specificity, dependence, and measurement difficulty, some attempt to anticipate as many contingencies as possible and to incorporate them into increasingly intricate contracts. However, the preemptive use of contingent contractual clauses is a futile exercise. With consultants and legal experts in tow, such organizations eventually can get to the point where the sheer overheads of administering these contracts make them untenable. Alternatively, the mistrust engendered by minutiae can vitiate their relationships with offshore vendors. The intensification of these dysfunctional dynamics provides a window for network-style relationships to replace contracts.

stage 2: networks As application complexity increases, the efficacy of contractual mechanisms breaks down. The client’s success with unstructured, intricate projects is more dependent on the vendor’s internal practices and methods than before. This creates the need for better scrutiny of the vendor’s processes, which contracts alone are unable to provide, given their enforcement-oriented nature. Higher task complexity necessitates joint coordination and a closer, more cooperative working relationship. Pronounced differences in location, culture, business processes, and regulatory practices stemming from the very nature of offshoring magnify these imperatives. A networklike linkage based on trust, solidarity, shared values, and

522

open communication, therefore, represents a better option for the client, because it engenders procedural coordination, vendor self-enforcement, and reciprocity (collaboration and cooperation). The establishment of such a relationship tends to foster product and process innovation (Ritter & Gemunden, 2003). Interorganizational networks such as joint ventures, alliances, associations, and consortia typically consist of three or more organizations. However, a client-vendor dyad with soft interorganizational boundaries can exhibit working interfaces and other properties similar to those of classic networks. The major advantage of networklike relationships over purely contractual mechanisms for offshoring is that they better facilitate the codification and communication of technological skills and organizational knowledge (Park, 1996). In particular, underlying tacit knowledge is more successfully exchanged due to the mutual trust, strong social ties, and shared values/systems in such relationships (Dhanaraj, Lyles, Steensma, & Tihanyi, 2004). The successful codification and transfer of tacit undocumented knowledge is crucial for more complex applications, as it provides the offshore vendor a better grasp of the client’s general business context and unstructured aspects of task requirements. Although such knowledge exchanges increase coordination costs even more (Sobrero & Roberts, 2001), they are accompanied by the joint creation of new knowledge, a higher order benefit (Sharma, 1997). Both tacit knowledge transfer and new knowledge creation are invaluable in the development of more complex applications and necessary in order for synergistic innovations to emerge (Hardy, Phillips, & Lawrence, 2003). Procedural coordination, a key attribute of network-style relationships, enhances the effectiveness of existing contractual client-vendor exchanges when used as a secondary linkage mechanism (Sobrero & Schrader, 1998). The complementary advantages that it provides are highly effective, even if the original contractual

Client-Vendor Relationships in Offshore Applications Development

exchanges were highly customized (Poppo & Zenger, 2002). Studies of IT outsourcing have shown that trust, another critical attribute of networks, is preferred over contracts, particularly when contractual hazards are perceived as high (Barthelemy, 2003). In an empirical study, IT outsourcing projects often were found to begin with simple, outcome-oriented controls in place, but performance problems usually led to the introduction of additional controls oriented toward trust, vendor behavior, and clan-like affiliation (Choudhury & Sabherwal, 2003). Another empirical study that focused on software offshoring by small firms found that clients attempted to mitigate the high inherent transaction costs of contracts through embedded network ties in the form of mutually trusted individuals or liaisons of knowledge flows (Carmel & Nicholson, 2005). The importance of trust in interorganizational collaboration is well-documented elsewhere, as well, both for IT outsourcing (Jennex & Adelakun, 2003; Lanfield-Smith & Smith, 2003; Sabherwal, 1999; Willcocks & Choi, 1995) and in general (Vangen & Huxham, 2003; Zaheer, McEvily, & Perrone, 1998).

stage 3: hierarchies The introduction of trust and clan-like affiliation represents a step up from an exclusive reliance on contracts. However, network-style client-vendor relationships by themselves or in conjunction with long-term contracts by no means represent the stable state. The very network attributes that serve to bring the client and vendor together in a closer working relationship (i.e., trust, reciprocity, effective knowledge transfer, and vendor self-enforcement) ultimately render it ineffective. Eventually, more authoritative mechanisms are needed, and the appropriate relationship is a command-oriented hierarchy. This may be achieved in one of two ways. The first entails the client acquiring a formal stake in a vendor organization through part or full ownership (i.e.,

vertical integration). In the second approach, the client sets up a captive offshore subsidiary of its own (Preston, 2004). While neither of these two approaches may be feasible for every client organization, the following discussion justifies the eventual need for authoritative mechanisms. The primary impetus for the transition from Stage 2 to Stage 3 comes from continuing changes to the attributes of offshore applications to the point where higher complexity is accompanied increasingly by criticality to the client’s business processes (Jensen, 2004). This is but a natural outcome of a close working relationship in which client-vendor synergies constantly are being explored. Business criticality poses enhanced risk and necessitates greater checks and balances on the vendor than are feasible through the network. Trust and reciprocity alone become insufficient to maintain a healthy relationship, and institutional control mechanisms are needed (Miles & Snow, 1984). The resulting swing toward monitoring and formalization, however, threatens the autonomy of the partner organizations, even as they are highly interdependent (Van de Ven & Walker, 1984). The implementation of new checks, balances, and controls also imposes even higher coordination costs, which destabilizes and ultimately breaks the network (Park, 1996). Thus, networks, like contractual markets in the previous stage, eventually unravel in the face of ever-changing attributes of offshore applications. Key empirical evidence for this comes from a study that found that partner commitment in outsourcing relationships actually declines with the age of the relationship, increasing the chances of conflict (Lee & Kim, 1999). Trust, a fundamental basis of network-like arrangements, is known to be particularly fleeting in knowledge-sharing relationships. The progression of such relationships is affected more importantly by procedural justice than by trust (Daellenbach & Davenport, 2004) and by structures that propagate goal congruence, particularly in the presence of opportunism (Jap & Anderson, 2003). In a study,

523

Client-Vendor Relationships in Offshore Applications Development

opportunism was found to be reduced more by formalizing policy than by encouraging cooperation (Dahlstrom & Nygaard, 1999). Procedural justice, goal congruence, and formalization are all attributes associated more closely with hierarchical relationships than with networks. In a seminal research study, equity-based mechanisms (e.g., part or full ownership of one organization by the other, etc.) were found to benefit partner organizations in a relationship more than nonequity mechanisms (Zollo, Reuer, & Singh, 2002). Likewise, in a study of strategic alliances, equity-based alliances were found to promote greater interfirm knowledge transfer (Mowery, Oxley, & Silverman, 1996). As has been noted, applications development offshoring entails a high degree of knowledge sharing and transfer. A study of vertical partnerships found that linkages that support the extensive integration of the structures and management of both organizations were more successful from the perspectives of both parties (Donada, 2002). Another study that focused on asymmetric partnerships, in particular, found that effectiveness and competitive advantage were higher when the leader organization utilized authoritative coordination mechanisms (Hernandez-Espallardo & Arcas-Lario, 2003). In other evidence, transaction cost economics theory (Williamson, 1975, 1985) predicts that a preponderance of transactions in which utilized assets have relatively little value outside of the transaction (high asset specificity) will lead to an integration of assets. The firm that stands the most to lose from a holdup (i.e., the client) by the other firm will tend to want to acquire the assets of the other. It also has been shown that in an interorganizational relationship in which the two firms hold complementary assets, the sum total of these assets leads to synergies or increasing returns to scale, and therefore, there is a natural tendency for integration or for both sets of assets to be acquired by one firm (Hart, 1995). Last, but not least, the introduction of a hierarchy alleviates internal political concerns in

524

the client organization regarding loss of valued in-house technical expertise and skills to offshore vendors. The establishment of a hierarchy brings these skills back into the client’s fold and under its control, albeit possibly at arm’s length. This regained expertise now may be leveraged by the client and sold to other organizations, thus providing an added source of business revenue.

OFFshOrE dEvElOpmEnT FOr ETrus: a casE sTudy This section provides an illustration of the proposed framework for offshore applications development in the form of a case study. The narrative describes how the interactions of Etrus, a realworld client organization, with various offshore development vendors, successively has mirrored the three stages of contracts, networks, and hierarchies. It highlights the interplay among various factors that influenced this evolution, including constantly changing objectives, internal imperatives, and external compulsions on both sides. While the specific circumstances of this case are unique, the broader lessons it offers are consistent with the proposed evolutionary framework. Etrus Corp.1 is a 13-year-old specialty telecommunications company whose expertise lies in identifying and relieving critical stress points and bottlenecks that impede its business customers’ network performance. Using a mix of systems, software, and services, it helps its customers to make maximum use of their applications that drive their businesses, while minimizing the total cost of their network ownership. Originally established as a Delaware corporation in the highend, IP-based optical niche market, the company since has grown tremendously to approximately $400 million in annual sales, largely through a series of acquisitions and mergers, including 11 in the past eight years. It also has carefully crafted technology and business partnerships with major telecom players such as Cisco in order to offer a

Client-Vendor Relationships in Offshore Applications Development

fuller range of solutions for its customers. Comprised of 1,500 employees, it now occupies specific niches across the breadth of telecommunications and serves customers on every major continent. These include cable service providers, telecommunications companies (telcos) such as Verizon, British Telecom, MCI, and AT&T; government agencies; and private corporations with their own networks. Its products and services include multiplexers, aggregators, switches, integrated platforms/systems, and specialized network layer services/enhancements, some of which have won prestigious industry awards. Essentially a design and engineering firm, Etrus envisions and builds new off-the-shelf products for both the horizontal and vertical markets, with customized variations for individual customers. Its contemporary rivals include Cisco (its business partner) as well as Lucent and Nortel. Along the way, Etrus also has acquired ISO 9001 certification. Etrus’ foray into applications development offshoring began with two conversion-oriented projects. These were precipitated by Etrus’ series of acquisitions of other specialty telecommunications companies in 2001 and 2002. The new product development processes of both Etrus and the acquired companies had depended extensively on an industry standard product management software tool from Agile, which enabled them to manage the cost of their products and to track various aspects of their supply chain (e.g., tracking parts and materials for manufacturing). While this platform compatibility between the acquiring and acquired companies definitely was a positive feature, all these companies were using different versions of the Agile software and, therefore, essentially employing somewhat different design, documentation, and manufacturing standards. Thus, an important objective was to get the data of the acquired companies into the structure and standards followed by Etrus so that the consolidated data could be managed centrally in an integrated manner. One of the conversion projects, therefore, entailed upgrad-

ing the software used by an acquired partner to a more modern and recent version by converting its design and database structure and content so that it was compatible with that used by Etrus. The other project actually entailed rolling a more recent version back to an older version, in the case of a different acquired partner that was using a more modern version of the software than Etrus was. While these conversion tasks were highly structured and fairly straightforward, they could not be fully automated, as the conversion process consisted of some decision points, choices, and new data creation. In addition, since Etrus had decided to leverage the opportunity created by both conversion efforts by adding new functionality to the off-the-shelf product, this called for some custom programming. Both conversion projects were outsourced to a Silicon Valley-based vendor called Blue Ridge, which had technology and business relationships with Agile and entrusted the projects to its offshore subsidiary in India. Etrus’ selection of Blue Ridge was based on the latter’s expertise with Agile software and on its apparent application development process maturity. This maturity was evidenced by its ISO-9001 certification, and its achievements related to the Capability Maturity Model (CMM), developed by Carnegie-Mellon University’s Software Engineering Institute (SEI).2 It used a proprietary extended framework that focused on key processes, and its unique internal governance mechanisms periodically monitored ongoing projects to provide directional guidance as well as to issue resolution. Blue Ridge previously had employed its skills and methodology successfully with Fortune 100 customers. It prided itself on being able to provide clients with a window into their internal processes and with total visibility of up-to-the-minute performance metrics and execution status of ongoing projects, regardless of the physical location of the actual application development efforts. Blue Ridge completed each project in about four weeks at a cost of approximately $20,000.

525

Client-Vendor Relationships in Offshore Applications Development

Both development projects were deemed to be resounding successes. In the words of Etrus’ Vice President of Engineering Services, the conversion work, together with the custom-built features from Blue Ridge, “dramatically reduces the time to take a product from design to large-scale production, giving Etrus vastly more revenue and market share. This enables us to achieve aggressive new product launch objectives through supply chain collaboration, so critical to our success. We couldn’t have asked for better support from Blue Ridge.” These initial small experiments with application development offshoring represented the first offshoring stage for Etrus. The successful culmination of contracts with Blue Ridge set a positive internal tone within Etrus and bolstered the confidence of its IT managers in offshore development. As the company continued to grow rapidly through acquisitions, the IT group decided that it would be best to focus in-house resources on tasks associated with new product development and to offshore more of the other routine application development work. However, the fast pace of corporate change and the quick adaptation expected from IT meant that the internal IT staff had very little time available to engage collaboratively with vendors in order to jointly generate specifications that were clear and detailed enough for the latter to take over and to complete the development process. This constraint prevented many new offshoring projects from being initiated in the first place. The solution that was agreed upon was to look for parcels of work that were both complex enough to leverage the cost and quality benefits of offshore development and, at the same time, structured enough to not set the internal IT group back in terms of time spent working with the vendor to generate excessively detailed specifications. This approach also would require the careful selection of vendors whose strengths matched the attributes of specific projects. The first such opportunity came about in the shape of a need to customize and implement an internal business application, an off-the-shelf

526

engineering and design information system oriented around engineering resources and portfolio management and built on a popular technology platform. The rest of the Etrus case study describes the characteristics of this particular development project, how the offshore vendor was selected and managed, the outcome of the development effort, and a discussion of its implications. This project represented a moderately complex application, whose deliverables consisted of the system setup, the standard template setup and custom template design, the standard reports setup and custom report design, and some custom workflow programming logic. It entailed a different technological platform than the other two projects, and Blue Ridge was deemed not to possess the ideal expertise for this job. Consistent with the aforementioned need to carefully select a vendor whose strengths matched the attributes of the application to be developed, the project instead was awarded directly to Fiore, a leading offshorebased global IT firm. Fiore’s strengths ranged across the full technology life cycle spectrum, including business and technology consulting, research and development, implementation, and process ownership/operations. For its applications development business line, Fiore owned and operated sophisticated, mature, offshore development facilities. Aside from Fiore’s excellent reputation, Etrus had had prior contacts with Fiore’s R&D group, which had designed and developed some components of their standard product offerings in the past. Since Fiore was well-placed in the high-end, engineering software niche, Etrus’ IT managers believed that Fiore possessed the background and skills to successfully deliver this application, which was more complex relative to the first two that they had offshored earlier. The application, when complete, would provide Etrus with the resource loading and skill prediction requirements across their entire engineering portfolio. It would enable them to load all their engineering projects that they had in the pipeline and track their status, their project plans, and the

Client-Vendor Relationships in Offshore Applications Development

skills that it was going to take to get them done. This project portfolio information then could be rolled up and mapped onto the skill sets of individual product designers and engineers in order to yield accurate estimates of how many people of each skill set they would need over the next couple of years and the personnel budgets that all of this would entail. It also would enable Etrus to build the background or foundation to support the product development commitments that their salespeople were making to their customers and to reconcile market realities with their planning processes. At a higher level of complexity relative to the prior offshore development projects, the development of this application called for closer communication and interaction between client and offshore vendor. However, even as this project was underway, Etrus’ internal resources, including IT, were under severe strain due to other pending corporate acquisitions. It was decided, therefore, to focus as much of the iterative dialog with the vendor as possible in the initial stages of the development life cycle and then to hand over the process entirely to Fiore to manage until the end product was ready. Fiore’s project leads, who were technical specialists, worked closely with Etrus’ internal IT staff in the initial stages. This minimized the number of contact points between client and vendor in the later stages of development, thereby enabling Etrus to function within their time constraints, but it also ensured that each contact point served as an intensive knowledge transfer linkage. Once the leads had internalized the specifications and the deliverables, the client then would be ready for them to move the actual development work offshore to Fiore’s premises and to manage it from there. Thus, in the requirements analysis stage, Etrus’ internal IT staff provided the vendor not only with documents containing detailed requirements specifications but also with some graphical mockups of key deliverables such as input/output screens and reports. These prototypical screens

and reports then were subjected to iterative changes based on short, rapid feedback cycles between Fiore and Etrus. While the technical context was well-documented and communicated to the vendor in this manner, the transfer of business domain knowledge or the organizational context (i.e., knowledge of the client’s business processes) was not given as much attention. Both client and vendor agreed that the application, while moderately complex in effort, represented a fairly structured task with few unknowns; for instance, the hardware, software, and technical architecture for the project already had been decided by Etrus. Aside from some examples of how things were done at Etrus, it wasn’t really necessary to get into details of the business knowledge in order for Fiore to complete the project, despite the fact that the two organizations had no prior interactions. This also was the reason that the project leads from Fiore were technical specialists rather than business or process specialists. Since the moderate level of application complexity also called for some degree of vendor control, Etrus chose to anchor this control to outcome-oriented measurable standards for the vendor to follow. This was consistent with the fact that the technical architecture already had been set by the client. The contract, therefore, spelled out both timelines and quality standards. An example of the latter was specifications pertaining to the expected number of rework cycles and other measures of operational efficiencies such as software bugs. These standards were based on Etrus’ objective assessment of the project’s complexity and its own historical data from other internally developed applications. Also added to the contract were specific deliverables associated with checkpoints. One example of a deliverable at a checkpoint entailed running the set of custom workflows through a series of test processes to ensure that the set touched all the right spots in the workflow. Enforcement of standards, while not strictly followed through formal audits, was built into

527

Client-Vendor Relationships in Offshore Applications Development

these checkpoints as threshold gates. If deliverables were determined not to have met certain standard levels, exit clauses would kick in, enabling Etrus to revisit the contract or to stop the project all together. Essentially, the client then could choose to take all the work that had been done to date, together with documentation, and to finish the project itself or hand it over to another vendor. Fiore then would be paid for work done to that point and no further. The intent of these clauses, though, was not based on an adversarial premise; the clauses were placed in the contract largely as mechanisms to document the expectations of quality to which both client and vendor were committed, essentially as vendor guidelines. Further, although the contract focused on deliverables rather than on process, it did not contain any provisions for special rewards or incentives for work that exceeded standards or that was completed ahead of schedule. The message to Fiore was, “We don’t have the time to accomplish this ourselves, so as long as you can manage the project and demonstrate the deliverables and the milestones, we’ll be perfectly happy.” Due to various reasons, including time constraints and the nature of the development work, the client maintained a clearly outcome-oriented stance; the vendor, on the other hand, was CMMcertified at a high level and took pride in following strictly established, documented, and publicized processes. Despite the fact that Fiore was a big player for whom this project represented, at best, a small foot in the door, it proceeded to apply high process standards for itself, including rigorous testing and documentation. This was over and above its self-enforcement of the deliverable-oriented contractual terms that had been set by Etrus. These respective outcome- and process-oriented approaches of client and vendor had a decidedly synergistic effect; the end result was a development project that came in at only slightly higher than the funds budgeted ($45,000 vs. $41,000), took less time than expected (six weeks vs. two months), and was regarded as successful by the

528

client, despite an unplanned switch of offshore project managers in the middle of the development effort. The vendor’s process orientation ensured the continuity that was needed at the point of this switch, and the carefully crafted deliverablesoriented measures that had been set by Etrus helped Fiore to carve the path to an unambiguous end point. When the project was complete, the in-house IT staff at Etrus was unanimous in its opinion that, although the work could have been done internally, it would have been more unpredictable, it would have entailed a longer learning curve, it would have cost approximately 50% more, and it probably would not have been as high of a technical quality. Etrus’ successful experience with Fiore represents the second stage in its evolutionary experiences with application development offshoring. This stage was characterized by higher complexity work, a closer relationship with the vendor, and a greater focus on process. Ironically, though, as the IT staff at Etrus now considers a full-fledged role for applications development offshoring, some of the key factors that worked to its advantage in its recent project are the ones that it thinks will work against it in the future. Specifically, the dynamics of the telecommunications industry are changing, and the acquisition and consolidation mania is beginning to slow down. This implies that the IT staff will be less engaged in putting out acquisition-related fires and will be more available to leverage offshoring by sending out increasingly complex applications for development. While the benefits of offshoring more complex applications likely will be of a higher order, the need for closer working relationships between client and vendor IT personnel also is expected to be greater. The higher the application complexity, the greater is the need for joint, iterative activities in any development effort. While the internal IT staff finally may have more time available for such collaborative client-vendor activities, the uncertainty embedded in complex applications also usually results in several rounds of changes to

Client-Vendor Relationships in Offshore Applications Development

initial specifications as possibilities are explored, as knowledge is exchanged between client and vendor, and as implications continually are clarified. With vendors who flaunt high-level CMM certifications, this creates two problems. One has to do with the enormous level of detail needed in initially documented specifications, because CMM processes require extensive documentation. The second has to do with the communications, documentation, testing, and recertification costs of reworking these specifications with each round of changes. In other words, while vendor CMM certification provides reliability and confidence in the end product, it also adds a tremendous overhead burden to the cost structure. The net result can be that any incremental gains or values from initial offshoring work are offset by the high coordination costs of adhering to process-oriented standards such as CMM as the work gets more complex. For these reasons, Etrus has decided to disengage itself from Fiore. It has committed itself to establishing a captive (subsidiary) offshore application development facility of its own in the near future so that it can better leverage the higherorder benefits of offshoring and, at the same time, maintain some control over what otherwise would be exorbitantly high vendor coordination costs. Doing so will take Etrus into the third and final evolutionary stage for offshore development.

discussiOn and implicaTiOns Using a theoretical framework and a supporting case study, it has been argued that client-vendor relationships in application development offshoring contexts evolve first from transaction-oriented, price-based contracts to loose, informal, but fewer networks based on trust and vendor selfenforcement. Subsequently, the growing complexity and criticality of applications introduces the need for greater checks and balances, which necessitates a hierarchical arrangement: part- or

full-client ownership of a vendor. While this final stage actually may not be feasible for every client, essentially, a cost reduction game is replaced by one of risk control. There is somewhat of an irony in the position taken by this article that a formal hierarchy ought to succeed a networklike stage in a client-vendor relationship. Vertical integration as a controloriented, preferred organizational response to external uncertainty first was proposed in a classic work a long time ago (Thompson, 1967). Many years later, however, it was argued that creating a hierarchy entails mechanisms that are unnecessary, that are overkill, and that are difficult to establish or too costly to sustain. In its place, the network, with its freedom of exit attributes, was propounded as a superior response to dynamic, unpredictable environments (Achrol, 1997). The knowledge of a natural relationship progression can help decision makers on either side of an offshoring relationship. On the client side, senior business and technology executives can make more informed judgments regarding the viability of offshoring beyond the short term, given the kind of commitments that such vendor relationships ultimately will entail. The resultant better decision process will prevent organizations that are ill-equipped to deal with the concomitant costs from embarking upon complex or critical offshore projects. It will also enable organizations that do possess such a capability to be better prepared for the internal changes that will accompany changing relationship structures with vendor organizations. At the least, the clarity resulting from understanding the sequential stages of interorganizational processes will encourage executives to make candid assessments of why they might be interested in offshoring in the first place. On the vendor side, the implications of a relationship progression perhaps are more profound. With the realization that clients will seek to regain control as applications evolve to become complex and critical, decision makers in vendor organi-

529

Client-Vendor Relationships in Offshore Applications Development

zations are faced with fundamental questions pertaining to organizational mission, culture, and employee work autonomy. For example, should they even let client-vendor relationships progress to such points, or should they plan to stay with lower- and mid-level work? The greatest dilemma here is for the creative, decentralized, organic types of offshore vendor organizations. On the one hand, they may value the empowerment that their internal environment provides them. On the other hand, this empowerment may be threatened when put to good use for higher-level work. For researchers interested in pursuing further the progression of offshoring relationships, this article offers a couple of different directions for more rigorous empirical inquiry. The most obvious one is the implicit proposition that as a vendorclient offshoring relationship is established and as it ages and matures, vendor oversight first is conducted through possibly increasingly complicated contractual mechanisms; then through loose, trust-based, affiliation-solidarity networks; and finally, through a client-controlled hierarchy. An alternative investigation scheme would avoid using relationship age as the progression benchmark and, instead, would look for evidence of the three stages by employing application complexity as a surrogate for relationship maturity. If either of these two methods reveals the existence of such stages, then the next logical step would be to test whether hierarchies as the interorganizational structure of choice in mature relationships are really more effective than other alternative mechanisms.

rEFErEncEs Achrol, R.S. (1997). Changes in the theory of interorganizational relations in marketing: Toward a network paradigm. Journal of the Academy of Marketing Science, 25(1), 56–71.

530

Aubert, B.A., Rivard, S., & Patry, M. (2004). A transaction cost model of IT outsourcing. Information & Management, 41(7), 921–932. Barringer, B.R., & Harrison, J.S. (2000). Walking a tightrope: Creating value through interorganizational relationships. Journal of Management, 26(3), 367–403. Barros, M.O., Werner, C.M.L., & Travassos, G.H. (2004). Supporting risks in software project management. The Journal of Systems and Software, 20(1-2), 21–35. Barthelemy, J. (2003). The hard and soft sides of IT outsourcing management. European Management Journal, 21(5), 539–548. Benamati, J., & Rajkumar, T.M. (2002). The application development outsourcing decision: An application of the technology acceptance model. The Journal of Computer Information Systems, 42(4), 35–43. Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of IT work. Management Information Systems Quarterly-Executive, 1(2), 65–76. Carmel, E., & Nicholson, B. (2005). Small firms and offshore software outsourcing: High transaction costs and their mitigation. Journal of Global Information Management, 13(3), 33–54. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, 14(3), 291–314. Clemons, E.K., Reddi, S.P., & Row, M.C. (1993). The impact of information technology on the organization of economic activity: The “move to the middle” hypothesis. Journal of Management Information Systems, 10(2), 9–35. Daellenbach, U.S., & Davenport, S.J. (2004). Establishing trust during the formation of tech-

Client-Vendor Relationships in Offshore Applications Development

nology alliances. Journal of Technology Transfer, 29(2), 187–202.

under ex post opportunism. Management Science, 49(12), 1684–1701.

Dahlstrom, R., & Nygaard, A. (1999). An empirical investigation of ex post transaction costs in franchised distribution channels. Journal of Marketing Research, 36(2), 160–170.

Jennex, M.E., & Adelakun, O. 2003. Success factors for offshore information system development. Journal of Information Technology Cases and Applications, 5(3), 12–31.

Dhanaraj, C., Lyles, M.A., Steensma, H.K., & Tihanyi, L. (2004). Managing tacit and explicit knowledge transfer in IJVs: The role of relational embeddedness and the impact on performance. Journal of International Business Studies, 35(5), 428–442.

Jensen, B.K. (2004). The expert opinion. Journal of Information Technology Cases and Applications, 6(4), 51–54.

Donada, C. (2002). Generating cooperative gain in a vertical partnership: A supplier’s perspective. Canadian Journal of Administrative Sciences, 19(2), 173–183. Dyer, J.H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23(4), 660–679. Goes, J.B., & Park, S.H. (1997). Interorganizational links and innovation: The case of hospital services. Academy of Management Journal, 40(3), 673–696. Hardy, C., Phillips, N., & Lawrence, T.B. (2003). Resources, knowledge and influence: The organizational effects of interorganizational collaboration. The Journal of Management Studies, 40(2), 321–347. Hart, S.L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20(4), 986–1014. Hernandez-Espallardo, M., & Arcas-Lario, N. (2003). The effects of authoritative mechanisms of coordination on market orientation in asymmetrical channel partnerships. International Journal of Research in Marketing, 20(2), 133–152. Jap, S.D., & Anderson, E. (2003). Safeguarding interorganizational performance and continuity

Khan, N., & Fitzgerald, G. (2004). Dimensions of offshore outsourcing business models. Journal of Information Technology Cases and Applications, 6(3), 35–50. King, W. (2005). Outsourcing becomes more complex. Information Systems Management, 22(2), 89–90. Koh, C., Ang, S., & Straub, D.W. (2004). IT outsourcing success: A psychological contract perspective. Information Systems Research, 15(4), 356–373. Lander, M.C., Purvis, R.L., & McCray, G.E. (2004). Trust-building mechanisms utilized in outsourced IS development projects: A case study. Information & Management, 41(4), 509–528. Lanfield-Smith, K., & Smith, D. (2003). Management control systems and trust in outsourcing relationships. Management Accounting Research, 14(3), 281–307. Lee, J.-N., & Kim, Y.-G. (1999). Effect of partnership quality on IS outsourcing success: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29–61. Lonsdale, C. (2001). Locked-in to supplier dominance: On the dangers of asset specificity for the outsourcing decision. The Journal of Supply Chain Management, 37(2), 22–27. Matloff, N. (2004). Globalization and the American IT worker. Communications of the ACM, 47(11), 27–29. 531

Client-Vendor Relationships in Offshore Applications Development

Miles, R.E., & Snow, C.C. (1984). Fit, failure and the hall of fame. California Management Review, 26(3), 10–28.

Sharma, A. (1997). Professional as agent: Knowledge asymmetry in agency exchange. Academy of Management Review, 22(3), 758–798.

Mowery, D.C., Oxley, J.E., & Silverman, B.S. (1996, Winter). Strategic alliances and interfirm knowledge transfer. Strategic Management Journal, 17, 77–91.

Sobrero, M., & Roberts, E.B. (2001). The trade-off between efficiency and learning in interorganizational relationships for product development. Management Science, 47(4), 493–511.

Natovich, J. (2003). Vendor related risks in IT development: A chronology of an outsourced project failure. Technology Analysis & Strategic Management, 15(4), 409–419.

Sobrero, M., & Schrader, S. (1998). Structuring inter-firm relationships: A meta-analytic approach. Organization Studies, 19(4), 585–615.

Park, S.H. (1996). Managing an interorganizational network: A framework of the institutional mechanism for network control. Organization Studies, 17(5), 795–824. Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements? Strategic Management Journal, 23(8), 707–725. Preston, S. (2004). Lost in migration: Offshore need not mean outsourced. Strategy & Leadership, 32(6), 32–36. Rajkumar, T.M., & Mani, R.V.S. (2001). Offshore software development: The view from Indian suppliers. Information Systems Management, 18(2), 63–73. Ramarapu, N., Parzinger, M.J., & Lado, A.A. (1997). Issues in foreign outsourcing. Information Systems Management, 14(2), 27–31. Richmond, W.B., & Seidmann, A. (1993). Software development outsourcing contract: Structure and business value. Journal of Management Information Systems, 10(1), 57–72. Ritter, T., & Gemunden, H.G. (2003). Network competence: Its impact on innovation success and its antecedents. Journal of Business Research, 56(9), 745–755. Sabherwal, R. (1999). The role of trust in outsourced IS development projects. Communications of the ACM, 42(2), 80–86. 532

Thompson, J.D. (1967). Organizations in action. New York: McGraw-Hill. Van de Ven, A.H., & Walker, G. (1984). The dynamics of interorganizational coordination. Administrative Science Quarterly, 29(4), 598–621. Vangen, S., & Huxham, C. (2003). Nurturing collaborative relations: Building trust in interorganizational collaboration. The Journal of Applied Behavioral Science, 39(1), 5–31. Willcocks, L., & Choi, C.J. (1995). Cooperative partnership and “total” IT outsourcing: From contractual obligation to strategic alliance. European Management Journal, 13(1), 67–78. Williamson, O.E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. Williamson, O.E. (1985). The economic institutions of capitalism. New York: Free Press. Zaheer, A., McEvily, B., & Perrone, V. (1998). Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance. Organization Science, 9(2), 141–159. Zollo, M., Reuer, J.J., & Singh, H. (2002). Interorganizational routines and performance in strategic alliances. Organization Science, 13(6), 701–713.

Client-Vendor Relationships in Offshore Applications Development

EndnOTEs 1

2

The identities of the client and key vendor organizations have been disguised, and other descriptive statistics and facts carefully distorted in order to maintain confidentiality and yet preserve the essence of the case. While the principles of the Software Capability Maturity Model (SW-CMM) continue to be followed by organizations worldwide, the model itself has been superseded by a

newer one called Capability Maturity Model Integration (CMMI), also from SEI. The original SW-CMM, now in sunset, focused on software development processes. Its structure was characterized by five levels of increasing maturity: Level 1–Initial, Level 2–Repeatable, Level 3–Defined, Level 4–Managed, and Level 5–Optimizing. Organizations at Level 5 epitomize highly mature, efficient, productive, innovative, and proactive development processes.

This work was previously published in Information Resources Management Journal, Vol. 19, Issue 4, edited by M. KhosrowPour, pp. 72-86, copyright 2006 by IGI Publishing (an imprint of IGI Global).

533

534

Chapter 2.9

An Outsourcing Acceptance Model:

An Application of TAM to Application Development Outsourcing Decisions John “Skip” Benamati Miami University, USA T.M. Rajkumar Miami University, USA

absTracT The use of outsourcing is expanding rapidly. This study empirically tests a model of application development outsourcing acceptance based on the technology acceptance model (TAM). TAM suggested perceived usefulness and ease of use mediate the effects of other variables on users’ attitudes towards a technology. The model tested in this study suggests perceived usefulness and ease of use of outsourcing mediate the effects of the external environment, prior outsourcing relationships, and risks on decision-makers’ attitude toward application development outsourcing. One hundred and sixty respondents to a survey sent to 3000 IT decision makers provided data to confirm the applicability of TAM and the influences of these external variables. Support for applying TAM in this alternative context was found. Three

sub-dimensions of risk, project management, relationship, and employee risk emerged. Project management and employee risks along with prior relationships were found to significantly influence decision maker perceptions about application development outsourcing.

inTrOducTiOn An increased reliance on information technology (IT) for success combined with the rapid, accelerating rate of IT change, has intensified both the importance and complexity of managing this now vital corporate resource. IT outsourcing, the transferring of all or part of a company’s IT functions to an outside party, offers additional alternatives to organizational decision makers. Hence, there is an increasing focus on determin-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

An Outsourcing Acceptance Model

ing the correct sourcing strategy for IT and IT services (King, 2001). However, choosing the appropriate IT functions to outsource and the best outsourcing vendor is very complex (Kern, Willcocks, & van Heck, 2002). This is especially true now because the motivation for IT outsourcing has moved beyond traditional cost cutting or efficiency gains to become more transformational. IT outsourcing now plays a much more strategic role, enabling companies to be more adaptive and respond quickly to new opportunities (Mazzawi, 2002). Kodak brought IT outsourcing to the forefront with their landmark decision to outsource their IT functions in 1989. Recent surveys indicate that around the globe, firms of all sizes across many industries view outsourcing as a realistic alternative for some or all of their IT functions (Barthelemy & Geyer, 2001; Kakabadse & Kakabadse, 2002). The use of IT outsourcing continues to grow at a phenomenal rate (Kernet al., 2002; Ross & Westerman, 2004). A wide variety of IT functions are outsourced. This study focuses on one particular function, applications development (AD), defined as any efforts in the organization involved with the analysis, design, or implementation of information systems. AD was identified in multiple prior studies as an IT function commonly outsourced (McFarlan & Nolan, 1995; Hurley & Schaumann, 1997; Elmuti & Kathawala, 2000; Ross & Westerman, 2004). Furthermore, recent surveys indicate that AD outsourcing is on the rise (Hurley & Schaumann, 1997; Ketler & Willems, 1999; King & ColeGomolski, 1999). More and more AD outsourcing is also done offshore which adds complexity to the decision making process (Elmuti & Kathawala, 2000; Robb, 2000; Prencipe, 2001). Thus, a better understanding of the AD outsourcing decision is important. More importantly, this knowledge may help to improve the understanding of other outsourcing decisions. A prior outsourcing study (Benamati & Rajkumar, 2002) proposed an application of

the technology acceptance model (Davis, 1989; Davis, Bagozzi, & Warshaw, 1989) as a basis for investigating AD outsourcing decision making. The model also proposed risk, prior outsourcing relationships, and an organization’s external environment to be important antecedents to decision-maker perceptions and hence important factors in AD outsourcing decisions (Benamati & Rajkumar, 2002). The goal of this research is to empirically test and validate that model as a basis for further study and shed new light on factors that influence AD outsourcing decisions. The following section reviews the proposed model of outsourcing acceptance and develops hypotheses from it. The methodology used and findings from an empirical validation of that model are then explained. Finally, implications of both the results and the model for future research are discussed. No other research has empirically applied TAM in this way. Nor has there been empirical testing of the influence of these three antecedent factors on the decision to outsource AD.

ThEOrETical basis FOr ThE rEsEarch mOdEl and hypOThEsis TAM states that users’ perception of the usefulness of a technology, defined as the degree to which a person believes that using the technology will enhance his or her job performance, and ease of use, defined as the degree to which a person believes that using the technology will be free of effort (Davis, 1989), directly affect the users’ attitude about and hence their intention to use the technology. These two perceptions also moderate the effects of antecedent constructs on the decision to use the technology. The AD outsourcing acceptance model (Benamati & Rajkumar, 2002) that is the focus of this study, shown in Figure 1, illustrates TAM constructs, outsourcing decision antecedent

535

An Outsourcing Acceptance Model

constructs, and posited relationships among the constructs. It proposes that TAM constructs are applicable to the acceptance of AD outsourcing. The TAM constructs and interrelationships are applied consistently with previous TAM research (Davis et al., 1989; Mathieson, 1991; Karahanna, Straub, & Chervany, 1999). Decision-maker perceptions of the usefulness, defined as the degree to which the decision maker believes that AD outsourcing will enhance the performance of the IT group, and ease of use, the degree to which the decision maker believes that AD outsourcing will be free of effort, are posited to influence their attitude about AD outsourcing which in turn affects their intention to do it. Consistent with TAM, the model proposes that a decision-maker positively inclined towards outsourcing is more likely to have intentions to outsource. Many organization level decisions are ultimately made by an individual within the organization. IT managers most often prepare sourcing evaluations (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004) and IT sourcing decisions elevate to the CIO, CFO, and CEO levels in organizations (Kakbadse & Kakabadse, 2002). A study of 160 French and German companies found the decision to outsource IT was made by an individual executive in 90% of the French and 75% of the German organizations studied (Barthelemy & Geyer, 2001).

The studies indicate most IT outsourcing decisions are organizational decisions primarily made by individuals. The unit of analysis in prior TAM research has predominantly been individual adoption of a specific technology. Recent studies apply TAM to organizational level adoptions decisions by owners or executives in small and medium sized enterprises (SME) and more general technology categories such as ecommerce (Granden & Pearson, 2004) or having a Web presence (Riemenschneider, Harrison, & Mykytyn, 2003). Since AD outsourcing is a solution to a general technology problem, TAM constructs and relationships may be applicable to high level decision-makers’ acceptance of AD outsourcing. Furthermore, TAM is rooted in the theory of reasoned action (Azjen & Fishbein, 1980) and other research has drawn on attitude based choice theory rooted in the theory of reasoned action to study organizational level decisions. Mykytyn and Harrison (1993) studied the acceptance of strategic information systems by senior management and Candel and Pennings (1999), the choice of financial services by entrepreneurs. This provides further support for organizational level decision makers as a unit of analysis. Figure 1 also illustrates the hypotheses tested in this study. Hypotheses one through four stem directly from the established TAM relationships.

Figure 1. Outsourcing acceptance model Antecedents External Environment

H5 H6

Prior Outsourcing Relationships H10 (-)

Perceived Risks of Outsourcing

536

H7 H8 (-) H9 (-)

TAM

Perceived Usefulness of Outsourcing

H2

Attitudes towards Outsourcing

H4

Perceived Ease of Use of Outsourcing

H3

H1

Intention to Use Outsourcing

An Outsourcing Acceptance Model

It is hypothesized that these relationships will hold in the AD outsourcing decision context as well. Hence, it is hypothesized that: H1: Decision maker attitude toward outsourcing AD positively affects their intention to use it. H2: Decision maker perception of the usefulness of AD outsourcing positively affects their attitude towards it. H3: Decision maker perception of the ease of use of AD outsourcing positively affects their attitude towards it. H4: Decision maker perception of the ease of use of AD outsourcing positively affects their perception of its usefulness. The model also proposes the external environment, prior outsourcing relationships, and the perceived risk of outsourcing AD as antecedents to decision maker perceptions of AD outsourcing. Each is proposed to affect one or both of the TAM perception variables. Support for the influence of these antecedents on outsourcing decisions exists in prior literature. A firm’s external environment plays a role in decision-making (Goll & Rasheed, 1997). A dynamic, competitive, or uncertain environment can lead firms to focus on core competencies and outsource others (Slaughter & Ang, 1996). As hypercompetition becomes an unavoidable way of life in many industries (D’Aveni, 1994), IT plays a bigger and bigger role in achieving and sustaining competitive advantages. Furthermore, environmental change prompts organizations to maintain flexible organizational structures (Burns & Stalker, 1961; Perrow, 1970; Thompson, 1967; Woodward, 1965). Outsourcing provides flexibility and offers a way to adjust organizational boundaries in response to pressures from the environment (Lonsdale & Cox, 2000). For example, the critical contingencies that arise due

to stiff competition were found to influence IT outsourcing decisions in the banking industry (Ang & Cummings, 1997). This provides support for the fifth hypothesis in the model. H5: A more competitive external environment positively affects decision maker perception of the usefulness of AD outsourcing. The importance of the client supplier relationships has received increasing attention in the outsourcing literature. Organizations and their outsourcing vendors have become more tightly coupled (Lee, Huynh, Chi-wai, & Pi, 2000) and long term partnerships are more appropriate (Nam, Rajagopalan, Rao, & Chaudjury, 1996; Saunders, Gabelt, & Hu, 1997; Mazzawi, 2002). Some outsourcing arrangements form as strategic alliances with deep levels of interdependence (Lacity & Willcocks, 1998; King, 2001) and the ability to build a trusted partnership and avoid relational trauma is imperative for success (Kern et al., 2002). It becomes critical to consider outsourcing as the management of relationships with service providers as opposed to simply managing contracts for IS commodities (Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). A recent survey of 700 IT professionals indicates that reliability and trust in the outsourcing vendor were the two most important factors in selecting an outsourcing vendor (Gareiss, 2002). Surprisingly, these two relationship qualities ranked above more traditional selection criteria such as cost and technical skills. Whitten and Leidner (2006) found that for varying perceptions of product and service quality (high, low or poor), poor relationship quality has caused the decision to backsource or bring application development back in-house. The quality of the outsourcing relationship is clearly important (Lee & Kim, 1999) as these relationships are becoming mission critical (Kern & Willcocks, 2002). From a decision making perspective, early outsourcing research predominantly overlooked

537

An Outsourcing Acceptance Model

the fact that many outsourcing decisions are not independent decisions but instead are based on prior outsourcing experiences (Nam et al., 1996; Lee et al., 2000). Past marketing research into customer-service provider relationships found that customer satisfaction with prior experiences with a provider affected their loyalty to that provider and the strength of the relationship increased with the length of prior experience (Bolton, 1998). Likewise, prior outsourcing experiences certainly influence follow-on outsourcing decisions. The outsourcing acceptance model posits that prior outsourcing relationships will influence decision maker perceptions about outsourcing’s usefulness and ease of use as stated in hypotheses six and seven. H6: Positive prior AD outsourcing relationships positively affect decision maker perception of the usefulness of AD outsourcing. H7: Positive prior AD outsourcing relationships positively affect decision maker perception of the ease of use of AD outsourcing. Risk is also an important factor in the AD outsourcing decision (Earl 1996; Aubert, Patry, & Rivard, 1998; Ketler & Willems, 1999). Risk, if ignored, leads to undesirable consequences, such as increased likelihood of project failure (Lyytinen, Mathiassen, & Popponen, 1998; Bahli & Rivard, 2005). IS managers may perceive outsourcing to reduce risk because it can provide skills the organization lacks to develop a particular application. However, outsourcing introduces many new risks such as hidden costs, lack of proper skills or infrastructure to manage the engagement, staff morale problems, and loss of control to or key dependence on a third party (Ketler & Walstrom, 1993; Hurley & Schaumann, 1997; Smith, Mitra, & Narasimhan, 1998; Barthelemy, 2001). Offshore outsourcing adds many additional challenges and risks to the outsourcing engagement (Ramarapu, Parzinger, & Lado, 1997). For

538

example, the project team is, by definition, virtual and must be managed across time, distance, and perhaps even borders or oceans. Although some virtual organizations succeed, the value of virtual organizations has been oversold and more fail than succeed (Chesbrough & Teece, 2002). Perceived risk has been shown to inhibit system or product evaluation and adoption in e-service settings (Featherman & Pavlou, 2003). That study also provided strong empirical evidence that perceived risk adversely influences perceived usefulness. In an AD outsourcing context, perceived risk can be expected to negatively influence the perceived usefulness of outsourcing. Hypotheses eight states this expectation. H8: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the usefulness of AD outsourcing. The risks associated with outsourcing highlight the need to outsource in the right way (Ross & Westerman, 2004). When risk is perceived, users introduce standard risk management mechanisms such as risk assessment, and developing risk mitigation plans to handle the perceived risk. Contracts for example, are one mechanism used to effectively manage the outsourcing relationship and provide for early termination, in case of underperformance (Osei-Bryson & Ngwenyama, 2006). The outsourcer also typically sets up an organizational unit to coordinate interactions between its information technology staff and the vendor as well as monitor the vendor’s performance. Users must pay close attention to coordination in the early stages of the AD outsourcing projects so that costly adjustments to the coordination mechanisms do not occur later (Sabherwal, 2003). This additional effort to manage risks introduces a burden on the user to invest more time and effort in governance, oversight, and coordinating mechanisms, reducing the ease-of-use of outsourcing. Hence, this leads to the hypotheses:

An Outsourcing Acceptance Model

H9: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the ease of use of AD outsourcing. Today’s outsourcing relationships involve strategic alliances with shared risk between the provider and the purchaser of the outsourcing services (Lacity & Willcocks, 1998; Kishore et al., 2003). Just as good prior relationships should increase perceptions of ease of use and usefulness, it would be expected that positive past experiences would reduce the perception of risk associated with outsourcing. This expected inverse relationship forms the basis for a final hypothesis. H10: Positive prior AD outsourcing relationships negatively affect decision maker perception of the risk of AD outsourcing.

mEThOdOlOgy A survey instrument was implemented to empirically test the model and hence, the applicability of TAM and the influence of the antecedent variables. Most prior outsourcing studies applied more qualitative or case study research. Very few studies employed quantitative methods. This research is the first to employ a quantitative instrument to study the applicability of TAM and one of only a few to quantitatively examine antecedents to outsourcing decision making.

instrument development The instrument items used to operationalize the constructs in Figure 1 were all derived from past research. All questions used a 1 to 7 scale where 1 meant “strongly disagree” and 7 meant “strongly agree.” The items for the four TAM constructs are revisions of items from previously validated TAM instruments (Agrawal & Prasad, 1999; Hu, Chau, Liu Sheng, & Yan Tam, 1999; Venkatesh

& Davis, 2000). The items were reworded to change the focus from systems to application development outsourcing. For example, the TAM intention to use item “Given that I have access to the system, I predict that I would use it” became “Given that I have access to an outsourcer for applications development I predict that I would use them.” These items were applied to test the TAM hypotheses (H1-H4). Consistent with previous instruments applying TAM to organizational level adoption decisions (Grandon & Pearson, 2004), the items for ease of use focused on the decision maker’s perception of their own ability to use outsourcing. Grandon and Pearson (2004) operationalized perceived usefulness as a mix of the decision maker’s perception of the usefulness to themselves and to the organization. For example, “Using e-commerce would improve my job performance” and “Using e-commerce would enable my company to accomplish specific tasks more quickly” were used. For consistency, all usefulness items in the developed instrument addressed the usefulness of outsourcing to the organization. The items for external environment and prior relationships originated from instruments used in marketing research. To measure the competitive nature of the environment, items from Industruct (Pecotich, Hattie, & Peng Low, 1999), an instrument developed to measure Porter’s (1980) five competitive forces model were adapted. Only items from intensity of rivalry defined as “the extent to which firms in this industry frequently and vigorously engage in outwardly manifested competitive actions and reactions in their search for competitive advantage in the marketplace” (Pecotich et al., 1999) were applied. That study found that rivalry was the strongest force of the five. Competitive rivalry is also probably the one most directly applicable to help test hypothesis five. Many marketing studies have measured dimensions of relationship quality. The items for measuring relationship quality used here were

539

An Outsourcing Acceptance Model

drawn from two separate marketing instruments. This was done to tap into a representative set of relationship quality dimensions that may be applicable to outsourcing relationships. The first dimension adapted was relational norms (Heide & John, 1992). Relational norms allow both buyer and supplier to judge whether each party’s actions conform to established standards (Ivens, 2006). The measures tap into three aspects of the relationship norms; flexibility—the expectation of a willingness of the parties to be adaptable to changing circumstances, information exchange— the expectation that a proactive exchange of useful information will occur, and solidarity—the expectation that both parties place a high value on the relationship. Trust is also commonly identified as an important aspect of relationship quality (Crosby, Evans, & Cowles, 1990; Moorman, Zaltman, & Deshpande, 1992; Morgan & Hunt, 1994; Rindfleisch, 2000; Ulaga & Eggert, 2004; Huntley, 2006). Rindefleish’s (2000) five item scale for organizational trust, which he defined as “…

confidence in an exchange partner’s reliability and integrity” was adapted. This combination of 15 measures adequately represented the dimensions of relationship quality from an outsourcing perspective. These measures were applied to test hypotheses six, seven, and ten. Established measures for outsourcing risk were not found in prior research and hence were developed from outsourcing risks identified by Elmuti and Kathawala (2000). This was the most complete list that was found and is applied to explore risk factors and test the last three hypotheses. Table 1 details the number and the source of survey items for each construct in the proposed framework.

instrument pretest A pretest of the instrument was conducted with two IT academicians experienced in survey development, three IT executives who have outsourced applications development, and two executives from

Table 1. Source of survey items Construct

Number of Items

Source Venkatesh and Davis (2000) Agrawal and Prasad (1999) Hu et al. (1999)

Intention to Use

Intention to Use

5

Attitude

Attitude

4

Agrawal and Prasad (1999) Hu et al. (1999)

Perceived Usefulness

Perceived Usefulness

9

Davis (1989) Venkatesh and Davis (2000)

Perceived Ease of Use

Perceived Ease of Use

5

External Environment

Competitive Rivalry

9

Prior Relationships

Relational Norms

10

Trust

5

Outsourcing Risks

540

Prior Study Factor

18

Venkatesh and Davis (2000) Pecotich et al. (1999) Heide and John (1992) Rindefleisch (2000) Elmuti and Kathawala (2000)

An Outsourcing Acceptance Model

application development outsourcing providers. The pretest was done to ensure that the survey was clear and concise, and that items portrayed their intended meaning. Feedback was also sought on the length of the survey, its overall appearance, and how each participant would react to receiving it in the mail. Comments and suggestions were used iteratively to revise the survey. During each pretest, one of the authors met with each of the participants individually and discussed the purpose of the survey. The subjects were asked to complete the survey. They were also asked to suggest improvements and to identify anything not clear to them. After completion of the survey, the attending author clarified and recorded subject feedback and suggestions. The comments of each participant were incorporated before meeting with the next participant and the pretest iterated until all clarity issues in the survey were flushed out. The pretest resulted in substantial improvement in the clarity of the survey definitions and items. It also resulted in the addition of one ease of use item—using application development outsourcing makes it easier to share risk with the vendor. The Appendix lists all the survey items along with the instructions to subjects.

data collection To implement the survey, a random sample of 3000 IT executives was drawn from subscribers to an IS journal focusing on enterprise application issues. The journal qualified subscribers based on their level in the organization and provided a randomized sample from the over 25,000 subscribers with the level of director or higher in their organizations. Two mailings were done. The first contained a solicitation letter, the survey, and a postpaid return envelope. The letter also included the URL of an online version of the survey. The second mailing was a reminder card that also pointed to the online version. The IT executives provided a total of 160 usable responses.

Table 2. Subject organization industries Number

Percentage

Finance

Industry

20

12.50%

Other

19

11.88%

Education

18

11.25%

Manufacturing

18

11.25%

Consulting

15

9.38%

Government

14

8.75%

Communication

9

5.63%

Health Care

8

5.00%

Transportation

7

4.38%

Insurance

6

3.75%

Systems Integrator

5

3.13%

Utilities

4

2.50%

Marketing

4

2.50%

Software development

4

2.50%

Banking

3

1.88%

Publishing

2

1.25%

Construction

2

1.25%

Legal

2

1.25%

Subjects’ organizations represented a variety of industries. Table 2 summarizes them. The “other” category includes all industries represented by only one organization. Subjects’ demographics indicate they were indeed high level IT executives. They averaged 19.4 years of IS experience, 9.6 with their current employer. In addition, they managed on average 78 subordinates. All subjects also indicated they played significant roles in outsourcing decisions for their organizations. Table 3 summarizes the size of the subjects’ organizations in terms of number of IT professionals and IT budget. Subjects estimated that on average 13.2% of their IT budget was spent on application development outsourcing and 19.7% on all types of IT outsourcing. AD outsourcing decisions were being made in these organizations. Response rates in surveys of executive level individuals are often low (Pincus, Rayfuekdm, &

541

An Outsourcing Acceptance Model

Cozzens, 1991; Baruch, 1999) due to the numerous demands on their time. Many executives have buffer systems in place to control the receipt of requests for information such as surveys (Cycyota & Harrison, 2002). Subject organizations that are small exacerbate the low response rate problem (Dennis, 2003). Not unexpectedly, the response rate of 5.33% was low. Low response rates can introduce response bias. However, the absence of differences in the responses received at different times would be consistent with the claim that response bias was not present (Anderson & Gerbing, 1988). The responses for all of the factors and numeric demographic variables collected were tested for responses received before and after the second mailing. None of the t-tests (continuous variables) or chi-squared tests (categorical variables) showed responses to be significantly different. Hence, response bias was not found.

daTa analysis The data analysis proceeded through two phases. The first phase examined the applicability of TAM to outsourcing decision making and the second the influence of the three antecedents on decision maker beliefs about outsourcing. The following two sections discuss these phases.

The applicability of Tam The TAM analysis proceeded through two steps. The first employed exploratory factor analysis (EFA) techniques to establish the validity of the instrument and identify the coping mechanism categories (Hatcher, 1994; Stevens, 1996). The second used simple linear regression to test the TAM hypotheses in the context of AD outsourcing. The EFA used the principle factor method with promax oblique rotation. Oblique rotation is suggested when factors are thought to be correlated factors (Harman, 1976; Hatcher, 1994). The factors are hypothesized to interrelate (in fact, the data later showed that each resulting factor correlated with at least one other factor at .24 or higher). Based on the prior expectation of four TAM factors and the percent of variance criterion (Hatcher, 1994) with a five percent cutoff, four factors variables were retained. In the factor analysis items PU2, PU8, and IN5 (see the Appendix) cross loaded onto the attitude construct, indicating multidimensionality in these measures. All three were dropped. Additionally, PU1, PU5, and EOU1 did not load above the recommended .40 cutoff on their factors and were also dropped. All remaining items loaded on their expected constructs. The constructs all

Table 3. Subject organization size Number of IT Professionals

542

Number of Subject Organizations

1-49

77

Reported IT Budget (Thousands)

Number of Subject Organizations

Under $99

5

50-99

13

$100-$499

22

100-249

30

$500-$1,999

29

250-499

16

$2000-4,999

18

500-999

5

$5,000-9,999

22

More than 1000

18

More than $10,000

56

Not reported

1

Not reported

8

An Outsourcing Acceptance Model

had Cronbach alphas of .77 or higher, well within recommended thresholds (Nunnally, 1967). This indicated the reliability of the instrument. Table 4 presents the descriptive statistics for the analysis including the mean factor scores.

The second step in this analysis employed simple linear regression to test the TAM research hypotheses (H1 through H4). The regression results illustrated in Table 5 indicate that all four hypotheses were strongly supported.

Table 4. Final results of TAM exploratory factor analysis Perceived Usefulness of Outsourcing

Intention to Use Outsourcing

.90

.03

-.07

-.02

.79

.08

.09

-.13

Item

Attitude Towards Outsourcing

AT2 AT3

Perceived Ease of Use of Outsourcing

AT1

.77

-.09

.09

.11

AT4

.62

-.08

.05

.17

PU4

-.13

.80

.05

.01

PU7

.07

.66

-.13

.06

PU3

.12

.63

.14

-.14

PU9

.28

.55

.09

.02

PU6

-.11

.49

.09

.06

IN2

-.02

-.01

.95

.01

IN1

.02

-.01

.91

.01 .05

IN3

.19

.15

.48

IN4

.17

.25

.41

-.04

EOU2

.04

.07

-.04

.75

EOU1

-.10

-.11

.03

.67

EOU3

.16

.21

.00

.60

EOU4

.26

-.01

.07

.46

Alpha

.87

.82

.87

.77

Eigenvalue

6.833

1.564

0.832

0.688

Percent of Variance Explained

71.0

16.3

8.7

7.2

Mean

4.25

5.12

4.72

3.23

Std. Dev.

1.16

0.96

1.19

1.09

Table 5. TAM hypotheses linear regression results Independent Variable (Hypothis)

T value (P-value)

93.44 (D S2 ; D S2-- >R ecor ds 3

R ecor ds 2

C la im Form

R ecor ds 2- ->C F2; C F2 -->C la im Form

R ecor ds 2

Cl ai mFo rm fi ^Invoi ce -->PR 3; PR 3- ->Pa yme nt Paym ent

Cl ai mFo rm fi ,Invo ice

Output

R ul e

In put

Output

R ul e

In put

Insurance Company

R ule

Input

R ec ords 3 -->DS 3

R ec ords 3

Output

Ru le

Invoi ce Invoi ce -->D S10 /PR1 ; D S 10/ PR1 -->Inv oic e Invoi ce

ag reeR ep air

N ew R C-- >D S7 /R S3 ; D S7/ RS3 -->agre eR epai r

N ew R C

esti matedR C -->DS5 /IC 1 ; D S 5/IC 1 -->assi gne dA ass ign edA

RC= 5 00 esti matedR C

In put

Output

Ru le

In put

Outp ut

R ul e

Inp ut

a ted

Output

es t im

d s10 , pr 1

ds 7, rs 3

ds 5, ic1

d s3

D ay to day handling company

ic 3, d s6

ic 2

Outp ut

R ul e

Inpu t

Output

Input R ule

N ew RC

IC 3/ D S6-- >N ew RC

a ssi gnedA a ssi gnedA -- >IC2

Assessor

Outsourcing and Multi-Party Business Collaborations Modeling

Figure 12. Interactions between parties

estima ted RC Integration & Test Team

Transition

iter.#i+1

...

Time

interact interact integrate integrate

Offsite

architectural prototype is used to slice the project into smaller, considerably independent Agile projects. Each Agile project “owns” part of the system architecture. The “seed developers” transfer domain expertise from the client to the supplier’s site. Some of them are employees and managers from the client’s organization. The “seed developers” take on several roles. They lead the teams, serve as local architects, act as customer surrogates, and communicate with the initial architecture team, and if necessary, communicate directly with the client. This organization creates near-perfect conditions for agility in each offsite team. Each Agile offsite team works on a subsystem and develops its detailed subsystem use case model; hence the second elaboration phase, named “production elaboration” in Figure 4. For small projects, one offsite production team will suffice to develop the complete code.

586

iter. #i

Production Team

seeds

forks off

> Integration & Test Team

Construction

For large projects, however, several production teams might be necessary to do the job. In addition, one or more infrastructure teams must be set up to develop common elements such as middleware, services, and any reusable assets. The customers for the infrastructure teams are all other teams. Thus, no matter how many teams are spawned offsite, they all work in Agile conditions, even though predominantly with customer surrogates. It is important to use a common software tool to reduce the risk of miscommunication, to track and communicate project requirements, to identify replicated modules, to map test cases to requirements, and to successfully integrate the outputs from the Agile teams’ into builds. The context diagrams in Figure 5 model the environments in which the different offsite teams operate. Note the dual nature of “seed developers.” On the one hand, a “seed developer”

Agile Outsourcing Projects

Figure 5. Context diagrams for offsite teams

Seed Developer >

Agile Production Team

Architecture Team >

Seed Developer >

Customer (real)

Production Team >

(a) Production team

Agile Infrastructure Team

Architecture Team >

Customer (real)

(b) Infrastructure team

Figure 6. Nested iterations

Integration (project) iteration: 1 month to 6 months

Agile team iteration : week to a month

impersonates a customer, and on the other hand, he/she is part of the team. The interactions of offsite teams with the real customer are supposed to be infrequent and to be mediated by the “seed developers” and the architecture team. For large projects, somebody needs to put together the builds delivered by the production and infrastructure teams and to test the assembled system. This job is assigned to the Integration

& Test Team, or integration team for short. The testing engages the client so that the client’s feedback can situates the project and steer the future effort. The problem with the integration team is that it gets input from the offsite teams, but receives feedback from the client. Normally, the input and the feedback are coming from the same place, in other words, the customer. To account for this anomaly, we split the integration team

587

Agile Outsourcing Projects

into two teams, one located onsite and the other offsite (see Figure 4). Both integration teams derive directly from the initial architecture team. This guarantees that the developers in charge of integration and testing thoroughly understand the client’s needs. A problem with the proposed organization is that of fault propagation. For example, a defect committed by one of the production or infrastructure teams, can propagate through the integration process before the client detects it. Owing to the late stage of its detection, isolating and removing such a defect is expensive. We have provisioned for two floodgates preventing fault propagation: (1) the “seed developers” in each offsite team; and (2) the test engineers in the integration team. Since they all come from the primary architecture team, it is very likely that they would be able to detect many of defects, which are normally revealed with help from customers. The only two teams operating in non-Agile, but still iterative and incremental mode, are the onsite and offsite integration teams. The iterations (heart beats) of both the Agile and integration teams can be best illustrated with the dual beat structure shown in Figure 6. Striking a balance between the lengths of the Agile and integration iterations is the underlying objective of the management team. The management team, comprised of all local team managers, is lead by the managers of the integration teams. We do not show the management team as a separate box in Figure 4 because management is thinly distributed across all teams. Since all offsite teams reside in the same country, and most probably in the same city there are no cultural differences to overcome and communications among production, infrastructure and integration teams are not as ineffective as they are with geographically distributed teams. The management team is in a favorable position

588

because good communication is a prerequisite for effective coordination.

acTiviTiEs and wOrkFlOws In this section, we discuss the activities in an Agile outsourcing project.

inception phase During inception, the emphasis is on the user requirements. A user requirement is a specification of what the system must do. As user requirements are elicited, they are organized into use cases (Jacobson, 1987). Use case descriptions can smoothly scale to large and small systems alike. They promote refinement and traceability from system-level usage goals down to low-level (subsystem, component, and instance) usage goals. Use cases are sufficiently flexible to be used in highly iterative and incremental development environments (Jacobson et al., 1999), as the one proposed in this work. If a system consists of several subsystems, use case analysis can be applied recursively to the subsystems as well. This defines clearly the requirements and responsibilities of each subsystem. Subsystem-level use cases are derived from the system-level use cases and the system architecture (the architectural decomposition of the system into subsystems).

architectural Elaboration The onsite team carries out the architectural elaboration. The goals of the architecture team are to partition the system into multiple semantic domains centered around different subject matters, to define the architectural decomposition of the system into subsystems, and to map systemlevel use cases to subsystem use cases.

Agile Outsourcing Projects

Domain Modeling A domain is a subject area with a shared vocabulary (Mellor, Kendall, Uhl, & Weise, 2004), such as user interface (UI) or payment transaction management. Each domain contains many classes organized around a single subject matter. Most domains require specialized expertise, otherwise known as experience and knowledge in UI design or in payment transaction management. It makes sense to allocate the modeling of a domain to a developer with domain knowledge in that particular subject area. Since a domain model captures precisely the conceptual entities of a single subject matter, it can be said that domain models are logical models. Logical models are in sharp contrast to subsystem models, which are pieces of the physical system. Typically, a physical subsystem is constructed from instances of several logical models. For example, a collaboration realizing a system-level use case would involve instances from a UI domain, a business logic domain, a transaction management domain, a persistent storage domain, and a security domain. Domain modeling leverages scarce domain knowledge normally limited to very few team members and shields the rest of the team from the domain implementation detail. For example, to make an object persistent, a developer needs only to mark its class or one of its attributes as persistent, and a persistent software entity is automatically generated at compile time using the knowledge locked in the persistent storage domain model. The result is a simplified development process, where only a few developers need detailed knowledge about domain technicalities. Domains, unlike objects, are not elemental, but just like objects they are cohesive. The classes and components in a domain are tightly coupled and interdependent, and yet the domain is autonomous, in other words, its classes and components are decoupled from entities lying

outside the domain boundary. Once constructed, domain models have greater longevity than an application because they evolve independently of other domain models out of which the application is built, i.e., they become corporate assets and the biggest units of reuse. In UML, developers represent the containment hierarchy of a system through an aggregation of subsystems. A subsystem is defined as a subordinate system within a larger system. The subsystems define the large-scale physical architecture of the system.

Model Organization For small-sized systems, the subsystem structure can be organized by use cases. The system model is divided into subsystems of related use cases. This model organization is straightforward and allows tracing requirements easily to model elements. The downside of the use case-based model organization is that it does not scale up well and encumbers reuse. Developers are forced to reinvent similar classes in collaborations realizing different use case. For large systems, we propose to derive the subsystem structure from the requirements model and the domain model. A UML package is a container for modeling elements (Jacobson et al., 1999). It is an organizational unit defining a namespace for the modeling elements it contains. The top-level packages of the domain-based system model are: (1) system use cases package; (2) domains package; (3) infrastructure package; (4) subsystems package; and (5) builds package. The system use cases package contains system-level use cases and their actors. The domain package has one sub-package for each domain. The infrastructure domain is a special type of domain. Infrastructure domains contain services and extension points for system communication and infrastructure, and they are dependent on the selected imple-

589

Agile Outsourcing Projects

Table 1. Packages System use cases package

Architecture team

Domains package

Architecture team or reuse

Infrastructure domain packages

Infrastructure teams

Subsystem packages

Production teams

Builds package

Integration and test teams

mentation technology, such as RMI/J2EE or CORBA. The infrastructure package contains one sub-package for each infrastructure domain. Each infrastructure sub-package is assigned to an infrastructure team. Several production teams may use the classes and components realizing the services of an infrastructure subpackage. The subsystem package contains one package for each subsystem, otherwise known as, the classes and components of a subsystem. A large subsystem package can be recursively divided into sub-packages until the size of the leaf packages becomes manageable. A subsystem package normally refers to the classes of several domain packages. Finally, the builds package, containing the system test model, is divided into sub-packages, one per prototype to allow for easy management of incremental builds. The domain-based model organization scales up well to large-sized projects for three main reasons. First, subsystem package decomposition can be applied recursively, resulting in subsystems realizing subsystem use cases. Second, classes from different domains may be reused in different settings and deployments of the designed system, and third, domain models are assets that can be reused across projects. There are two problems with the domainbased model organization. Developers tend to blur the distinction between domain models and subsystem models, and there is an overhead associated with maintaining two separate types of

590

Team

models: domain models (logical) and subsystem models (physical).

production Elaboration All strategic decisions for the overall organization structure of the system have been made in the architectural elaboration phase. Production elaboration drills down inside the subsystems to specify the semantic objects whose collaborations deliver the system’s structure and behavior. In production elaboration, the subsystem use cases are detailed and mapped to collaborations of components and objects using communication diagrams (Jacobson et al., 1999). In Table 1 we show how packages are assigned to teams, for example, the architecture team is in charge of developing the system use cases, and therefore, “owns” the system use cases package.

challEngEs TO agilE OuTsOurcing prOJEcTs Managers of Agile outsourcing projects ought to be aware of the following challenges to project success. The architecture team is the key to project success. It is of paramount importance that this team be a good mix of requirements analysts and architects. Members of the architecture team elicit requirements, build the primary system

Agile Outsourcing Projects

architecture, and subsequently take the roles of surrogate customers, local managers, integration and test engineers, and communicate with customers throughout the entire lifecycle. Inter-team dependencies reduce teams’ abilities (especially affected is the infrastructure team) to test code and deliver builds. Production teams should provide early on the infrastructure team(s) with stubs, so that the work of the infrastructure team(s) proceeds smoothly. With multiple teams, there is always the danger of replicating functionality across teams. The proximity and common culture of the offsite teams work against the chances of duplicating functionality. The participation of the members of the architecture, and later of the integration teams, in design reviews and software inspections helps detect replication early.

cOnclusiOn In the late 1990s and early 2000s, Agile methods took the imagination of software developers by storm. This fact clearly indicates that heavyweight methods have not been embraced wholeheartedly by developers and managers alike and are found either impractical or costly (or both) in many environments. In this article, we introduced a novel project structure creating Agile conditions for large outsourcing software projects. We showed how to slice a large software project into multiple Agile projects. We proposed to separate the development activities to R&D activities, carried out onsite, close to the client, and production activities, carried out offsite and possibly offshore. The onsite, architecture team starts work on the project. In cooperation with the client, the architecture team develops the high-level use case model of the system and completes an architectural prototype with the strategic decisions for the overall system structure. The Agile offsite teams are seeded

with members of the architecture team and start functioning toward the end of the architectural elaboration. The “seed developers” transfer domain expertise to the supplier’s site and act as customer surrogates to help reproduce Agile conditions offsite. Outsourcing entire sets of related production activities retains interactivity at the offsite location and reduces the project risk significantly.

rEFErEncEs Agile Alliance. (2001). Agile Aalliance Manifesto. Retrieved from http://www.aanpo.org Akella, R., & Dossani, R. (2001). IT outsourcing and the software value chain: The Indian supplier during the downturn. In IT Conference, Government of India, Bangalore, India. Akella, R., & Dossani, R. (2004). Private communication. Beck, K. (1999). Extreme programming explained: Embrace change. Boston: AddisonWesley. Boehm, B., & Turner, T. (2004). Balancing agility with discipline. Boston: Addison-Wesley. Brownsword, L., & Clements, P. (1996). A case study in successful product line development (Technical report CMU/SEI-96-TR-035). Software Engineering Institute. CeBASE. (2004). eWorkshop on Software Inspections and Pair Programming. Retrieved April 2005, from http://www.cebase.org Craumer, M. (2002). How to think strategically about outsourcing. Harvard Management Update, 7(5).

591

Agile Outsourcing Projects

Dossani, R., & Kenney, M. (2003). Went for cost, stayed for quality?: Moving the back office to India. Stanford University, Asia-Pacific Research Center. Reteived from http://APARC. stanford.edu Evans, G. K. (2006). Agile RUP: Taming the Rational™ Unified Process. In B. Roussev, & L. Liu (Eds.), Management of object-oriented software development process (pp. 231-246). Hershey, PA: Idea Group Publishing. Gilb, T., & Graham, G. (1993). Software inspection. Boston: Addison-Wesley. Hale, K., Souza, R., Lo, T., Adachi, Y., & Babaie, E. (2005). Forecast: IT services, worldwide, 2005-2009. Retrieved June 2005, from http:// www.gartner.com Huber, N. (2005, May 3). Outsourcing ‘backlash’ highlights need for IT leaders to sharpen management skills. Computer Weekly, 24-27. Jacobson, I. (1987). Object-oriented development in an industrial environment. ACM SIGPLAN Notices, 22(12), 183-191.

Levina, N., & Ross, J. W. (2003). From the vendor’s perspective: Exploring the value proposition in information technology outsourcing. MIS Quarterly, 27(3), 361-364. Mellor, S. J., Kendall, S., Uhl, A., & Weise, D. (2004). MDA distilled. Boston: AddisonWesley. Mezak, S. (2005). The seven deadly dangers of outsourced software development. Retrieved April 2005, from http://www.accelerance.com Outsourcing Institute. (2005). Retrieved April 2005, from http://www.outsourcing.com Pollice, G. (2001). RUP and XP, Part I: Finding common ground, and Part II: Valuing differences. The Rational Edge. Retrieved from http://www. therationaledge.com Pollice, G. (2006). RUP and eXtreme programming: Complementing processes. In B. Roussev, & L. Liu (Eds.), Management of object-oriented software development process (pp. 183-199). Hershey, PA: Idea Group Publishing.

Jacobson, I., Booch, G., & Rumbaugh, J. (1999). The unified software development process. Boston: Addison-Wesley.

Paulk, M. C., Curtis, B., Chrissis, M. B., & Weber, C. V. (1993). Capability maturity model, version 1.1. IEEE Software, 10(4), 18-27. Retrieved from http://www.sei.cmu.edu

King, W. R. (2005). Outsourcing becomes more complex, Information Systems Management, 22(2), 89-90.

Royce, W. (2002, June). The case for results-based software management. The Rational Edge. Retrieved from http://www.therationaledge.com

Kirsch, L. J., Sambamurthy, V., Ko, D., & Purvis, R. L. (2002). Controlling information systems development projects: The view from the client. Management Science, 48(4), 484-498.

Schuh, P. (2005). Integrating agile development in the real world. Hingham, MA: Charles River Media, Inc.

Kruchten, P. (2000). The rational unified process: An introduction. Boston: Addison-Wesley. Kruchten, P. (2004, August). Scaling down large projects to meet the agile “sweet spot.” The Rational Edge. Retreived from http://www. therationaledge.com

592

Stephens, M., & Rosenberg, D. (2003). Extreme programming refactored: The case against XP. San Franciso: Apress. Tiwana, A., & Keil, M. (2004). The one-minute risk assessment tool. Communications of the ACM, 47(11), 73-78.

Agile Outsourcing Projects

Toth, K., Kruchten, P., & Paine, T. (1993). Modernizing air traffic control through modern software methods. In Proceedings of 38th Annual Air Traffic Control Association Conference, ATCA, Nashville, Tennessee. TPI. (2005). Technology International Inc. Quarterly Index. Retreived from http://www.tpi.net

This work was previously published in International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 37-52, copyright 2006 by IGI Publishing (an imprint of IGI Global).

593

594

Chapter 2.12

Object-Oriented Software Design Patterns Applied to IT Management Theory Eric Tachibana National University of Singapore, Singapore David Ross Florey Merrill Lynch Global Business Technology, Singapore

absTracT

inTrOducTiOn

Since the mid to late 1990’s, object-oriented software design patterns have proven to be a powerful tool in support of software design and product management. However, the usefulness of the methodology need not be restricted to the technical domain alone. In fact, the design pattern methodology represents a powerful tool that can also be used in support of it management at a business level. In this paper, we discuss the design pattern methodology, provide an example of how the methodology could be implemented to solve a business problem, the multivariate vector map (mvm), and then apply the mvm pattern to the problem of choosing an it outsourcing strategy as a means to demonstrate its effectiveness to it managers and to it outsourcing vendors.

Since they were first introduced in the mid to late 1990’s, Design Patterns for object-oriented software development have become a powerful force in software engineering. However, the efficacy of Design Patterns need not be limited to the technical realm. In this chapter, we present a broad paradigm through which business managers can apply the object-oriented Design Pattern methodology to help solve strategic management problems and to better predict the market outcomes of their choices. We will begin the discussion by briefly recounting the history of Design Patterns in software engineering. Next, we will discuss and define Design Patterns themselves and explain how the Design Pattern paradigm is used effectively in object-oriented software development.

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Object-Oriented Software Design Patterns Applied to IT Management Theory

Having defined our base of reference, we will then explore the ways in which the Design Pattern paradigm can be applied to the process of strategic management decision-making by examining how several popular management decision-making tools can be refactored as Design Patterns. Finally, we will propose our own Design Pattern, the Multivariate Vector Map (MVM), and demonstrate its effectiveness by applying it to the problem of strategic IT Outsourcing. In support of the case study, we have gathered data from a large multinational IT Services company based in Singapore that was able to provide the information and statistics required for the generation and implementation of the MVM Design Pattern.

whaT arE dEsign paTTErns? Over the last decade, Design Patterns have emerged at the forefront of object-oriented software engineering and have inspired dozens of books, conferences, online communities, and well-designed software solutions. Although the conceptual origins of Design Patterns were being postulated in the early 1990s by several sources, it was the groundbreaking book, “Design Patterns: Elements of Reusable Object Oriented Software” by Gamma, Helm, Johnson and Vlissides, affectionately known as the Gang of Four (GoF), which truly launched the Design Pattern paradigm into the popular consciousness. [FOWLER, 5] The core thesis argued by the GoF explains that rather than solving every software engineering design problem from first principles, good designers reuse abstracted designs developed (and copied) throughout their careers. When software architects discover designs that work, they continue using those designs over and over again. In the words of the GoF,

These patterns solve design problems and make object-oriented designs more flexible, elegant, and ultimately reusable….A designer who is familiar with such patterns can apply them immediately to design problems without having to rediscover them.…Once you know the pattern, a lot of design decisions follow automatically. [GoF, 1] Of course, the recognition of ‘good’ designs within software architecture was no epiphany. Any of the almost two dozen design patterns cataloged in the GoF’s revolutionary book were all designs that any senior, seasoned architect of the era would have intuitively recognized. The GoF’s truly novel contribution to the field was their definition of a paradigm with which to understand the process of recognizing, documenting, communicating and implementing Design Patterns. As they explain it, The purpose of [our] book is to record experience in designing object-oriented software as design patterns. Each design pattern systematically names, explains, and evaluates an important and recurring design. Our goal is to capture design experience in a form that people can use effectively. [GoF, 1] The benefits of using design patterns for objectoriented software engineering have proven to be numerous and significant. For one, while the object-oriented paradigm addressed reusability at the algorithm and object level, Design Patterns make it easier to reuse successful designs at the architectural level. This result is faster development turnaround and more reliable code. In addition, Design Patterns make more starkly visible the assumptions and consequences of design choices. This elevates the process of coding from fire-fighting to architecture, allowing developers to think more strategically about their designs. As noted by Shalloway and Trott,

595

Object-Oriented Software Design Patterns Applied to IT Management Theory

Table 1.1. The core structure of a design pattern ELEMENT Name

Intent Problem

Solution Participants & collaborators Consequences

Implementation Generic structure

DESCRIPTION Many authors have remarked on the importance of pattern naming. Typically a pattern’s name must convey the essence of the pattern effectively. Good names, as has been shown historically, become core components of the vocabulary and folklore of the field. A pattern’s intent defines its purpose. Typically, the intent is captured as a short statement that explains what the pattern does and the rationale and intent behind it. Every design pattern must solve a certain type of problem faced by an engineer. In the literature of Design Patterns, problems are typically described as scenarios that depict situations in which the patterns are applicable and how to recognize those situations. The Solution defines the pattern itself and how the pattern can be used to solve the problem just stated Explains the variables or entities that effect the implementation of the pattern This section includes an analysis of the forces at work in the pattern and documents the trade-offs that might be required when one chooses to use the pattern. Note that consequences can be good, bad, or neutral Usually sample code that provides an example as well as supporting text explaining pitfalls, hints, or techniques that might be useful. A diagram that depicts the essential components of the pattern

“developers are freed from the tyranny of dealing with details too early.” [S&T, 84] Further, representing proven techniques as formal Design Patterns rather than describing them loosely merely through intuition or ‘experience’, means improved communication, documentation, and maintenance as a result of shared terminology. This, in turn, makes systems more accessible to developers of new systems or to new developers. Using Design Patterns means that passing “knowledge” between people is streamlined and made more accurate. For example, a developer on a team need only declare that he intends to implement a “Factory Pattern” and a huge amount of information about his design intentions and their consequences will immediately and effectively be communicated to all other team members. Finally, Design Patterns codify best-practices and help to ensure that there is maximum reuse of industry experience and accumulated knowledge

596

by junior, intermediate, and senior professionals alike. Design Patterns are living, breathing artifacts of experience in that rather than being codified and frozen in place, they are starting points for extended dialog, open to continuous improvement and refinement from a variety of sources over time. In this way, they function as a basis for collaboration, analogous to written language in allowing knowledge to be imprinted and shared over space and time so that instead of constantly reinventing the wheel, we can benefit from the experience of others, past and to come. In Design Patterns, the GoF originally proposed 13 elements to define any Design Pattern. More recent authors have simplified the GoF Framework down to 8. Consider Table 1.1 that was adapted from Shalloway and Trott, [S&T, 83] All object-oriented software design patterns are defined rigorously using this format and, as noted in Section 4, we also use this format to define management design patterns.

Object-Oriented Software Design Patterns Applied to IT Management Theory

applicaTiOn OF dEsign paTTErns in managEmEnT Of course, despite the recent attention paid to the discipline of Design Patterns in software engineering, the theories upon which Design Patterns rely are not new. Nor are they specific to software. The roots of the pattern movement come from a wide array of sources, stemming at least all the way back to Plato’s musings on the nature of form and reality in the allegory of the Cave found in “The Republic”. However, most modern-day pundits would point to the works of Christopher Alexander as the watershed for Design Patterns in software engineering. Christopher Alexander was a professor of architecture at the University of California at Berkeley during the early 1990s. As part of his own studies, Alexander published a series of ‘pattern language’ books that defined his paradigm for recognizing, defining and cataloguing patterns in architecture. These works today are considered the prototypes for pattern books for the software engineering world, and much of the subsequent paradigmatic work, including the rows in Table 1.1, are drawn from his initial efforts. As noted by many authors, Alexander’s phrase, “a quality without a name” is often quoted as an attribute that all good software patterns should have. [Fowler, 6] At the heart of Alexander’s works was a search for the meaning of quality. As explained by Shalloway and Trott, Alexander was challenged by the question, Is beauty truly in the eye of the beholder, or would people agree that some things are beautiful and some things are not. What makes us know when an architectural design is good? Is there an objective basis for such a judgment - a basis for describing our common consensus? [S&T, 76] Ultimately, Alexander’s answer to the question was yes, there was an objective basis, beyond

taste or personal aesthetics, within architectural systems that could measure beauty through a quantifiable objective basis. This method would ultimately lead him to patterns. Of course, Alexander’s exploration of patterns was couched inside a study of architecture. He began by making observations of all manner of living spaces that people have erected, from individual buildings to towns and streets to more exotic creations. Over time, he tells us, repeatable patterns emerged from the data and commonalities became clear in all forms of constructs. As was explained by Shalloway and Trott, Architectural structures differ from each other, even if they are of the same type. Yet even though they differ, they can still be of high quality. Alexander understood this. He knew that structures couldn’t be separated from the problem they are trying to solve. Therefore, in his quest to identify and describe the consistency of quality in design Alexander realized that he had to look at different structures that were designed to solve the same problem. Alexander found that by narrowing his focus in this way, he could discover similarities between designs that were high quality. He called these similarities patterns. [S&T, 77] Alexander defined patterns as, solutions to a problem in a context. Each pattern describes a problem which occurs over and over again in our environment and then describes the core of the solution to that problem, in such a way that you can use this solution a million times over, without ever doing it the same way twice. [ALEXANDER, X] As with architects, anthropologists have pondered the same issues over the last 40 years. One branch of cultural anthropology, suggests that within a culture, individuals will agree to a large extent on what is considered

597

Object-Oriented Software Design Patterns Applied to IT Management Theory

to be a good design, what is beautiful. Culture makes judgments on good design that transcend individual beliefs. A major branch of cultural anthropology looks for such patterns to describe the behaviors and values of a culture. [S&T, 76] Examples include the structuralist movement pioneered by Claude Levi Strauss, in which meaning naturally forms into pairs of binary opposites whose very contrast defines both elements in sharp relief while binding them as a dyad. Levi Strauss applied these structuralist patterns broadly, throughout different cultures of the world and different elements within cultures, providing a new way of seeing culture not as amorphous and atomistic, but as an interaction of patterns and forms. [WIKI-STRAUSS] Also in the cultural realm, Richard Dawkins invented, or discovered if you like, the concept of memes. Memes are the cultural equivalent of genes, which of course are the ultimate biological pattern, defining our very physical makeup. Dawkins asserted that cultural patterns are no less real and relevant, and that their formation and replication formed a basis both for communication and investigation. [WIKI-DAAWKINS] Finally, patterns have been instrumental in Organizational Behavior with usage stemming at least as far back as Carl Jung whose work inspired a slew of Personality Sorter patterns including the well-renowned Meyers-Briggs Personality Types and the Keirsey Temperament Sorter [LEPLANTE, 15] Given the groundings of design pattern theory in the liberal arts, it makes sense that the framework should be applicable to management science. In fact, today’s management theory landscape appears very similar to the world of software engineering in the early 1990’s. Management models abound, but the discipline lacks a paradigm through which to organize patterns themselves into a meta-level analysis of the models. If the management science discipline can gain as much from an investigation at

598

this meta-level as the object-oriented software discipline did, then further investigation is very much warranted. To help the reader understand this, Table 1.2 provides a summary of some of the more common patterns used in management science discourse, but which have been refactored as Design Patterns. It is important to restate as we conclude our discussion of Design Patterns in management science that as was the case in the object-oriented software design space, management models themselves are not at all new. The key benefit of an investigation of Design Patterns is not necessarily any one individual implementation of a pattern (such as the BCG matrix as an implementation of the Quadrant Pattern). Instead, the benefit is to allow an investigation of the models at an abstract level to understand how, when, and where they can be applied to management strategic decision making.

a samplE managEmEnT dEsign paTTErn: ThE mulTivariaTE vEcTOr map Having spent the first half of this discussion focusing on the Design Pattern paradigm, we now provide an example of the process of identifying, describing, and using a new Design Pattern. As was said above, the reader should focus first on the process and utility rather than the details of the Design Pattern. As is often said, patterns are not created, they are discovered. One way in which management theory patterns can differ from software patterns is in their generation. While, as with software patterns, management theory patterns can take existing abstractions and attempt to apply them to other contexts, the examples in Section 3 being germane, the generation of new patterns is a somewhat different matter as we are not looking necessarily at formal design decisions

Object-Oriented Software Design Patterns Applied to IT Management Theory

Table 1.2. Management design patterns ASPECT Name Intent

PATTERN S-Curve

Quadrant

Perceptual Map

Describes repeatable, Helps managers make strategic decisions Positions entities relative to each phased changes to variables based on two-variable analysis other based upon 2-4 variables over time (life span) and represents relative changes in positioning over time Problem Many entities within the Managers need a simple tool to help Managers need a way to business environment are them make strategic decisions. Often, compare multiple entities over subject to changes over for the sake of speed and simplicity, time along 2-4 qualitative axes time. Managers need decision criteria may be reduced to two of differentiation in order to a pattern to help them dimensions track more complex market movements represent these time-based metamorphoses Solution Uses an s-curve to represent Uses a 2x2 grid to generate 4 strategic Plots entities against two axes the life cycle where points choices. Then plots a position against the and size and/or color and tracks along the curve from left two axes to solve for the recommended movements in positioning over time using arrows to right represent changes strategy over time Participants & Time/effort x variable 2 variables of the managers choice as 2-4 variables of comparison as collaborators that is evolving (such as well as 4 strategic choices well as 2 or more entities to be performance) positioned Consequences • Naturalistic and • Simplicity is both a strength and a • Strong visualization tool emergent but weakness • Does not deal well with the predictive and unexpected quantitative view • Works more effectively of management that when comparing qualitative provides flexible, but variables sometimes, high level lens into strategy Implementation Product &, industry life BCG Matrix, Ansoff’s Product / Competitive positioning Maps, (Examples) cycle curves, Emergence Market Grid, Ofman’s Core Quadrants, Market Segmentation Maps of disruptive technologies, Porter’s Competitive Strategies Grid, Gartner Hype Cycle Gartner Magic Quadrant Generic Structure

as with software, but more often at unstructured or semi-structured data as pertains to successful and unsuccessful strategic decisions. Primarily, to be useful, patterns must align with actual data. There are two methods of performing this step, inductive and deductive. An inductive

pattern is more or less a hypothesis put forward based on management theory and experience. Given the input variables, this pattern must then be tested against historical successes and failures to prove, disprove, and/or refine the pattern. Then, it must be applied across domains to verify its validity as a meta-tool. 599

Object-Oriented Software Design Patterns Applied to IT Management Theory

For example, a manager might have a strategic theory that at a certain threshold, high margin product sales merit additional investment in sales staff. Let’s say his hypothesis, based on intuition, is that for margins of 30% or higher, growing sales staff by 50% will lead to overall revenue and profit benefits even after reflecting the additional overhead costs associated with hiring. In order to test this hypothesis, the manager can formulate the theory as a pattern, say a Quadrant with the staff increase on the y axis and the margin on the x axis. He postulates that the sweet spot for growth will be in the top right, when margin is above 30% and growth is 50% or below. The next step in this example would be to test the hypothesis against real-world data. In this example, we can suppose that the manager has access to data from multiple sales divisions over time and can plot the data points on the grid, with successful cases mapped as a dot and unsuccessful cases, those in which profit did not increase within one year, mapped as an x. The results of this exercise might prove or disprove the hypothesis, but will be valuable in either case. Once iterated a sufficient number of times for the data to cluster in a meaningful way, the pattern would be considered tested and would be useful for ongoing strategic decision making. A deductive method, on the other hand, would first rely on observing patterns in raw data, e.g. by use of pattern recognition algorithms and/or rigorous quantitative analysis. This method will find parallels between data clusters and successes and failures. These clusters can then be abstracted, formed into a pattern, and tested and refined as above. An example of the deductive method could be simple or complex, but because the algorithms and statistics that would be used for the deductive approach are beyond the scope of this discussion, for our purposes we will not delve into the details of the methodology. Rather, we will hold the pattern-recognition analysis as a black box. 600

Thus, let’s assume that a manager has a large amount of unstructured data on the situation described above, including profit margins and sales staff growth but does not have any intuition about the meaning of that data. We can assume for the sake of argument, that our “black box”, a pattern recognition algorithm or a diligent quantitative analysis, could identify data clusters using various statistics. In this case, the manager iterates several rounds of deductive analysis before a pattern is recognized – when profit margins are high enough growth in sales staff leads to successful returns. Again, the final result of the process is the pattern itself, which can then be used for strategic decision making. It is important to note that the method for generating the pattern, whether inductive or deductive, is more or less unimportant as the pattern, once discovered, enters into the feedback loop of retesting and refinement. Once the pattern holds up to the rigors of this process and can be predictive of success or failure based on relevant inputs, it can be generalized as a tool and applied to various contexts with customization. The efficacy of the approach is made clearer in the examples above that employ the magic quadrant pattern, which has been used successful time and time again and in numerous varied situations. Again, as in software patterns, management theory patterns are simply abstractions of solutions that have worked in one context and can be reused in other contexts. As discussed above, patterns are not a novel approach to management theory, which uses many approaches to abstract rules and representations to transform data to information and again, to actionable knowledge driving a solution set. As such, by applying the techniques of software patterns to management theory, managers will benefit from the ways that Design Patterns frame problems in useful ways and allow for repurposing some of the tools and methods that have been developed in the software community to a paradigm of management theory.

Object-Oriented Software Design Patterns Applied to IT Management Theory

The sample pattern that we have developed for this investigation is the Multivariate Vector Map (MVM). This sample pattern is purely used in this context to demonstrate the possible utility of such patterns to management theory and should be considered work-in-progress. As with all patterns, it should be approached as a template, more or less useful in different situations, and freely challenged or modified to suit a specific management problem being addressed. See Exhibit A. Generally, there will be two major steps in the creation of any MVM 1. 2.

Define the map topology Define the vectors

The definition of vectors on the other hand, is a two-stage process. From basic math we know that vectors have two components, 1. 2.

A numeric value A direction

The creation of the map topology follows iterations of inductions and deduction. Successful and unsuccessful results should tend to cluster in meaningful ways. One can either form areas on the map as solutions and then test with results, or take data and map successes and failures to ascertain which solutions cluster together as successes in particular points on the map. Once a few iterations are performed, the topology should be refined enough to be used as a pattern for new data points to be entered and evaluate the applicable solution based on the MVM. In the case of our analysis, the MVM was actually derived deductively from data forming the case study below, which should also help illustrate its use. It is important to note however that in this context, it is more appropriate to simplify the pattern and its use due to space constraints, as well as to more clearly show the concept without getting lost in an inordinate amount of detail. Finally, it is important to mention that while we decided to limit the map topology to 4 solutions for the purposes of this discussion, the MVM

Exhibit A. ELEMENT Name Intent

Problem

Solution Participants & collaborators Consequences

Implementation Generic structure

DESCRIPTION Multivariate Vector Map The aim is to take a basic combination of input values, factor them together as vectors and apply their solution to a grid with a predetermined topology of strategic choices to help managers make the right choices given their unique business contexts In management, there is often a wide array of quantitative data and qualitative comparisons, that defy the visualization and contextualization required to justify specific strategic choices or solutions to an existing problem. While the Quadrant pattern is fairly well-recognized, it lacks the finesse to handle truly multivariate situations and also limits the solution domain to four solutions. This pattern seeks to frame inputs as values to add as vectors to arrive at a map point defining a strategic solution. The two key steps in applying this pattern are choosing relevant inputs and converting those inputs into relatively-scaled vector, then building the topography of the solution map. If properly applied, the multivariate vector map reduces complex analysis to a simple, easy to explain, graphical solution. However, if not properly developed and tested, the results may mislead. Refer to Case Study in Section 5, IT Services Solution Refer to Figure 1.1.

601

Object-Oriented Software Design Patterns Applied to IT Management Theory

pattern is not limited in any way to the number of solutions, nor to the use of a Quadrant-based solution map. The MVM would be just as useful, for example, using clouds, overlapping circles, or any other form of topology. With deductive analysis, quite unique and unexpected patterns will tend to arise from clusters of data. For the numerical values, the critical factor is to scale the input values more or less evenly across all vectors. Thus, for example, if you have a dollar value for one vector and a time value for another vector, if the dollar values vary between $1 and $1000 and the time from 10 to 100 days, you’ll want to make the dollar vector scale by units of $100 and the time by units of 10 days. This gives more or less comparable values so that the results don’t skew too wildly on the map. The second issue to address with vectors is their direction. Ideally, the inputs will vary in a predictable way versus each other, whether inversely, complementarily, or additively. For example, in situations where economies of scale preside, cost and volume should vary inversely, meaning that the vectors will be diametrically opposed. These relationships among vectors’ directions will allow them to usefully interact in combining to indicate a position on the map. Typically, as will be demonstrated in Section 5, the direction of vectors will be governed by the map topology.

form of IT Service solution is appropriate to any given particular environment? In today’s hyper-competitive and globalized market, all businesses that use IT services in performing core functions, from banks to farms, face the problem of how best to source and supply IT services to meet business goals in a way that is tailored to their business goals, capabilities, and resources. [BRAGG, 1] The same issue applies in reverse to IT service providers – which organizations (or market segments) are the best potential customers for specific solutions based on their IT environment? How should any one IT Service provider segment the total market? [BRAGG, 14] By deriving and applying the MVM Design Pattern to this problem, customers and providers can have greater confidence in a best-fit solution based upon a bounded rigorous methodology. As was mentioned in Section 4, application of the MVM begins first with an analysis of the solution topology. In the case of the IT Services market, we are quite fortunate because the map topology is fairly well defined by the industry itself. The typical decision space for IT service provision generates 4 generic solutions: •

•

dEsign paTTErns by ExamplE: using mvms TO analyzE dEcisiOns abOuT iT OuTsOurcing Given the importance as well as the real and perceived complexity of strategic IT services outsourcing in S.E. Asia (both from a supplier and a buyer perspective), and because both authors had access to industry data, it was natural to focus our research on this domain. The following case study addresses a basic problem in the industry – what

602

•

•

In-house –An organization supports its business using its own IT environment, its own people, and its own management Out Tasking – an organization supports its business needs by employing external contract staff, possibly in addition to inhouse staff, to manage and run its own IT environment. Managed Services – an organization employs an IT Service provider to staff and provide a degree of management in fulfilling IT services. That is, the organization’s business is supported by its own IT environment, however, the environment is managed by the provider, using the provider’s people Outsourcing – an organization employs an IT Service provider to completely ac-

Object-Oriented Software Design Patterns Applied to IT Management Theory

cept responsibility for all, or an area, of its IT infrastructure, including management by contracted service levels. This solution in essence makes the service provider the organization’s IT department, governed by business goals and overall IT strategy codified as service levels. In many cases, the organization transfers people and capital equipment to the provider. The correct selection and application of these solutions has been the subject of much debate as IT infrastructures grow in cost, complexity, and importance and as outsourcing gains popularity as a viable option. However, in many instances, there is great uncertainty about the appropriate solution, and when an inappropriate solution is selected, many problems arise for both organizations hoping to outsource and their outsourcing service providers. As a result of the lack of a strategic decision-making tool, there has been a well-reported backlash against outsourcing and we believe some of the lack of confidence is avoidable by applying more rigorous methods to the selection process itself. [WIKI-OUT] In particular, using the MVM design pattern can result in stronger, more relevant decisions. Whatever the case, the MVM topology is based on a set of four solutions. It is important to note here that to some degree, the map positions are arbitrary since the weightings and direction of the vectors will be based on the solutions. But as noted above, from industry best practice and from experience we can say that Managed Services and Outsourcing are more similar and should be proximate to each other. If we place them both at the top left and top right of the grid respectively, then we need to look at the other two solutions in relation to them to propose their relative position. Since both In-House and Outsourcing solutions are managed by a team in which IT managers and staff are from a single organization, they would appropriately by nearer each other. The remaining

section next to Outsourcing is bottom right, so we place In-House there. This leaves Outtasking to the bottom left. This is a simplified topography – you might well have more solutions grouped in less symmetrical ways, but for our purposes, this topography should show the MVM in action. Figure 1.1 depicts the MVM solution grid for the IT outsourcing market. Having defined the map topology based upon industry practice, MVM analysis next calls for a definition of the vectors of differentiation. In our study, the vectors of differentiation selected to generate our data set were chosen because 1) management felt that they represented a statistically significant subset of possible data points, 2) our target company only captured certain data points and 3) the point of the study was to demonstrate the methodology of applying the Design Pattern paradigm to management strategy rather than to generate a complete and tested pattern, and, as a result, a key goal was to simplify the set for clarity and convenience. It is worth mentioning that we believe that in refining the MVM for this specific domain question, it would be useful to abstract the study across more companies and additional vectors of differentiation however this was beyond the scope of this study With that said, the data points are all very relevant to the process and the actual Design Pattern did support management intuition and experience. Thus, with no further ado, the vectors that we used for the case study are as follows: •

•

•

Criticality was defined as a measure of how critical the IT services provided are to business functions. Specificity is a measure of the degree of proprietariness of the infrastructure/applications. Complexity is a measure of the heterogeneity of the technical environment.

603

Object-Oriented Software Design Patterns Applied to IT Management Theory

•

Scale is a measure of staff/infrastructure size.

In regard to these four vectors, it is important to pause here to reference back to Section 4. As was mentioned there, all vectors have 1) a value and 2) a direction. Thus, the next step in the implementation of the MVM pattern is to define the vector values. But recall that because vectors must be measured in the same scale, we must also harmonize the scales across all four vectors. That is, if we say that the set of companies examined has a range of scale (staff and/or systems) from 100 to 1000, a complexity from 2 to 13, a specificity from 0 to 8, and finally criticality from USD50K/ week to USD900K/week; then we align the unit values to approximate a range of 1-10, we can arrive at the values given above. Scaling was done as follows: •

•

Criticality was defined as a measure of how critical the IT services provided are to business functions. The vector unit values are based on the financial impact in hundreds of thousands of USD per week to service interruption to 1. Specificity was defined as a measure of how bespoke the environment is, measured by the percentage of highly modified platforms and critical applications. Vector unit values were taken on a 10% to 1 basis.

Figure 1.1. MVM grid for the IT outsourcing market

•

•

Complexity was defined as a measure of the number of platforms employed, by OS and critical application. Vector unit values were taken on a one to one basis. Scale was measured in terms of the number of staff and the number of critical systems (servers, desktops, and software applications) available in the infrastructure. Unit values were taken in groups of 100 (100 staff or 100 critical systems equal 1 vector unit).

Thus, for example, consider one of the following study companies: Company X is a pharmaceutical company with manufacturing facilities in Singapore. Other than the ERP systems supporting the production lines, the majority of the IT infrastructure is fairly non-critical, including mostly admin, logistics, and finance support systems. However, because of the costs associated with manufacturing bottlenecks, a profitability analysis yields a cost of US$400,000 per week of downtime The scale of the operations is also fairly small including about 50 IT staff supporting about 150 systems. In addition, while the company does employ a fairly standardized Standard Operating Environment (SOE), for historical reasons there are 4 separate operating environments including Windows XP, AS400, UNIX, and LINUX. Finally, the infrastructure is highly specific. With the exception of the ERP environment, most of the environment is standard office suites, applications . Following our rules defined above, the company was given the following scores: Criticality – 4 Scale – 2 Complexity – 4 Specificity – 5

604

Object-Oriented Software Design Patterns Applied to IT Management Theory

As was mentioned in Section 4, the next step in the MVM design pattern is to assign directionality to each vector. To some degree, the directionality was determined inductively based first upon management experience and then tested against the data set in order to refine it and validate it. The following section records the decision criteria that went in to defining vector directions. •

•

Criticality reflects the business impact and means that cost is less decisive (because downtime is so expensive). As a result, the specialist expertise and flexibility of an external provider can be helpful to avoid outages. On the other hand, a highly developed inhouse staff is also a viable option. Ultimately, the fact that the vector is being pulled two ways yields a sloped direction. Although simplistic, for the purposes of our analysis, we chose to define the slope at a 45 degree angle upward to the right which reflected that outsourcing is strongly preferred over Outtasking, but Managed Services and In-House solutions both receive partial inclinations. Specificity This vector points in the exact opposite direction from Scale. In fact any vector which dis-incentivizes an outsourcing solution would point downward. In the group of vectors identified Specificity would be in this category as a highly proprietary environment, developed by in-house staff, would be exceedingly difficult for an external service provider to manage and would usually only be an Outsourcing candidate

•

•

if the scale was large enough to be overwhelming for a customer organization to manage on its own. Complexity - Heterogeneous environments are more difficult to manage and tend to work better if the team is monolithic, which is the case in both outsourced and in-house solutions where management and staff are all from the same organization so better coordination of efforts can be achieved. Therefore, the direction for this vector is horizontal to the right. Scale is slightly more straight-forward. Large-scale environments tend to be good candidates for outsourcing as they require a large number of staff and would represent a concomitantly large management distraction, especially for a non-IT company. Therefore, in the study we assigned to the scale vector an upwards direction, or 90 degrees from a horizontal axis, and used this as a reference direction for vectors that tend to lead to an outsourcing solution.

Figure 1.2 represents the directionality visually With the 1) map topology, 2) vector scaled values and 3) vector directionality, we are ready to apply the MVM Design Pattern to actual decisions. While the study included only 10 customers of our single IT Outsourcing vendor, for the purposes of demonstration we provide the analysis of 4, as they represent a fairly diverse and interesting set of solutions that test the efficacy of the pattern

Figure 1.2. Vector directionality

605

Object-Oriented Software Design Patterns Applied to IT Management Theory

Figure 1.3. MVM for Company 1

well. It is worth noting that details have been altered to protect the anonymity of the companies involved.

company 1 Criticality – 2 Specificity – 10 Complexity – 10 Scale – 2 Figure 1.3 provides a graphical representation of the solution grid for Company 1. Company 1 is a high-end technology research facility. Like the Pharmaceutical example in Section 4, while the systems are important to the ongoing profitability of the business, downtime is not particularly expensive. Specifically, Criticality was measured at 2. On the other hand, Specificity and Complexity reached their maximum values. The infrastructure heterogeneity is driven by the need to develop products on a variety of platforms, but this also means the staff are highly technically skilled. Because this is a development environment, by definition all the applications are completely

606

proprietary and developed in-house. Finally, the scale of operations is fairly low as R&D tends to require smaller infrastructures. This was supported by the actual data. Ultimately, one can see from the MVM that for this company, in-house staffing should be the preferred solution and this company would not be a good candidate for the sales representative of an IT Services vendor. This makes sense intuitively as it is a small environment, highly modified, with a highly complex but less mission critical set of systems as outages have minimal impact as long as data is backed up since none of the applications are live. A small team can manage this environment, but they must be specialized.

company 2 Criticality – 10 Specificity – 10 Complexity – 10 Scale – 10 Figure 1.4 provides a graphical representation of the map solution for Company 2.

Object-Oriented Software Design Patterns Applied to IT Management Theory

This situation is quite different from Company 1. This company is a large bank with numerous servers on various platforms running highly proprietary applications. Needless to say, the infrastructure is as mission critical as exists, with millions of dollars of transactions running through the systems. While the backup and disaster recovery regimes mitigate the frequency and impact of downtime, any outage has a high monetary impact. This company can benefit from the economies of scale a service provider

can provide in outsourcing, with the benefits including backfill, remote support, and increased general background knowledge, as well as a pool of skilled resources.

company 3 Criticality – 1 Specificity – 1 Complexity – 1 Scale – 10

Figure 1.4. MVM for Company 2

Figure 1.5 MVM for Company 3

607

Object-Oriented Software Design Patterns Applied to IT Management Theory

Figure 1.5 provides a graphical representation of the map solution for Company 3. Company 3 runs a call center, with replicated workstations and quite a few racks of identical network equipment. This environment is very large, but it is very generic given the scale, and is virtualized using blade servers and standard operating environments. In this case, a Managed Service solution can provide an external team to oversee the infrastructure to mitigate the impact of a high number of headcount being taken on by the customer, but since the infrastructure is simple and relatively non-critical, the organization can manage the external team relatively easily.

company 4 Criticality – 1 Specificity – 5 Complexity – 1 Scale – 1 Figure 1.6 provides a graphical representation of the map solution for Company 4. Company 4 is a small game-design workshop, with a fairly specialized infrastructure. Because

Figure 1.6. MVM for Company 4

608

the skills required to manage the systems are unique, the company relies on finding correspondingly unique resources. If the company employs the resource directly, the management will likely have little knowledge of the platform expertise and if the resource must be replaced, the recruiting overhead can be high in finding the appropriate staff. Using a service provider does not interfere with the management process since in this case it is relatively hands off, and the task of finding and/or replacing the specialized skills is handed off to an outside company that is more experienced in recruiting for such roles., this scale might not even require full-time employees, so contracting staff from a third party is much more cost effective.

cOnclusiOn It is finally worth mentioning that these are relatively extreme cases, and also simplified to illustrate the utility of the pattern, but conceptually the strategic decisions driven by the use of the MVM should be well-supported by relevant market data. Use of the model should increase

Object-Oriented Software Design Patterns Applied to IT Management Theory

the confidence level both of the organization and the supplier that their IT service partnership is an appropriate, sustainable, and supportable one. These decisions are often made by management based on intuition and market trends. Intuition is as good or bad as the experience and knowledge of the manager making the decision, so this tool can aid managers, good and not so good, by allowing them to approach the problem at the correct level of abstraction and relevance. A CIO should not be looking at an asset list and employee roster, with numerous other detailed data points, but needs to focus on the real strategic bird’s eye view of the situation when making such a critical decision. Market trends can be useful, but only if interpreted properly, which is usually more beneficial in hindsight. Hype and bust curves are obviously misleading, and strategic market trends as a guide implicitly rely on the market performing a useful amount of analysis, that if it takes place at all is seldom transparent to outside organizations. Market data is far more useful when analyzed in context, using proven methods and tools. In the case of outsourcing, market trends have varied wildly, with success of implementations varying almost as much. In this environment, CIO surveys and the like become less reliable.

budget, or disruptor. Of course, this would take as much analysis and testing to derive as any other pattern, but we put it forward here to show other potential areas the pattern could address. Ultimately, individual MVMs can be more or less useful, but the power lies in the application of the Design Pattern Paradigm to management theory in order to allow a more formalized method for developing and communicating strategic analysis in the management field.

rEFErEncEs Alexander, C., & Ishikawa, S. (1977). A Pattern Language. New York: Oxford University Press. Bragg, S. M. (2006). Outsourcing. Hoboken, NJ: John Wiley and Sons. Fowler, M. (1997). Analysis Patterns: Reusable Object Models. Indianapolis, IN: AddisonWesley. Gamma, E., Helm, R., Johnson, R., & Vlissides, J. (2000). Design Patterns: Elements of Reusable Object-Oriented Software (Paperback). Boston, MA: Addison-Wesley. http://en.wikipedia.org/wiki/Claude_LeviStrauss

addiTiOnal pOssiblE casE sTudy

http://en.wikipedia.org/wiki/Outsourcing http://en.wikipedia.org/wiki/The_Selfish_Gene

Another area of great debate and consternation is the pricing of products and services. The MVM pattern could potentially be applied successfully to this problem as well. For example, one could use the inputs of market size, market share, innovation, and value and create a map topology divided into market segments such as market leader on the high end, to mainstream,

Laplante, P. A., & Neill, C. J. (2006). Antipatterns: Identification, Refactoring, and Management. Boca Raton, FL: Auerbach Publications. Shalloway, A., & Trott, J. R. (2005). Design Patterns Explained: A New Perspective on Object-Oriented Design. Boston, MA: AddisonWesley.

This work was previously published in Strategic Information Technology and Portfolio Management, edited by A. Tan; P. Theodorou, pp. 296-312, copyright 2009 by Information Science Reference (an imprint of IGI Global).

609

610

Chapter 2.13

The Creation of a Commercial Software Development Company in a Developing Country for Outsourcing Purposes Sam Lubbe University of KwaZulu-Natal, South Africa

absTracT SDC has financial services knowledge with cross-industry technical skill capabilities. Their emphasis is on advanced development techniques and tools. The model they used is proving to be successful for all parties and the growth process had provided them with invaluable experience and expertise in the HR transformation. The lesson they have is that they need to ensure that they have a strong presence in the market.

inTrOducTiOn Some case studies are qualitative while some are not. Custom also has it that not everything is a case, but firstly having established the criteria for case

studies, it was therefore decided to subsequently follow the case study method. This was also done because the authors felt that the creation of a software development company (SDC) justified a case study. This was further motivated because there has been a growing interest in the use of qualitative techniques in the administrative sciences and the case study could do justification to research. This case study will therefore report on the creation of a software development company (SDC) in South Africa using a detailed description of interrelationships between perceptions of what is happening in developing countries and what is happening in developed countries. The case describes the scenario and contributions stemming from the methodological point of view. The case study also illustrates points such as the value of

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

The Creation of a Commercial Software Development Company in a Developing Country

following a structured method of establishing a methodology for starting such an SDC. The need is discussed for context specific measures of the characteristics for an SDC and the reporting of process measures while establishing an evaluation of the SDC that is being created. Also the need to explore the necessary relationships between the clients and the systems that are created and the perceptions of the clients are discussed. This is because the unidirectional assessment of the SDC can impact on the users and user characteristics and on computer software implementation. Despite the normative nature of the SDC the most important conclusion is the desirability for a variety of approaches to studying SDCs. No one approach to SDC research can provide the richness that information systems research needs for further advancement of the skills in a developing country.

inFOrmaTiOn sysTEms in sOuTh aFrica in cOnTExT South Africa is a medium sized country, 471,000 square miles at the southern tip of the African continent with a population of some 43 million people. Relative to the rest of Africa, South Africa is substantially industrialised. The Republic of South Africa is a wealthy country from an industrial and agricultural point of view and computers have been actively in use in South African business and industry since the early 1960s when both IBM and ICL opened offices in Johannesburg. Today South Africa employs computers in every aspect of industry, business, and government, as well as having a relatively high percentage of home computers among the middle class. All the major vendors are present and there is considerable interest in hi-tech. The business and industrial sectors in South Africa are as sophisticated as anywhere in the world in the use of information systems. South Africa leads the world in deep level mining and

supports this activity extensively with computer systems. The country also has a substantial financial services sector that has won international recognition for its excellence in information technology. For example, the First National Bank (FNB) of South Africa was named one of the world’s top 100 computer users by ComputerWorld Magazine in May 1995 and in July 1996; the same bank also won the prestigious Smithsonian Institute prize for the innovative application of biometrics in their information technology.

background Information systems play an important role in the survival of a country and its organisations. Coupled with the lower costs, increased processing capabilities of hardware, and cost conscientiousness of many CIOs and CEOs, it becomes a vital source of deriving efficient and cost effective solutions for organisational problems. A good manager using a well-organised information system enhances any organisation’s ability to compete favourably and it minimizes the assumptions and presumptions in decision making that could lead to bad performance and eventually the downfall of the organisation. In many organisations, information technology (IT) (especially software) also shapes the process of product development. Organisations that are able to adapt new software technology into their development process have often seen increased productivity and improvement overall in product quality. This is why so much emphasis is being placed in South Africa on the correct procedure for software development. This has provided the motivation for many organisations to strive to become a software development company (SDC). The cost of software development systems, like information systems, stems directly from the cost of resources required to provide and support the functions of systems. The decision to outsource development to SDCs can be a serious strategic change. Therefore, before managers can support

611

The Creation of a Commercial Software Development Company in a Developing Country

software engineering, these SDCs must have a realistic understanding of the viability and of the costs and benefits of the tools. Cost benefit analysis usually can mean continuous reaching of goals (Lubbe, 1997). Benefits must usually exceed costs to justify the expense and this is another reason why organisations will look at SDCs as an alternative to developing software in-house. The economics of software engineering has often focused on software cost estimation. Essentially this is a consideration of the costs related to single development projects. First world sophistication, which is in demand, requires worldwide growth of the use of information technology. However, a worldwide shortage of information technology skills exists. The high level of South African skills (business and technical) consequently causes an alarming rate of loss of top skills and thus a shortage of quality human resources in the IT sector.

motivation for starting a commercial software development Operation The external business pressure causes conversions and downsizing of industry sectors. This in turn causes a trend towards more efficient, focused business SDCs. The increasing competition in the global market place and new entrance is another motivation for starting a new commercial software development operation. The demand for faster and more cost-effective software systems delivery causes better local content as well as flawless production services, which can also be another motivating factor. Some of the internal IT pressures such as skill shortages, the need for incentives to retain IT staff, perceived lack of professionalism, better productivity, delivery speed, quality, and clear career paths could be a very good motivating factor for starting an SDC. Further motivation for starting an SDC in developing countries could be to stop the outflow of South African talent by creating job opportuni-

612

ties for new graduates. The worldwide dispersion of these talents could be prevented, ensuring a nucleus of software developers. For all software developers, recruitment opportunities would be created, thus enabling a contracting option and keeping their talent for the newly proposed SDCs. The SDC should ensure retraining of these people—ensuring interest, loyalty, and the driving force to succeed in the company. Creating the previously mentioned nucleus of software experts makes it easier for customers to rely on excellent solutions and maintenance of the completed products. The solution could be a result of a mixture of the right professionals leading to applicable end products.

creating a commercial software development company Background to Starting a New SDC The vision of the SDC company is to become the leading SA systems integrator for speed of delivery, quality, and value, using the most advanced tools and techniques, and to be the most appealing IT employer in SA. One should keep in mind that to start a largescale software development company, some projects, such as high-volume commercial transactions processing systems, require advanced analysis, design, and development techniques. This will also entail doing an evaluation of the SDC’s software development process in respect of the capability maturity model (CMM). Currently a minimum of CMM Level 3 has been targeted. This will ensure that a standard system development process is integrated throughout all development activities of the SDC. As a result, of this a degree of certainty in the quality of the software products will be guaranteed. Furthermore, this will also allow the SDC to benchmark its development process against international standards. The present SDC company has signed and completed more than 1700 maintenance requests

The Creation of a Commercial Software Development Company in a Developing Country

in their first year of operation. On the other hand, they have finished 99 projects in the first year and the following figures were provided in respect of the attainment of their goals: •

have some academic connections with one SA university since 1990 and had recruited some of the IS graduates from this university. They regard this as a long and mutual friendship. The managing structure of the company starts as a normal hierarchical organisation with a managing director at the top and directors for various departments. The operations director controls the following sectors: strategy and architecture, software factory, business intelligence, systems maintenance, support and renewal, project office, and network infrastructure (see Figure 1). The company identified the software manufacturing industry in South Africa as a situation of concern. They identified the current outputs of the IT industry as of a low standard and regard this as a future challenge for the success of the SDC. Their strategy is basically to prevent high staff turnover and to keep abreast of dramatic changes in the software manufacturing business.

Of 78 projects with planned end dates: ○ 18% were delivered ahead of time. ○ 44% were delivered on time. ○ 27% were delivered within one month of the planned dates giving them a completed figure of 89%.

An issue of concern is that they did not speak about the 11% that were needed to complete a 100% record. Of the 60 projects with initial costs estimates: • • •

52% were delivered under estimate. 28% were delivered on estimate. Only 20% were delivered slightly over.

Services and Operations of the SDC Company

The 20% delivered slightly over, needs to be defined but they declined the offer to clarify this. The company was created in the late 1990s by combing an established existing organisation and some key staff from the present organisation in the ratio of 3:2. The organisation presently has nearly 200 staff members and is based in one of the harbour cities of South Africa. Their future aim is to expand into international markets. They

The company’s services include items such as strategy and architecture, software factory, business intelligence, systems maintenance, and support renewal. On the strategic architecture side of the SDC, IT enabled business transformation consulting for this newly established organisation consists

Figure 1. Organogram for SDC Managing Director

Research and Standards

Strategy and Architecture

Operations

Software Factory

Sales & Marketing

Business Intelligence

Finance & Admin

Systems Maintenance, Support & Renewal

Project Office

Provincial Operations

Network Infrastructure

613

The Creation of a Commercial Software Development Company in a Developing Country

of project definition, planning, and management. Analysis is an important aspect of any SDC and for this specific SDC that had been set up. The design of processes, applications, and technology are important factors for managers of SDC and the organisation. Business migration and development coordination is an aspect that should be kept in mind by the managers when they want to develop a new system or application and development of technology. All of this ensures business change and proper development coordination. The SDC can evaluate packages on behalf of any organisation and look at gap analysis in order to ensure that all variations are within all acceptable norms. Project management is an important facet of systems development. The SDC would, however, struggle to do some systems integration if they are not an integral part of the company. The SDCs staff however, needs some training in order to ensure a successful implementation. On the other hand, business systems development is the main thrust for the company that had been selected as part of the case study component. They specialise in enterprise systems groups and the distributed systems for any organisation. Their approach is an engineered, model-driven approach with tight project definition, management, and control. They feel that this approach would enable them to satisfy requirements from organisations that approach them. They implement changes and new systems with a minimum disruption to any organisation. The problem they face is that as an organization, they have only six years component-based developing experience. However, overall the combined experience of the staff might be several years. They specialise in applications such as GEN (Sterling), Microsoft, DB2, SQL server, and Oracle. The business intelligence section of SDC entails the formulation of a data warehouse strategy for the organisation by designing, developing, and helping to implement the data warehouse. They

614

regard their duties as including the following: data analysis and DB design, data sanitisation and transformation, data warehouse development, and metabase management. The important aspect of this part of their duty includes data distribution, data mining, information reporting, and decision support. Here they use software such as SA.S, BO, DB2, and the SQL server. The systems maintenance, support, and renewal sectors include some of the following duties: • • • • • • • • • •

•

•

Service level agreement Production maintenance, running, and control Help service desk Request logging and work tracking Change control and management Production management, support, and standby Optimisation of platform Legacy renewal via internet enablement and component wrapping They use software such as COBOL, IDB2, IDMS, ADS/Online, MS, and Delphi. The strong point of the SDC is whole personal finance solutions. The system entails personal insurance (life and risk), employee benefits, and medical aid thus ensuring a well-developed financial package that ensures that the human resources section of any organisation is well run. In this regard, they use an EB2000/Dataway. Their customer base expansion strategy includes the EB centre (retirement funds, life insurance, properties, healthcare, and investments) while they work across industry into telecommunications, transport, utilities and manufacturing. Their approach to systems development

They use a twin track type of development. This entails the following:

The Creation of a Commercial Software Development Company in a Developing Country

•

•

•

•

•

•

The first step is the usual application requirements gathering, analysis, and design. During requirements gathering and analysis, the underlying philosophy is centred around in-depth identification of business needs. It is recognised that these phases of development are as crucial in terms of final product quality, as is the choice of development technology and actual construction. Therefore, the deployment of good analysts with sufficient experience in the client’s business area is given a priority. Thereafter, development is split in two different tracks along a component based development timeline. The first track entails component design and operation specification and the specific development of components. They release the component and the two tracks meet each other. During the first track’s process they also release the component interface release to the second track developers. The second track entails the application interface prototyping, building the application and application integration testing. There is communication between these two tracks all of the time in order to ensure that tile timeline is honoured. The last combined step is the application release builds whereby the application is installed and tested in the organisation.

The important step for SDC is the tactical delivery approach that the organisation follows. They follow the European approach whereby code and older software is re-used. If this approach is not applicable, they would investigate. If it is not better to buy, they build the application. If this is not applicable, then build for re-use would be their suggestion to their clients. Their target market is existing systems in the open market but their conceptual approach might differ. They keep

a stock of component objects they can re-use. During the development process, they adopt an approach such that the end product is the application that can be generalized and used for other companies as well.

Taxonomy of Components Their taxonomy could be divided into two sections. The first section is the technical section and deals with the following aspects: •

•

•

•

The security aspect has eight entities in the component and more than 30 public operations. The ADPV is a purchased component as well as the audit part of it. They do registration of all the parts they develop and install. The main taxonomy of components can be found in the business side of the organisation. They have 40 FIC applications and 19 public operations. The important aspect of their business is the client environment (69 entities and 11 public operations), investment applications (12 entities and 2 public operations), contribution applications (14 entities and 3 public operations), annuity costing basis (11 entities and public operations), EB event (1 entity and 3 public operations), client agreement role (68 entities and 14 public operations), fees (12 entities and 2 operations), Notation (5 entities, 2 public operations), annuity calculations (2 entities), global operations (no entities or public operations), agreement applications (40 entities, 11 public operations), portfolio applications (34 component entities and 5 public operations), and some investment switching applications which they have finished but nothing is sold yet. Components in the developing pipeline entails issues such as EB late pay limits, EM membership fixed property, EB bonus rates, EB commutation limits, and global tax rates and limits. 615

The Creation of a Commercial Software Development Company in a Developing Country

•

The results of the joint venture are that they had a successful HR transformation ensuring that they do not lose too many of their employees (8% vs. 25% previously). Their productivity is 100% better and therefore they can deliver systems faster. There is an international demand for their products.

companies are building their research and development capabilities. This would require: • • • •

Broad Requirements for Sustaining SDC Development In order to succeed, an aggressive government plan is needed. Industry and regional initiative need to be coordinated and correlated. The important aspect is free movement of information and skills. This means the elimination of inflow barriers for high-tech skills. To reach this goal, the government needs to do aggressive international marketing. Furthermore, the government needs to offer incentives for sustaining the growth of SDCs. Some ideas could be tax holidays for new start-ups, facilitation of international links, and knowledge exchange programmes, and so forth.

Sustaining the Generation of SDCs Companies need to copy examples of the growth of a national software capability that will ensure survival. This would require a prototype roadmap for the growth of a software centre. A lesson can be learned from the government of India: The Indian government has drawn up some software companies contracts with multi-nationals to send Indian programmers to work in the USA or Europe at the client’s site or under direct suspension of clients’ technical managers. Indian companies set up development centres in India where development and maintenance was done under Indian managers. Typical projects were systems maintenance, software test development, and execution as well as software components. Furthermore, some value adding is required while

616

Highly developed project management capabilities Quality by decision Extensive employee training The highly evolved practise of process engineering and relationship management

The South African software industry and the SDCs need extensive domain knowledge in banking, insurance, and financial services. They also need to create new technical capabilities and products to sell overseas. For all of this, SDCs in developing countries need a highly educated work force, low cost of labour, highly developed information and telecommunication infrastructure and business modules consisting of: • • • •

Pilot project Larger scale development Dedicated development centres Own development units

The success factors of countries such as India and Ireland need to be copied. South Africa and other developing countries would like to educate a young, highly educated workforce with strong technical and business skills. These workers need to be highly effective and efficient. SDCs need full government support for the industry, with both financial and nonfinancial industries for both indigenous and overseas companies. This would make these countries an ideal gateway to the international markets. To summarise some patterns: • • •

A well-educated work force is mandatory. Do not start building independent products. Take advantage of regional markets.

The Creation of a Commercial Software Development Company in a Developing Country

cOnclusiOn

rEFErEncE

They have strong financial services knowledge with strong cross-industry technical skill capability and an emphasis on advanced development techniques and tools. The model they are using is proving to be successful for all parties and the growth process had provided them with invaluable experience and expertise in the HR transformation. They think they are well positioned for significant growth.

Lubbe, S. (1997). The assessment of the effectiveness of IT investments in South African organisations. PhD dissertation. University of the Witwatersrand, Johannesburg, SA.

This work was previously published in Information Communication Technologies: Concepts, Methodologies, Tools, and Applications, edited by C. Van Slyke, pp. 862-869, copyright 2008 by Information Science Reference (an imprint of IGI Global).

617

618

Chapter 2.14

Networked Knowledge Management Dimensions in Distributed Projects Ganesh Vaidyanathan Indiana University South Bend, USA

AbstrAct Can knowledge capture and dissemination be managed efficiently? Is there a framework that addresses distributed knowledge management from creation to facilitation? The generation and dissipation of knowledge needs to be embedded in corporate processes. These processes need to have an underlying principle that eliminates the obstacles of collecting multiple knowledge perspectives within complex organizations. Furthermore, extrinsic motivators, social-psychological forces and organizational climate factors are believed to influence knowledge sharing. This paper discusses a framework that provides a synergized view to collect, share, and manage the distributed corporate knowledge using organizational knowledge models and technology knowledge models. Structural, cognitive, relational, and technological factors are derived from a synthesized literature review to formulate this

framework. The role of peer-to-peer networks and grid computing on distributed knowledge management is also examined.

IntroductIon Distributed knowledge management (DKM) is important in today’s knowledge-based economy (Desouza & Evaristo, 2004; Ezingeard, Leigh, & Chadler-Wilde, 2000; Pedersen & Larsen, 2001; Spangler & Peters, 2001; Un & Cuervo-Cazurra, 2004). The concept of the management of intellectual capital is well established in the academic arena (Grant, 1996; Lynn, 1999; Masoulas, 1998; Nonaka, 1994; Templeton, Lewis, & Snyder, 2002). Firm-specific knowledge that is a part of the intellectual capital is difficult for competitors to imitate even when employees are hired away since that knowledge is specific to the original work environment (Hatch & Dyer, 2004). How-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Networked Knowledge Management Dimensions in Distributed Projects

ever, the firm-specific human capital of knowledge can be retained by using knowledge management systems (KMS). Knowledge management (KM) is of paramount importance to organizations and is emerging as a powerful source of competitive advantage (Hahn & Subramani, 2000). Scholars have recognized inter-organizational knowledge transfer and knowledge flows and their link with competitive success (Inkpen & Tsang, 2005; Gupta & Govindarajan, 2000). One of the reasons why multinational corporations exist is because of their ability to transfer and exploit knowledge more efficiently and effectively (Gupta & Govindarajan, 2000). Knowledge flows in such firms provide them the ability to be flexible, respond more quickly to changing market conditions, be more innovative, and improve decision making and productivity (Alavi & Leidner, 1999). The goal of such organizations is to be aware of the existence and management of collective and individual knowledge (Bennet & Bennet, 2003). KM incorporates organization of corporate knowledge according to a single, supposedly shared and objective classification. However, most of the KMS do not have this vision of knowledge (Bonifacio, Bouquet, & Traverso, 2002). Moreover, in the process of knowledge extraction and refinement, all subjective and contextual aspects of knowledge are eliminated (Bonifacio, Bouquet, Mameli, & Nori, 2003). DKM is an approach to KM based on the principle that multiplicity and heterogeneity of perspectives within complex organizations should not be viewed as obstacles to knowledge exploitation, but rather as an opportunity that can foster innovation and creativity (Bonifacio et al., 2002). DKM is a distinct and explicit process that attempts to leverage various perspectives of organizational knowledge into shared institutional capital. While DKM is a process and a strategy, KMS is an advanced information technology tool that is essential to implement the knowledge management process and strategy. Literature on KM may be broadly classified into four dimensions that includes structural, cog-

nitive, and relational dimensions in management journals (Rulke & Galaskiewicz, 2000; Inkpen & Tsang, 2005), and technology solutions dimension in information systems research (Hahn & Subramani, 2000; Lee & Choi, 2003). The KM enablers that include social and technical perspectives were mapped to a knowledge creation process (Nonaka, 1994) to initiate an integrated view of KM (Lee & Choi, 2003). This integrated model discusses only the knowledge creation process. But, KM is more than just knowledge creation. In general, KM is the creation, representation, storage, dissemination, transformation, application, maintenance, and facilitation of distributed organizational knowledge (Schultze & Leidner, 2002; Alavi & Leidner, 2001). In DKM, knowledge discovery, knowledge transfer and facilitation of knowledge are as important as knowledge creation (Briggs, De Vreede, Nunamaker, & Sprague, 2002; Grover & Davenport, 2001). The literature lacks a general framework that captures all these facets of DKM to represent a unified model of DKM. Such a framework is needed for academicians to further research distributed knowledge systems and for practitioners to understand the implications of DKM implementations. In this paper, a framework for DKM using structural, cognitive, relational, and technology dimensions is proposed. The framework is based on a balanced view of organizational management, social, cognitive, and technological facets of DKM. Peer-to-peer (P2P) and grid computing are discussed as technologies for organizational knowledge management using these dimensions of DKM. The rest of the paper proceeds as follows. The next section defines DKM and provides the background literature for the proposed framework. The following section derives the four dimensions of DKM supported by existing research literature. The section afterwards defines P2P technology and grid computing in the context of organizational knowledge management and discusses how these technologies can be used. The final sections discuss the contributions of the study and presents avenues for future research. 619

Networked Knowledge Management Dimensions in Distributed Projects

orgAnIzAtIonAl Knowledge And dIstrIbuted Knowledge MAnAgeMent The concept of DKM has received widespread attention primarily because organizations have come to realize that a large amount of corporate knowledge resides in the heads of workers and is dispersed in the processes, practices, and documents of the organization (Davenport, DeLong, & Beers, 1998). Sharing this knowledge is a critical catalyst for creativity and subsequent innovation (Peters, 1999) as it provides a means by which ideas can be conceptualized, shared, and tested. To share this disparate knowledge, a distributed knowledge strategy is needed. Without an effective distributed knowledge strategy, firm-specific individual-owned organizational knowledge is lost when employees leave the organization (DeLong, 2004). It is appropriate to define knowledge in an organizational context before discussing DKM approaches. Most researchers distinguish knowledge from data and information (Courtney, 2001). Davenport et al. (1998) defines knowledge as information combined with experience, context, interpretation, and reflection. There are several classifications of KM in the research literature. Courtney (2001) describes several types of knowledge recognized in the literature that includes explicit vs. tacit, procedural vs. declarative, esoteric vs. exoteric, and shallow vs. deep. The distinction between explicit and tacit knowledge is of particular importance in KM. While both types of knowledge are important, organizations have focused primarily on managing explicit knowledge. The attempt to manage tacit knowledge is relatively a recent development. Nonaka (1994) was among the first researchers to suggest the importance of managing tacit knowledge and he proposed the Spiral model of organizational knowledge creation. The Spiral model is comprised of four modes of knowledge

620

conversion that include socialization, combination, externalization, and internalization. The socialization mode refers to the conversion of tacit knowledge to new tacit knowledge through social interactions and shared experience among organizational members, for example, mentoring. The combination mode refers to the creation of new explicit knowledge by merging, categorizing, reclassifying, and synthesizing existing knowledge, for example, statistical analysis of sales data. Externalization and internalization are the critical steps in the spiral of knowledge. Externalization refers to converting tacit knowledge to new explicit knowledge, for example, writing requirement specifications after interviewing a potential client. Internalization refers to the creation of new tacit knowledge from explicit knowledge, for example, gaining new research ideas through reading a journal article. Earl (2001) proposes a more extensive classification of KM strategies. His research identifies the following schools of KMS that include cartographic, engineering, commercial, organizational, spatial, and strategic. The “learning ladder” model (Ciborra & Andreu, 2001) discusses a compact way of describing the unfolding of multiple organizational knowledge creation, transformation and transfer processes to three different organizational contexts. For a distributed decision support system, a classification based on dimensions of system design and their attributes were developed (Ba, Stallaert, & Whinston, 2001). In this view of classification, three dimensions that include software engineering, technology acceptance, and incentive alignment are discussed. All these three dimensions are key attributes to any generic information systems design. However, there are important factors to be considered for DKM other than the generic design attributes. Collaboration (Lee & Choi, 2003), social networks (Cross & Cummings, 2004) and facilitation of knowledge (Kwok, Ma, & Vogel, 2002) are essential to DKM implementation.

Networked Knowledge Management Dimensions in Distributed Projects

Grover and Davenport (2001) developed a framework that focuses on the knowledge process and the context in which the process is embedded. Even though this framework considers the generation, codification, transfer, and realization of KM, it can be extended with specifics of how technology may be integrated towards the success of firms. A model for KM success takes into account key managerial influences, key resource influences, and key environmental influences (Massey, Montoya, & O’Driscoll, 2002). KM initiatives will not be successful by focusing on the knowledge transfer processes alone. The knowledge transfer processes combined with knowledge acquisition using the efficiencies of the technology will likely to be more successful in managing knowledge. These studies pose a question: What technologies are to be used for successful knowledge management? Even though there is a great deal of advanced technologies, due to variations in organizational nature and different KM approaches, executives confront the challenging task of deciding the type of information technology (IT) to deploy in support of their KM initiatives (Kankanhalli, Tanudidjaj, Sutanto, & Tan, 2003). Effective use of tools like knowledge management systems (KMS) result in successful management of knowledge and are manifested in a variety of implementations (Davenport et

al., 1998). IT tools and IT infrastructures are important enablers of DKM systems (King, Marks, & McCoy, 2002). Collaborative computing tools, knowledge servers, enterprise knowledge portals, electronic document management tools, knowledge harvesting tools, search engines, and knowledge management suites are some of IT tools that support DKM. These tools help firms to produce, manipulate, store, communicate, and disseminate information and knowledge. These IT tools need to harmonize with existing infrastructure as firms have invested enormous amounts of capital in their existing computer systems (King et al., 2002). IT can play an important role in transcending organizational boundaries such as functional knowledge repositories and geographically dispersed employees. While the most obvious role of IT is seen in the creation, capture, and maintenance of knowledge repositories, IT also plays a dominant role in the access and dissemination of distributed organizational knowledge (Hendriks, 1999). These KM strategies and technology may be used to formulate a framework of networked knowledge management. Organizations should strive to balance the efficiencies of process capabilities and technology infrastructure capabilities (Gold et al., 2001). The process capabilities of organizations, in the form of structural, cognitive, and relational dimensions found in management

Figure 1. Four dimensions of distributed project knowledge management

621

Networked Knowledge Management Dimensions in Distributed Projects

journals along with the technology solution dimension in information systems research can be integrated to form a framework as described in the next section.

Four-dIMensIonAl FrAMeworK Firms incorporate knowledge repositories to store knowledge. Knowledge of individual employees do not transform easily into organizational knowledge even with the implementation of knowledge repositories (Bock, Zmud, Kim, & Lee, 2005). Individuals tend to hoard knowledge for various reasons. Factors such as extrinsic motivators, social-psychological forces and organizational climate factors are believed to influence individuals’ knowledge sharing intentions (Bock et al., 2005). While these factors contribute to knowledge sharing, other attributes of social capital networks are important to knowledge transfer in firms (Inkpen & Tsai, 2005). In addition, technology to manage creation, sharing and transfer knowledge is much needed to realize knowledge flows (Grover & Davenport, 2001). Firms use technology tools to support knowledge transfer and management (Alavi & Leidner, 2001). All of these organizational attributes of distributed knowledge management may be organized in four dimensions. These four dimensions are illustrated as a framework in Figure 1. Each one of these dimensions is comprised of various factors that are discussed in the following sections and detailed in Table 1. The dimensions and factors have been adapted from multi-disciplinary research literatures.

structural dimension Structural dimension (Nahapiet & Ghoshal, 1998; Inkpen & Tsang, 2005) involves the pattern of relationships between the project team members. The structural dimension factors include ties,

622

configuration, stability, informality, and management of project teams.

Ties Team member ties deal with the specific way members are related. Social ties facilitate interteam member social interactions and provide channels for knowledge transfer. Strong ties between members are needed for knowledge transfer to occur. Factors that support these ties are prior team relationships and repeated transactions during projects (Inkpen & Tsang, 2005). Griffith, Sawyer, and Neale (2003) proposed location and time spent interacting with team members via various media as one of the constructs in their research. In group performances, Fjermestad (2005) illustrated that teams using constructive consensus procedures in a virtual environment have a greater willingness to work together than the teams using structured conflict procedures, especially after the first task and have a tendency towards stronger decision acceptance.

Configuration The configuration determines the pattern of linkages among project members. Hierarchy, density, and connectivity affect the flexibility and ease of knowledge transfer through their impact on the extent of the contact and accessibility among the team members (Krackhardt, 1992). Intra-corporate project teams are arranged in a hierarchical way providing connectivity among the team members. Decentralization of authority to the team members is important so that they can determine how to make the best use of their knowledge (Inkpen & Tsang, 2005). The quality and pattern of relationships existing among group members (Argote, McEvily, & Reagans, 2003) is important as specialists and generalists perform well in decentralized teams (Rulke & Galaskiewicz, 2000).

Networked Knowledge Management Dimensions in Distributed Projects

Stability Organizational learning depends partially on memories of individuals and their learning abilities (Carley, 2005). Intra-corporate teams are usually stable, but this stability may not help if there is a high personnel turnover. Maintaining a stable pool of personnel can help individuals develop relationships. This stability retains knowledge as well as promotes knowledge sharing by establishing rapport and friendship (Inkpen & Tsang, 2005).

Flexibility Knowledge creation requires flexibility and less emphasis on work rules. Flexibility gives rise to new ideas. Increase flexibility in an organizational structure can result in increased creation of knowledge (Lee & Choi, 2003). This flexibility enables team members to communicate and interact with one another (Jarvenpaa & Staples, 2000).

Management The competence of knowing what others know enhances a team’s overall knowledge capacity (Grant, 1996). Maintaining this directory of the environment is needed for managing distributed projects. Ability to develop and maintain relationships with others as well as interacting and working with team members is crucial to managing others (Joseph, Ang, & Tan, 1996). Leadership and disciplined project management helps managing project teams and enables project managers to interact and find ways of combining business processes and establishes an appreciation of knowledge assets relative to core business processes (Bassellier & Benbasat 2004; Massey et al., 2002). Managerial influences that establish enabling conditions for KM includes leadership, coordination, control and measurement. Measurement is essential for evaluation of the impacts of KM initiatives and consequently leadership,

coordination and control (Massey et al., 2002). Knowledge managers facilitate knowledge creation, transfer, sharing and maintenance (Grover & Davenport, 2001).

cognitive dimension The cognitive dimension represents the resources that provide shared meaning and understanding between project team members (Nahapiet & Ghoshal, 1998; Inkpen & Tsang, 2005). Shared goals and shared culture encouraged in organizations enable project team members to achieve tasks and outcomes (Inkpen & Tsang, 2005). Learning is part of this cognitive dimension as leaning can be defined as the degree to which it is encouraged in organizations (Hurley & Hult, 1998; Lee & Choi, 2003). Through a learning environment organizations can help team members play active roles in knowledge creation (Lee & Choi, 2003). The cognitive dimension factors include shared goals, shared culture and learning as resources and environments provided by organizations to share knowledge.

Shared Goals Shared vision (Tsai & Ghosal, 1998) involves collective goals and aspirations for project team members. Members have similar perceptions on interacting with each other. This promotes mutual understanding and exchanges of ideas and resources. A shared vision is a bonding mechanism that helps different parts of distributed project teams to integrate knowledge (Inkpen & Tsang, 2005). Lower levels of goal clarity increases frustration and dissatisfaction among team members (Schnake & Cochran, 1985).

Shared Culture Distributed project teams may be culturally diverse. The local or national culture needs to be understood and accommodated so that when

623

Networked Knowledge Management Dimensions in Distributed Projects

knowledge is transferred from one to another, cultural conflicts will not hinder the knowledge transfer (Inkpen & Tsang, 2005). Overall effect of cultural diversity should be beneficial to knowledge transfer (Inkpen & Tsang, 2005).

Learning The organizational level is where we find stores of knowledge and learning in such nonhuman elements as structures, systems, procedures, routines, and strategy (Crossan & Berdrow, 2003). Analysis at the organization level shows us the importance of aligning these nonhuman resources with the competitive environment (Mintzberg, Ahlstrand, & Lampel, 1998). Successful KM requires appropriate management style, work environment, and incentives. For successful knowledge creation, organizations should develop a deeply integrated

learning culture and provide resources such as education, training, and mentoring (Lee & Choi, 2003; Alavi & Leidner, 2001).

relational dimension The relational dimension focuses on the role of the direct ties between team members. This dimension is relational as opposed to structural outcomes of project team interactions (Inkpen & Tsang, 2005). The relational dimension factors include trust and collaboration among distributed project teams.

Trust Trust is essential for the coherence of any social system and is an essential and pervasive feature of individual and organizational relationship

Table 1. Distributed project knowledge management dimensions Dimensions Factors Ties Configuration Structural

Stability Flexibility Management

Description Strong ties between members; Prior partner relationships and repeated transactions; constructive consensus Decentralization of authority by headquarters; group structure Personnel relationships; Low personnel turnover Flexible work rules; lack of formal structure; synergistic group processes Disciplined project management; leadership

Shared vision; collective goals; goal clarity Shared Culture Cultural diversity; accommodation Learning environment; training; Learning mentoring Clear and transparent reward; incentives Trust to reduce mistrust Active available help within team; Collaboration sharing of knowledge; expertise credibility; perceived status Shared goals

Cognitive

Relational

Technical

624

Tools

IT to enable DKM; technology acceptance & adoption; compatibility; ontology; security

Support and Maintenance

Support from IT; knowledge maintenance; loose structure

References Inkpen & Tsang (2005); Griffith et al. (2003); Fjermestad (2005) Inkpen & Tsang (2005); Rulke & Galaskiewicz (2000) Inkpen & Tsang (2005) Lee & Choi (2003) Massey et al. (2002); Bassellier & Benbasat (2004); Grover & Davenport (2001) Inkpen & Tsang (2005) Inkpen & Tsang (2005) Lee & Choi (2003); Alavi & Leidner (2001) Inkpen & Tsang (2005); Ba et al (2001) Lee & Choi (2003); Herzog (2001); Thomas-Hunt et al. (2003); Sussman & Siegal (2003) Bonifacio et al. (2003); Ba et al (2001); Grover & Davenport (2001); King et al. (2002); Gregor & Benbasat (1999); Edgington et al. (2004) Lee & Choi (2003); Hahn & Subramani (2000)

Networked Knowledge Management Dimensions in Distributed Projects

(Maclagan, 1997). Trust plays an important part in the willingness of team members to share knowledge. Trust in a firm focuses on the role of direct ties between actors and the relational, as opposed to structural, outcomes of interactions (Inkpen & Tsai, 2005). As trust develops over time, opportunities of knowledge transfer should increase (Inkpen & Tsang, 2005). When team members compete against one another for resources, suspicion may replace trust in their relationship and consequently, knowledge sharing is sacrificed (Inkpen & Tsang, 2005). Hence, it is important that corporations establish clear and transparent reward criteria so that the team members concerned will not suspect any underthe-table favoritism (Inkpen & Tsang, 2005). Knowledge sharing is both constrained and difficult without proper and necessary incentives for doing so (Ba et al., 2001).

Collaboration Collaboration is defined as the degree to which team members actively help one another in their work (Hurley & Hult, 1998). Electronic collaboration is defined as collaboration among different individuals to accomplish a common task using electronic technologies (Kock & D’Arcy, 2002). Collaborative culture fosters this type of exchange by reducing fear and increasing openness to other members. There is a positive relationship between collaboration and knowledge creation process (Lee & Choi, 2003). Trust has been identified as a factor in successful collaboration. Successful collaborative project teams use shared processes and conditions to build trust and enable open and honest communication. Collaborative sharing of knowledge can be a valuable and powerful tool for building collaborative team trust (Herzog, 2001). In the context of text-based messages, which is one of the mediums of collaboration in distributed projects, the opinions changed significantly in the direction advocated by the communicator when the material was attributed

to a high-credibility source than when it was attributed to a low-credibility source (Sussman & Siegal, 2003). Individuals within a project team may derive status both from social interaction with other members and their knowledge or expertise (Thomas-Hunt, Ogden, & Neale, 2003). Socially isolated members participate more in discussions and express greater unique knowledge than socially connected members. Social status can promote the differential emphasis of shared, own, and other unique knowledge, as well as biased evaluations of member knowledge and contribution (Thomas-Hunt et al., 2003).

technical dimension Technology plays an important role in all aspects of KM (Grover & Davenport, 2001). Collaborative computing tools, knowledge servers, knowledge portals, search engines, document management tools, knowledge harvesting tools, and KM suites encompass the technologies used in distributed projects. Firms are making significant IT investments in deploying systems to manage knowledge (Hahn & Subramani, 2000). The major challenge of managing knowledge is less its creation and more its capture and integration (Grant, 1996). To effectively manage knowledge, organizations should strive to balance the efficiencies of process capabilities and technology infrastructure capabilities (Gold, Malhotra, & Segars, 2001). To achieve this balance, technology and its support functions need to be addressed as a dimension. The technology dimension includes IT tools, support, and maintenance.

Tools System design plays an important role in KM initiatives (King et al., 2002). As with most information systems, the success of a DKM system partially depends upon the extent of use, which itself may be tied to system quality, information quality, and usefulness (Delone & McLean,

625

Networked Knowledge Management Dimensions in Distributed Projects

1992). One difference between traditional IT and DKM systems is the ex ante nature of objectives, outcomes, and processes of the system to be developed (Hahn & Subramani, 2000). Traditional approaches to system development may not be appropriate for KMS. A distributed knowledge representation is needed. Knowledge schemas change over time and different schemas may be used for different parts of the organization (Hahn & Subramani, 2000). Further, quality of the DKM system may be addressed using information systems product measurements. The quality of a product is measured with respect to whether the software functions correctly under every possible contingency, whether the system can be ported easily, whether the system has been well documented, whether standards have been adhered to, whether open architecture has been followed, and so forth (Ba et al., 2001). Technology acceptance has been a subject in research for a number of years (Davis, Bagozzi, & Warshaw, 1989; Devaraj, Fan, & Kohli, 2002).User friendliness, user acceptance, perceived ease-ofuse, perceived usefulness, user satisfaction, cognitive fit, and task/technology fit along with incentives make users adapt and contribute to a system (Ba et al., 2001). KMS need to adapt this view to be more successful. Size of the KM system especially in the technology sense, needs to be addressed. Users of P2P networks established that there is an optimal size in network externalities and that they are less likely to contribute resources to the system as the network size increases (Asvanund, Clay, Krishnan, & Smith, 2004). Explanations, when suitably designed, improve performance and perceptions of the system especially when the users perceive an anomaly, when they want to learn, and when they want a specific piece of knowledge to solve a problem (Gregor & Benbasat, 1999). In a distributed project system, support of local languages as well as company-specific functional language translations of knowledge is needed (Massey et al., 2002).

626

KM success is enhanced when applying ontology as an enabler to integrate KM practices and processes (Edgington, Choi, Henson, Raghu, & Vinze, 2004). A centrally located index for knowledge in projects helps foster an efficient coordination mechanism, as this index contains the sources of knowledge in projects (DeSouza & Evaristo, 2004). Security of the stored knowledge is of utmost importance as the intellectual wealth of an organization is capture electronically. DKM infrastructure has to be compatible with the existing computer systems (King et al., 2002). Finally, as with any information systems technical standards need to be established for DKM (King et al., 2002). In summary, IT tools include data mining, learning, bulletin boards, repositories, knowledge directories, expert systems and workflow systems enable knowledge creation, storage, retrieval, transfer, and application.

Support and Maintenance Maintaining contributions to distributed knowledge content is an important issue. Motivating team members to contribute depends on the structuring of content (Hahn & Subramani, 2000). When knowledge structure is loosely structured, response behavior of members is enhanced and thus provides a source for motivation, greater visibility, and in general, engendering a higher social status (Hahn & Subramani, 2000). IT facilitates collection, storage, and exchange distributed project knowledge, integrates fragmented flows of knowledge, and fosters all modes of knowledge creation (Lee & Choi, 2003). This support from information technologies is critical in all aspects of DKM. Recent research has established relevant technologies that pertain to DKM in organizations (Bonifacio et al., 2003; Desouza & Evaristo, 2004). The framework established in this study embraces technology as one of the main dimensions of networked knowledge management. In large global firms and in hypercompetitive environ-

Networked Knowledge Management Dimensions in Distributed Projects

ments, IT will be interlaced with organizational KM strategies and processes (Alavi & Leidner, 2001). The next section illustrates how technology can be used in conjunction with the proposed DKM framework.

organizational Knowledge Management and technologies P2P technologies include file sharing, resource sharing, and collaboration systems. The primary challenge in P2P computing is to design and implement a robust and scalable distributed system composed of inexpensive, individually unreliable computers in unrelated administrative domains (Balakrishnan, Kaashoek, Karger, Morris, & Stoica, 2003). The demand of users for transparent access to information and applications, regardless of the hosts on which they reside, are changing the computing environment from a traditional centralized model to a distributed model (Bauer & Coburn, 1994). In the long term, the partitioning of components into clients and servers will become constraining and a computing environment based on P2P interactions will be required (Bauer & Coburn, 1994). P2P technologies permit a greater degree of freedom and independence on the part of users by making resources available in a more customized manner (Schoder & Fischbach, 2003). P2P computing mirrors face-to-face human interaction more closely than do client/ server architectures (Barth, 2001). Peer-mediated DKM technology has been proposed by Bonifacio et al. (2003). A hybrid approach including centralized (client-server) technology and a peer-mediated technology has been proposed by Desouza and Evaristo (2004). Moreover, P2P networking naturally supports DKM by closely adopting the conventions of face-to-face human communication (Tiwana, 2003). For P2P technologies to be established in DKM, it must support robust security. A viable hybrid model incorporating both client/server and P2P architecture will give end-users the flexibility to

share documents and applications and still allow a central authority to exercise basic policies and control (Desouza & Evaristo, 2004). Fattah (2002) distinguishes between two main categories of applications for the P2P architecture: active ones in which users or systems take some action; and passive ones in which idle resources are harnessed for other uses. Table 2 illustrates this classification scheme and provides examples of applications in each category. Each of these application categories offers unique solutions to specific problems and they are mostly independent of each other. Another facet in research of DKM technologies is the knowledge grid (Cannataro & Talia, 2003). Although grid computing is becoming an important framework for enabling applications to utilize widely distributed collections of computational and data resources, current grid software is still in rudimentary stages. Grid computing is the most promising framework for future implementations of high-performance data-intensive distributed applications. The knowledge grid is a significant step in the integration architecture for distributed data mining and knowledge discovery (Cannataro & Talia, 2003). Bilykh et al. (2003) use the grid computing paradigm to integrate medical information. When data is maintained over geographically distributed sites the computational power of distributed and parallel systems can be exploited for knowledge discovery in databases. In this scenario the grid can provide an effective computational support for distributed knowledge discovery on large data sets (Congiusta, Pugliese, Talia, & Trunfio, 2003). P2P technologies and grid computing have great potential to grow into a strategic organizational tool for knowledge sharing. Current IT solutions for DKM are mostly focused on explicit knowledge, its capture and codification. P2P and grid computing provides a way to circumvent the limitations of current IT for KM in distributed project purposes. Kini (2002) suggests that the corporate version of P2P will enable users to actively share knowledge and information in innovative

627

Networked Knowledge Management Dimensions in Distributed Projects

Table 2. Classification scheme of P2P technologies Active Applications User Collaboration: File Sharing, Workgroups & Communications, Gaming Application Interaction: Knowledge Management Systems

and flexible ways. Schoder and Fischbach (2003) state that P2P refers to technology that enables two or more peers to collaborate spontaneously in a network of peers by using appropriate information and communication systems without the necessity for central coordination. Current collaboration systems are designed to provide the ability for easy formation of ad hoc groups and communities without intervention from any central authority. Groove Networks’ Groove platform has received the most attention in this arena. Groove has bundled instant messaging, file sharing, online chat, and video conferencing in a single platform. When users work offline in the Groove space, their changes to group documents are synchronized with the rest of the group as soon as each person returns to the Web. GlaxoSmithKline PLC uses Groove Networks P2P software for collaboration with scientists at other biotech firms and universities (DiSabatino, 2001). Since current P2P technologies are still in their rudimentary stages, the decentralized nature of P2P architecture poses special challenges. Schoder and Fischbach (2003) list the following P2P concerns in an organizational context that includes network control, security, interoperability, metadata, and cost sharing. Finally, P2P technologies create significant legal and ethical concerns. The ability to access information from individual’s computer and share this information with a number of users raises security and privacy issues.

628

Idle Utilizations Resource Utilizations: Processing Power, Storage, Bandwidth Conversion Super Computing: High-Performance Applications

conclusIon The knowledge network in an organization must be supported by its technology network as well as structural, cognitive, relational networks. KM involves distinct but interdependent processes of knowledge creation, knowledge storage and retrieval, knowledge transfer and knowledge application (Alavi & Leidner, 2001). The integrated four dimensions that form a unified model of DKM discussed in this paper form a strategy to integrate these interdependent processes. The extent to which P2P and grid technologies are implemented for organizational purposes will depend on technological, economic, and legal factors. While the discussion of the “purity” of P2P and grid computing efforts is of academic interest, organizations are only interested in the practical consequences of P2P computing. The short term benefits of P2P and grid technologies include cost savings, efficiency, and better human interface. In the long term, P2P and grid technologies have the potential to change how organizations do business using KM in distributed projects.

lIMItAtIons And Future reseArch The primary objective of this paper is to characterize an integrative view of distributed knowledge management and provide a strategic guideline to practitioners and academicians. This study has a few limitations. We have discussed only the major

Networked Knowledge Management Dimensions in Distributed Projects

factors of the four dimensions and there are other social capital relationships exist. Environmental, political and legal relationship factors have not been considered in this study. Knowledge transfer across strategic alliances is important and was not taken into account in this study. Most studies in this area have examined some of the dimensions in isolation (Inkpen & Tsang, 2005; Lee & Choi, 2003; Becerra-Fernandez & Sabherwal, 2001; Szulanski, 1996; Zander & Kogut, 1995). Researchers and practitioners have not tried a fully integrative model of DKM. The framework discussed in this article integrates the voluminous scholarly work in area of DKM and is ready to be examined by researchers for further studies. One challenge is to decipher the relationships among the four dimensions proposed in this study. The results of this study needs to be formulated and tested in a theoretical model. The framework may be used as a stepping stone for further empirical research and can help formulate robust strategies that involve trade-offs between these four dimensions. The relationships among the four dimensions of DKM can provide insights to practitioners of knowledge management, IT managers, as well as academicians. The ideas, discussion, and the integration of research views in this paper hopefully will stimulate further interest in this topic.

reFerences Alavi, M., & Leidner, D. (1999). Knowledge management systems: Emerging views and practices from the field. In Proceedings of 32nd Annual HICSS, Maui, Hawaii. Alavi, M., & Leidner, D. E. (2001). Review: Knowledge management and knowledge management systems: Conceptual foundations and research issues. MIS Quarterly, 25(1), 107-132. Argote, L., McEvily, B., & Reagans, R. (2003). Introduction to the special issue on managing

knowledge in organizations: Creating, retaining, and transferring knowledge. Management Science, 49(4), 571-582. Asvanund, A., Clay, K., Krishnan, R., & Smith, M. D. (2004). An empirical analysis of network externalities in peer-to-peer music-sharing networks. Information Systems Research, 15(2), 155-174. Ba, S., Stallaert, J., & Whinston, A. (2001). Research commentary: Introducing a third dimension in information systems design — The case for incentive alignment. Information Systems Research, 12(3), 225-239. Balakrishnan, H., Kaashoek, M. F., Karger, D., Morris, R., & Stoica, I. (2003). Looking up data in P2P systems. Communications of the ACM, 46(2), 43-50. Barth, S. (2001, March). The promise of peerless platforms. Knowledge Management, 66-68. Bassellier, G., & Benbasat, I. (2004). Business competence of information technology professionals: Conceptual development and influence on IT business partnerships. MIS Quarterly, 28(4), 673-694. Bauer, M. A., & Coburn, N. (1994). A distributed system architecture for a distributed application environment. IBM Systems Journal, 33(3), 39926. Becerra-Fernandez, I., & Sabherwal, R. (2001). Organizational knowledge management: A contingency perspective. Journal of Management Information Systems, 18(1), 23-55. Bennet, A., & Bennet, D. (2003). The partnership between organizational learning and knowledge management. In C. W. Holsapple (Ed.), Handbook on Knowledge Management, Volume 1k (pp. 439460). New York: Springer-Verlag. Bilykh, I., Bychkov, Y., Dahlem, D., Jahnke, J. H., McCallum, G., Obry, C., Onabajo, A., & Kuziem-

629

Networked Knowledge Management Dimensions in Distributed Projects

sky. C. (2003). Can GRID services provide answers to the challenges of national health information sharing? In Proceedings of the 2003 conference of the Centre for Advanced Studies on Collaborative research, Toronto, Canada (pp. 39-53). Bock, G., Zmud, R.W., Kim, Y., & Lee, J. (2005). Behavioral intention formation in knowledge sharing: Examining the roles of extrinsic motivators, social-psychological forces, and organizational climate. MIS Quarterly, 29(1), 87-111. Bonifacio, M., Bouquet, P., Mameli, G., & Nori, M. (2003). Peer-mediated distributed knowledge managemen (Tech. Rep. DIT-03-032). University of Trento. Bonifacio, M., Bouquet, P., & Traverso, P. (2002). Enabling distributed knowledge management: Managerial and technological implications. Novatica and Informatik/Informatique, 3(1). Bonifacio, M., Bouquet, P., & Cuel, R. (2002). Knowledge nodes: The building blocks of a distributed approach to knowledge management. Journal of Universal Computer Science, 8(6), 652-661. Briggs, R. O., De Vreede, G., Nunamaker, J. F., & Sprague, R. H. (2002). Special issue: Decision-making and a hierarchy of understanding. Journal of Management Information Systems, 18(4), 5-9.

knowledge discovery. Web Intelligence & Agent Systems, 1(2), 91-104. Courtney, J. F. (2001). Decision making and knowledge management in inquiring organizations: Toward a new decision-making paradigm for DSS. Decision Support Systems, 31(1), 17-39. Cross, R., & Cummings, J.N. (2004). Tie and network correlates of individual performance in knowledge-intensive work. Academy of Management Journal, 47(6), 928-937. Crossan, M. M., & Berdrow, I. (2003). Organizational learning and strategic renewal. Strategic Management Journal, 24(11), 1087-1105. Davenport, T. H., De Long, D. W., & Beers, M. C. (1998). Successful knowledge management projects. Sloan Management Review, 39(2), 43-58. Davenport, T. H., & Prusak, L. (1998). Working knowledge: How organizations manage what they know. Boston: Harvard Business School Press. Davis, F. D., Bagozzi, R. P., & Warshaw, P. R. (1989). User acceptance of computer technology: A comparison of two theoretical models. Management Science, 35(8), 982-1003. Delone, W. H., & McLean, E. R. (1992). Information systems success: The quest for the dependent variable. Information Systems Research, 3(1), 60-95.

Cannataro, M., & Talia, D. (2003). The knowledge grid. Communications of the ACM, 46(1), 89-93.

DeLong, D. W. (2004). Lost knowledge: Confronting the threat of an aging workforce. New York: Oxford University Press.

Carley, K. (1992). Organizational learning and personnel turnover. Organization Science, 33, 353-365.

Devaraj, S., Fan, M., & Kohli, R. (2002). Antecedents of B2C channel satisfaction and preference: Validating e-Commerce metrics. Information Systems Research, 13(3), 316-333.

Ciborra, C. U., & Andreu, R. (2001). Sharing knowledge across boundaries. Journal of Information Technology, 16(2), 73-82. Congiusta, A., Pugliese, A., Talia, D., & Trunfio, P. (2003). Designing grid services for distributed

630

Desouza, K., & Evaristo, J. R. (2004). Managing knowledge in distributed projects. Communications of the ACM, 47(4), 87-91.

Networked Knowledge Management Dimensions in Distributed Projects

DiSabatino, J. (2001, April 16). Collaborative peer-to-peer technology finds groove at GlaxoSmithKline, Raytheon. Computer World. Earl, M. (2001). Knowledge management strategies: Toward a taxonomy. Journal of Management Information Systems, 18(1), 215-233. Edgington, T., Choi, B., Henson, K., Raghu, T. S., & Vinze, A. (2004). Adopting ontology to facilitate knowledge sharing. Communications of the ACM, 47(11), 85-90. Ezingeard, J., Leigh, S., & Chandler-Wilde, R. (2000). Knowledge management at Ernst & Young UK: Getting value through knowledge flows. In Proceedings of the Twenty First International Conference on Information Systems, Brisbane, Australia (pp. 807-822). Fattah, H. M. (2002). How peer-to-peer technology is revolutionizing the way we do business. Chicago: Dearborn Trade Publishing. Fjermestad, J. (2005). Virtual group strategic decision making using structured conflict and consensus approaches. Internal Journal of eCollaboration, 1(1), 43-61. Gold, A. Malhotra, A., & Segars, A. H. (2001). Knowledge management: An organizational capabilities perspective. Journal of Management Information Systems, 18(1), 185-214.

Grover, V., & Davenport, T. H. (2001). General perspectives on knowledge management: Fostering a research agenda. Journal of Management Information Systems, 18(1), 5-22. Gupta, A. K., & Govindarajan, V. 2000. Knowledge flows within multinational corporations. Strategic Management Journal, 21(4), 473-496. Hahn, J., & Subramani, M. (2000). A framework of knowledge management systems: Issues and challenges for theory and practice. In Proceedings of the Twenty First International Conference on Information Systems, Brisbane, Australia (pp. 302-312). Hansen, M. T., & Nohria, N. (1999). What’s your strategy for managing knowledge? Harvard Business Review, 77(2), 106-117. Hatch, N. W., & Dyer, J. H. (2004). Human capital and learning as a source of sustainable competitive advantage. Strategic Management Journal, 25(12), 1155-1178. Hendriks, P. H. J. (1999). Why share knowledge? The influence of ICT on the motivation for knowledge sharing. Knowledge and Process Management, 6(2), 91-100. Herzog, V. L. (2001). Trust building on corporate collaborative project teams. Project Management Journal, 32(1), 28-37.

Grant, R. M. (1996). Prospering in dynamicallycompetitive environments: Organizational capability as knowledge integration. Organization Science, 7(4), 375-387.

Hurley, R., & Hult, T. (1998). Innovation, market orientation, and organizational learning: An integration and empirical examination. Journal of Marketing, 62(3), 42-54.

Gregor, S., & Benbasat, I. (1999). Explanations from intelligent systems: Theoretical foundations and implications for practice. MIS Quarterly, 23(4), 497-530.

Inkpen, A. C., & Tsang, E. W. K. (2005). Social capital, networks, and knowledge transfer. Academy of Management Review, 30(1), 146-166.

Griffith, T., Sawyer, J. E., & Neale, M. A. (2003). Virtualness and knowledge in teams: Managing the love triangle of organizations, individuals and information technology. MIS Quarterly, 27(2), 265-287.

Jarvenpaa, S. L., & Staples, D. S. (2000). The use of collaborative electronic media for information sharing: An exploratory study of determinants. Strategic Information Systems, 9(2-3), 129-154. Joseph, D., Ang. S., & Tan, H. T. (1996). The nature

631

Networked Knowledge Management Dimensions in Distributed Projects

of soft skills of information systems professionals. In Proceedings of the Americas Conference on Information Systems, Phoenix, Arizona. Kankanhalli, A., Tanudidjaj, F., Sutanto, J., & Tan, B. C. Y. (2003). The role of IT in successful knowledge management initiatives. Communications of the ACM, 46(9), 69-73. King, W. R., Marks, P. V., & McCoy, S. (2002). The most important issues in knowledge management. Communications of the ACM, 45(9), 93-97. Kini, R. B. (2002). Peer-to-peer technology: A technology reborn. Information Systems Management, 19(3), 74-85. Kock, N., & D’Arcy, J. (2002). Resolving the ecollaboration paradox: The competing influences of media naturalness and compensatory adaption. Information Management and Consulting, 17(4), 72-78.

Masoulas, V. (1998). Organizational requirements definition for intellectual capital management. International Journal of Technology Management, 16(1-3), 126-143. Massey, A., Montoya, W., & O’Driscoll, T. M. (2002). Knowledge management in pursuit of performance: Insights from Nortel networks. MIS Quarterly, 26(3), 269-289. Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). Strategy safari: A guided tour through the wilds of strategic management. New York: Free Press. Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23(2), 242-266. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14-38.

Krackhardt, D. (1992). The strength of strong ties. In N. Nohria, & R. G. Eccles (Eds.), Networks and organizations: Structure, form and action (pp. 216-239). Boston: Harvard Business School Press.

Pedersen, M. K., & Larsen, M. H. (2001) Distributed knowledge management based on product state models — The case of decision support in health care administration. Decision Support Systems, 31(1), 139-158.

Kwok, R.C., Ma, J., & Vogel, D.R. (2002). Effects of group support systems and content facilitation on knowledge acquisition. Journal of Management Information Systems, 19(3), 185-229.

Peters, T. (1999). The circle of innovation: You can’t shrink your way to greatness. New York: Vintage Books.

Lee, H., & Choi, B. (2003). Knowledge management enablers, processes, and organizational performance: An integrative view and empirical examination. Journal of Management Information Systems, 20(1), 179-228. Lynn, B. E. (1999). Culture and intellectual capital management: A key factor in successful ICM implementation. International Journal of Technology Management, 18(5-8), 590-603. Maclagan, P. (1997). Corporate social responsibility as a participative process. Business Ethics: A European Review, 8(1), 43-49.

632

Rulke, D. L., & Galaskiewicz, J. (2000). Distribution of knowledge, group network structure, and group performance. Management Science, 46(5), 612-625. Schnake, M. E., & Cochran, D. S. (1985). Effect of two goal-setting dimensions on perceived intraorganizational conflict. Group & Organizational Studies, 10, 168-183. Schoder, D., & Fischbach, K. (2003). Peer-topeer prospects. Communications of the ACM, 46(2), 27-30. Schultze, U., & Leidner, D. E. (2002). Studying knowledge management in information systems

Networked Knowledge Management Dimensions in Distributed Projects

research: Discourses and theoretical assumptions. MIS Quarterly, 26(3), 213-242. Spangler, W. E., & Peters, J. M. (2001). A model of distributed knowledge and action in complex systems. Decision Support Systems, 31(1), 103125. Sussman, S., & Siegal, W. (2003). Informational influence in organizations: An integrated approach to knowledge adoption. Information Systems Research, 14(1), 47-65. Szulanski, G. (1996). Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17(10), 27-43. Templeton, G. F., Lewis, B. R., & Snyder, C. A. (2002). Development of a measure for the organizational learning construct. Journal of Management Information Systems, 19(2), 175-218.

Thomas-Hunt, M., Ogden, T. Y., & Neale, M. A. (2003). Who’s really sharing? Effects of social and expert status on knowledge exchange within groups. Management Science, 49(4), 464-473. Tiwana, A. (2003). Affinity to infinity in peerto-peer knowledge platforms. Communications of the ACM, 46(5), 76-80. Tsai, W., & Ghoshal, S. (1998). Social capital and value creation: The role of intrafirm networks. Academy of Management Journal, 41(4), 464478. Un, C. A., & Cuervo-Cazurra, A. (2004). Strategies for knowledge creation in firms. British Journal of Management, 15(1), 27-41. Zander, D., & Kogut, B. (1995). Knowledge and the speed of the transfer and imitation of organizational capabilities: An empirical test. Organization Science, 6(1), 76-92.

This work was previously published in International Journal of e-Collaboration, Vol. 2, Issue 4, edited by N. Kock, pp. 19-36, copyright 2006 by IGI Publishing (an imprint of IGI Global).

633

634

Chapter 2.15

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era Igor Crk University of Arizona, USA Dane Sorensen Raytheon Missile Systems, USA Amit Mitra TCS Global Consulting Practice, USA

Abstract

Introduction

Collaborative work groups that span multiple locations and time zones, or “follow the sun,” create a growing demand for creating new technologies and methodologies that enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. The hurdles faced by members of such virtual teams are in three key areas: differences in concepts and terminologies used by the different teams; differences in understanding the problem domain under consideration; and differences in training, knowledge, and skills that exist across the teams. These reasons provide some of the basis for the delineation of new architectural approaches that can normalize knowledge and provide reusable artifacts in a knowledge repository.

The increasing prevalence of collaborative work groups that span multiple locations and time zones create a growing demand for creating new technologies and methodologies that can enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. In the specific case of information technology (IT), more than 380,000 professionals are currently focused exclusively on export-oriented activities (Aggarwal & Pandey, 2004). The hurdles faced by members of such virtual teams are in three key areas: (i) differences in concepts and terminologies used by the different teams; (ii) differences in understanding the problem domain under consideration; and (iii) differences in training, knowledge, and skills that exist across the teams (Chang, Dillon, Sommerville, & Wongthongtham, 2006). These reasons provide some of the basis for the delineation of new architectural approaches

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

that can normalize knowledge and provide reusable artifacts in a knowledge repository. This article focuses on the issue of providing information systems agility, especially when the work is outsourced from one country (or company) to another or as the work is performed in multiple countries using a hybrid offshoring model such as the 24-Hour Knowledge Factory concept (Gupta, Seshasai, Mukherji, & Ganguly, 2007). This article also deals with the issue of creating an evolving knowledge repository that can be used when systems need to be redesigned or reimplemented.

Related Work The object management group (OMG) is actively involved in the creation of a heterogeneous distributed object standard. In a departure from modeling standards, such as the common object request broker architecture (CORBA) and the related data distribution service (DDS), OMG moved towards the unified modeling language (UML) and the related standards of meta-object facility (MOF), XML data interchange (XMI), and query views transformation (QVT). The latter standards provide a foundation for the model drive architecture (MDA). In an effort to bring UML and the Semantic Web together, OMG is leading progress toward the ontology definition metamodel. More specifically, MDA, as related to software engineering, composes a set of guidelines for creating specifications structured as models. In MDA, the functionality is defined using a platform-independent model with a domain-specific language. The domain specific language definition can be translated into platform-specific models by use of a platform definition model (PDM). The ontology definition metamodel is an OMG specification that links common logic and OWL/ RDF ontologies with MDA. Common logic being an ISO standard for facilitating the exchange of

knowledge and information in computer-based systems, and resource description framework (RDF) and Web ontology language (OWL) being the latest examples of framework and related markup languages for describing resources authored by the World Wide Web Consortium (W3C). OMG and W3C standards are available online at omg. org and w3.org, respectively. The notion of reuse of knowledge has been previously explored with respect to organizational memory systems. Markus (2001) identified distinct situations in which reuse arose according to the purpose of knowledge reuse and parties involved. The knowledge reuse situations exist among producers who reuse their own knowledge, those who share knowledge, novices seeking expert knowledge, and secondary knowledge miners. The solutions to the problems of meeting the requirements of knowledge storage or retrieval were presented as a combination of incentives and intermediaries. In the context of allocation of IT resources, O’Leary (2001) conducted a case study of a knowledge management system of a professional service firm concluding that service-wise requirements for knowledge reuse should impact the design of knowledge systems. For example, the studied firm contained three primary service lines: tax, consulting, and audit. Differential reuse, stemming from the relatively low reuse in the consulting service line to high reuse in the tax line, leads to a particular allocation of knowledge bases, software, hardware, and network resources. O’Leary’s paper supports earlier work by Vanwelkenhuysen and Mizoguchi (1995), which showed that knowledge reuse has depended on organizational aspects of knowledge systems. Their work suggested dimensions along which ontologies for knowledge reuse may be built, based on workplace-adapted behaviors. The concept of knowledge reuse and agility is especially relevant to “follow the sun” models, similar in spirit to the 24-Hour Knowledge Factory, and have been attempted by others. Carmel

635

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

(1999, pp. 27-32) describes one such project at IBM. In this project, IBM established several offshore centers in a hub-and-spoke model where the Seattle office acted as the hub. Each offshored site was staffed by a phalanx, a mix of skill sets that were replicated across each spoke. Work would be handed out by the Seattle hub; each spoke would accomplish the given task and send the results back to Seattle. This hub-and-spoke model necessitates specialization of the Seattle site. With only one site offering the specialized service, the Seattle site quickly became overwhelmed. The original goal of daily code drops could not be maintained. Treinen and Miller-Frost (2006) highlight several lessons learned that are echoed in other studies, particularly problems with continuity, misunderstanding and the lag time between cycles of conversation. Cultural differences are also cited as being problematic, especially with respect to various assumptions that were held in lieu of well specified requirements and planning. Perhaps the most relevant study in respect to the 24-Hour Knowledge Factory, Follow the Sun: Distributed Extreme Programming Development (Yap, 2005) describes a globally distributed, round-the-clock software development project. Here, a programming team was distributed across three sites (United States, United Kingdom, and Asia). One of the three sites had prior knowledge of extreme programming. The two remaining sites were coached on extreme programming practices prior to the collaboration. These two sites believed that the first site had an advantage due to its previous knowledge with extreme programming. Individuals from the three sites also met in person, which helped to build confidence about the capabilities of the members of other sites. The team used virtual network computing (VNC) and video conferencing to facilitate communication. Hand-off of project artifacts initially consisted of a daily work summary, but later grew to include knowledge learned and new objectives.

636

Xiaohu, Bin, Zhijun, and Maddineni (2004) discussed the situation where development teams were dispersed globally, though it seemed that each global unit was still responsible for its own module of the project. The teams did not need to discuss development decisions with each other unless they were related to interfacing or would affect another team. They used the extreme programming method, but because of the global dispersal of teams, they lacked the benefits of customer colocation and participation. They thought the inability to get rapid customer feedback when the customer was in a different location adversely impacted the development of the product and the development time. These issues could easily impact development in a 24-Hour Knowledge Factory setting because customers in one location would thus not be able to interact with all sites. The above examples highlight the need for an agile knowledge ontology that can more adequately manages the problem of change.

Agility and the Problem of Change Change is difficult, complex, and risky because it usually has unintended side effects. Each decision has many consequences, which in turn have many more. The Y2K problem is a classic example of a seemingly innocuous design decision that snowballed into a worldwide problem. The decision to use a 2-digit representation of the year was originally deemed to be prudent. Later, it was thought to be a problem that would cripple computer systems when their clocks rolled over into the year 2000, since 00 is ambiguous. Ultimately, it cost the world around $600 billion (López-Bassols, 1998) to convert a 2-digit representation of the calendar year to four digits!

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Fundamental Computing Technologies

application frameworks, which provide the architecture for assembling components into a software system. Components and frameworks may be either developed in-house or externally procured. CBD typically involves using both inhouse developed and externally procured software components and frameworks. CBD leverages the emergence of middleware and software objects standards to make software reuse a reality (Ravichandran, 2005). Since CBD encourages the move toward more modular systems built from reusable software artifacts, it was expected to enhance the adaptability, scalability, and maintainability of the resultant software (Szyperski, 1997). CBD requires systems to be architected using a component framework necessitating developers to think through the interrelationships between various elements of an application system at a more granular level at an earlier stage in the development process than in traditional development approaches (Sparling, 2000).

Figure 1 shows the evolution of computing technology as researchers sought to tackle the problem of change and to remain agile though increasingly more complex demands are placed upon the technology. At the far left end of the spectrum lies hardware, originally physically and meticulously programmed to perform relatively simple tasks. Machine code replaced the physical machine programming by the formulation of CPU-specific words, bit patterns corresponding to different commands that can be issued to the machine. Each type of CPU has its own machine code. Similarly, the CPU architecture has a corresponding assembly language. As such, assembly language is not portable and does not increase flexibility, but it does provide the essential abstractions that free the programmer from the tedium of remembering numeric codes or calculating addresses (as was the case when programming was accomplished through machine code). An assembly language is an example of a second-generation language. Third generation languages, denoted by 3GL in Figure 1, finally freed the task of programming from the underlying hardware. This is a much overlooked, but crucial, example of adapting technology to find a solution to the problem of change. The more recent notion of component-based development (CBD) involves building software systems using prepackaged software components (Ravichandran, 2005). CBD involves reusing

IBM’s System/360: The Beginnings of Agile Development A good example of a business transformation tackling the issues of agility and change through modularity is provided by IBM’s System/360 (Amdahl & Blaauw, 2000) in the 1960s (Baldwin & Clark, 2000). The hardwired instruction sets of virtually all computers in the 1950s imposed a high level of interdependence of design parameters. Each computer was designed from scratch and each market niche was matched with

Figure 1.

Increasing Flexibility and Abstraction Hardware

Machine Assembly Code

1950

Code

1960

3GL

Functional Data Decomposition Models

1970

1980

Objects

1990

Components Services Meanings BPM

2000

?

637

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

a different system. Searching for new ways for teams to work together on a project, IBM led the effort to use modularity as a guiding principle. System/360 was the result of that effort. Further, System/360 marks the point at which the industry was transformed from a virtual monopoly to a modular cluster comprised of more than a thousand publicly traded firms and many startups (Fergusson, 2004). What makes System/360 an important landmark in the agility effort is that it belongs to the first family of computers that was designed with a clear distinction between architecture and implementation. The architecture of each model in the 360 family was introduced as an industry standard, while the system peripherals, such as disk drives, magnetic tape drives, or communication interfaces allowed the customer to configure the system by selecting from this list. With the standardization of the architecture and peripheral interfaces, IBM opened the doors for the commodity component market. With its list of peripherals, System/360 allowed the technology to adapt to a customer’s needs. Its backward compatibility tackled the problem of change in its own right, by allowing customers to upgrade and replace their hardware without losing essential capabilities. The ideas of encapsulation of functionality and the standardization of system interfaces inherent in System/360 are critical to understanding the importance of leveraging and reuse of knowledge.

Business Rules and the Structure of Information Just as was the case with early computer technology decades ago, prior to 3GL in our first example and System/360 in the second, today’s business rules are replicated in dissimilar formats in intermingled ways in multiple information systems and business processes. When any rule is changed, a concerted effort must be launched to

638

make modifications in multiple systems. It makes change and innovation complex and error-prone. The framework described in this article attempts to untangle business rules with an ontology derived from the inherent structure of information. By untangling business rules even in complex legacy models and systems, one gains the capability to represent specific elements of business knowledge once, and only once, in a knowledge repository. Using this repository, the specific elements of knowledge can be designed to naturally manifest themselves, in appropriate forms, to suit the idiosyncrasies of different business contexts. As business processes became more tightly coupled with automation, the lack of agility in information systems became a serious bottleneck to product and process innovation. Frameworks that have attempted to solve this problem include structured programming, reusable code libraries, relational databases, expert systems, object technology, CASE tools, code generators and CAPE tools. They were not very effective partially because they did not adequately address the ripple effects of change; ideally, business rules and knowledge should be represented so that when we change a rule once, corresponding changes should automatically ripple across all the relevant business processes (Mitra & Gupta, 2006). Knowledge transfer and reuse (Kingston 2002; Myopolous 1998; Van Zyl & Corbett, 2000) attain greater importance in the case of outsourcing. In order to achieve efficiency of resource consumption, we need new approaches to facilitate encapsulation of knowledge and the sharing of such knowledge among the relevant set of workers.

The Framework of Knowledge Reuse While meaning and understanding are abstract notions, they are rooted in the physical world. We learned in chemistry that we can continually

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

subdivide a substance before reaching a building block, the subdivision of which would disallow us from identifying the substance and knowing its properties. Similarly, to identify the components of knowledge, we must distinguish between assertions whose division will involve no loss of information, and assertions whose division will sacrifice meaning: if an assertion is decomposed into smaller parts and the information lost cannot be recovered by reassembling the pieces. The fundamental rules that cannot be decomposed further without irrecoverable loss of information are called indivisible rules, atomic rules, or irreducible facts (Ross, 1997).

Objects, Relationships, Processes, Events, and Patterns In the real world, every object conveys information. The information content of physical objects is conveyed to us via one or more of our five senses. Objects are associated with one another. While some associations involve the passage of time, other associations, such as the relative locations of physical objects, are relationships that do not necessarily involve time. These relationships and associations are natural storehouses of information about real world objects. Further, these relationships are objects in their own right. Processes are artifacts for expressing information about relationships that involve the passage of time (i.e., those that involve before and after effects). As such, the process is not only an association but also an association that describes a causative temporal sequence and passage of time. This is also how the meaning of causality is born: The resources and the processes that create the product are its causes. A process always makes a change or seeks information. Business process engineers use the term cycle time to describe the time interval from the beginning of a process to its end. A process, like the event it is derived from, can even be instantaneous or may continue on indefinitely. Processes that do not end, or have no

known end, are called sagas. Therefore, a process is a relationship, and also an event, which may be of finite, negligible, or endless duration. Knowledge involves the recognition of patterns. Patterns involve structure, the concept of similarity, and the ability to distinguish between the components that form a pattern. Claude Shannon developed a quantitative measure for information content (Shannon, 1948). However, he did not describe the structure of information. For that, we must start with the concept and fundamental structure of Pattern and measurability in order to build a metamodel of knowledge. The integrated metamodel model of Pattern and measurability (from which the concept of “property” emerges) will enable us to integrate the three components that comprise business knowledge (inference, rules, and processes) into one indivisible whole. The interplay between objects and processes is driven by patterns. Patterns guide the creation of relationships between objects, such as the formation of a team or the modular assignment of duties within a team and across geographically distributed teams. Partnering Employee belonging to one team with that of another is caused by a skill or performance pattern that governs the relevant properties of Employee. As such, the ownership of an artifact under development is shared between Employee objects, which, at a coarser granularity, exist as a unified object we can refer to as a Composite Persona (CP) (Denny et al., 2008).

Perception and Information: Meaning, Measurability, and Format When an object is a meaning, it is an abstract pattern of information. Its perception is a concrete expression of this meaning, and the same information may be perceived or expressed in many ways. Lacking perceptual information, several expressions or perceptions may all point to the same pattern of information, or meaning. In order to normalize

639

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

knowledge, we must separate meaning from its expression. This may be done by augmenting our metamodel to represent entities of pure information that exist beyond physical objects and relationships. This section will introduce three of these objects: domain, unit of measure (UOM), and Format. Unlike matter or energy, meaning is not located at a particular point in space and time; only its expression is (Verdu, 1998). All physical objects or energy manifested at a particular place at a point in time convey information, and the same meaning can occur in two different artifacts that have no spatial or temporal relationship with each other. They only share meaning (i.e., information content; Baggot, 1992). A single meaning may be characterized by multiple expressions. Differing understandings of concepts, terminology, and definitions are some of the problems that have characterize software developers working in a multisite environment (Chang et al., 2006). Unlike a specific material object or a packet of energy that is bound to only a single location at a single point in time, identical information can exist at many different places at several different times. The need to understand the underlying natural structures that connect information to its physical expressions is inherent in the effort to normalize business rules. Information mediation and expression within the real world is achieved by two metaobjects. One is intangible, emerging from the concept of measurability and deals with the amount of information that is inherent in the meaning being conveyed. The other is tangible; it deals with the format, or physical form, of expression. The format is easier to recognize. It is much harder to recognize the domain of measurability, henceforth referred to simply as domain (Finkbeiner, 1966).

Measurability and Information Content Through the behavior, or properties, of objects we observe, the information content of reality manifests itself to us. Although these are quite dissimilar qualities of inherently dissimilar ob-

640

jects, such as a person’s weight and the volume of juice, both these values are drawn from a domain of information that contains some common behavior. This common behavior, that each value can be quantitatively measured, is inherent in the information being conveyed by the measurement of these values, but not in the objects themselves.

Physical Expression of Domains Domains convey the concepts of measurability and existence. They are a key constituent of knowledge. There are four fundamental domains that we will consider in this article; two of them convey qualitative information and the other two convey quantitative information, as follows: •

Qualitative domains, containing: Nominal Domains, which convey no information on sequencing, distances, or ratios. They convey only distinctions, distinguishing one object from another or a class from another.  Ordinal domains, which convey distinctions between objects and the information on arranging its members in a sequence. Ordinal domains are a pattern of information derived from nominal domains by adding sequencing information. However, ordinal domains posses no information regarding the magnitudes of gaps or ratios between objects (values). • Quantitative domains:  Difference-scaled domains not only express all the information that qualitative domains convey, but also convey magnitudes of difference; they allow for measurement of the magnitude of pointto-point differences in a sequence. This makes difference-scaled domains to be a pattern of information derived from ordinal domains by adding quantitative information on differences between 



Leveraging Knowledge Reuse and System Agility in the Outsourcing Era





values in the domain, which makes it a subclass of ordinal domains in the ontology of the meaning of measurability. Ratio-scaled domains perform three functions; they assist in the classification and arrangement of objects in a natural sequence, are able to measure the magnitude of differences in properties of objects, and take the ratios of these different properties.

The hierarchy of domains provides the most fundamental kind of knowledge reuse. However, this information is still abstract. In order to give information a physical expression, it must be physically formatted and recorded on some sort of medium. A single piece of information must be recorded on at least one medium, and may be recorded in many different formats. A symbol is sufficient to physically represent the information conveyed by nominal and ordinal domains. Of course, ordinal domains also carry sequencing information, and it would make sense to map ordinal values to a naturally sequenced set of symbols like digits or letters. Unlike qualitative domains, quantitative domains need both symbols and units of measure to physically express all the information they carry. This is because they are dense domains (i.e., given a pair of values, regardless of how close they are to each other, it is always possible to find a value in between them). A discrete set of symbols cannot convey all the information in a quantitative domain. However, numbers have this characteristic of being dense. Therefore, it is possible to map values in a dense domain to an arbitrary set of numbers without losing information. These numbers may then be represented by physical symbols such as decimal digits, roman numerals, or binary or octal numbers. There may be many different mappings between values and numbers. For example, age may be expressed in months, years, or days; a person’s age will be the same regardless of the number used. To show that

different numbers may express the same meaning, we need a unit of measure (UOM). The UOM is the name of the specific map used to express that meaning. Age in years, days, months, and hours are all different UOMs for the elapsed time domain. Both the number and UOM must be physically represented by a symbol to physically format the information in a quantitative domain. Indeed, a UOM may be represented by several different symbols. The UOM “dollars,” for the money domain, may be represented by the symbol “$” or the text “USD.” In general, a dense domain needs a pair of symbols to fully represent the information in it: a symbol for the UOM and a symbol for the number mapped to a value. We will call this pair the full format of the domain. Domains, UOMs, and Formats are all objects that structure meaning. They are some of the components from which the very concept of knowledge is assembled. The metamodel of knowledge is a model of the meaning of knowledge built from abstract components. Figure 2 depicts a semantic model. The lower limit (1) on the occurrence of Unit of Measure highlights the fact that each quantitative domain must possess at least one unit of measure. This is because the unit of measure is not optional. A quantitative value cannot be expressed unless a unit of measure can characterize it. The arrow that starts from, and loops back to, Unit of Measure reads “Unit of Measure converts to none or at most 1 Unit of Measure.” Conversion rules, such as those for currency conversion or distance conversion, reside in the Metamodel of Knowledge. This relationship provides another example of a metaobject (since relationships are objects too), and demonstrates how a metaobject can facilitate the storage of the full set of conversion rules at a single place. The conversion rule is restricted to conversion from one UOM to only one other UOM; this constraint is necessary to avoid redundancy and to normalize information. A single conversion

641

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Figure 2. A partial metamodel of domain Domain

Quantitative

Qualitative

Ordinal

Nominal

DifferenceScaled

Ratio-Scaled

Increasing Information Content

Qualitative Domain

Quantitative Domain

is expressed by 1 or many

is expressed by 1 or many

Format

is expressed by 1 or many

convert to 0 or 1

rule enables navigation from one UOM to any other arbitrary UOM, by following a daisy chain of conversion rules. The upper bound of one on the conversion relationship in the metamodel also implies that if you add a new UOM to a domain, you have to add only a single conversion rule to convert to any of the other UOMs, and that such information will suffice to enable conversion to every UOM defined for that domain.

Metaobjects, Subtypes, and Inheritance Metaobjects help to normalize real world behavior by normalizing the irreducible facts we discussed earlier. The metaobjects that of interest are object, property, relationship, process, event, domain, unit of measure (UOM), and format. The kinds of atomic rules normalized by each type of metaobject are summarized in Figure 3. The ontology in Figure 3 organizes objects in

642

Unit of Measure convert to 0 or 1

a hierarchy of meaning. Lower level objects in the ontology are derived from objects at higher levels by adding information. Figure 3 shows that the meaning of process is configured by combining the meanings of relationship, an interaction between objects, with the meaning of event, the flow of time. This kind of relationship is special. It is called a subtyping relationship and forms the basis of the ontology. Subtyping relationships convey information from higher levels to lower levels of an ontology. The lower level object becomes a special kind of higher level object. Figure 3 shows that ratio scaled domain is a special kind of domain because of the chain of subtyping relationships that lead from Domain to ratio scaled domain via quantitative domain.

The Repository of Meaning The atomic rule is the most basic building block of knowledge and the ultimate repository of information. It is a rule that cannot be broken into

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Figure 3. Basic inventory of metaobjects Object

Relationship

Dynamic

Domain

Property

Static

smaller, simpler parts without losing some of its meaning. The metaobjects of Figure 3 are the natural repositories of knowledge. They provide the basis of real world meaning. Just as molecules react with molecules in chemical reactions to produce molecules of new substances with different properties from the original reagents, atomic rules may be built from other atomic rules. As we enhance our business positions with product and process innovation, some atomic rules will be reused. These rules are examples of those that can act as reusable components of knowledge. In order to build specialized domains of knowledge, entire structures and configurations may be reused. This is similar to manufacturers creating reusable subassemblies to build machines from ordinary parts. The end product may incorporate many versions and modifications of these reusable subassemblies.

24HrKF: A Practical Application of Knowledge Reuse Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a

Increasing information content

Event

Nominal

Ordinal DifferenceScaled RatioScaled

Format

} }

Unit of Measure

Qualitative

Quantitative

shared language and mental models. MultiMind is a collaboration tool under development at the University of Arizona (Denny et al., 2008), aimed at improving upon DiCE (Vin, Chen, & Barzilai, 1993) and other collaborative engineering tools. A Lifestream database (Freeman & Gelernter, 1996), is a chronologically ordered persistent database, used to collect objects and events relevant to a project. Lifestream incorporates incorporates an algebra that can be coupled to the semantics of project artifacts and knowledge events, allowing substantial opportunity for the automation of mundane tasks and higher level functions. In MultiMind, the Lifestream archives project artifacts and provides configuration management services, in a similar fashion as the Concurrent Versioning System (CVS) or Subversion (SVN) revision control system. In MultiMind, knowledge events are observed and logged into Lifestream. Activities such as reading a message, posting a message, executing a search, or reading a web page, are logged into LifeStream. The correlation of knowledge events with the evolution of project artifacts allows for the reuse of relevant knowledge

643

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

between members of a development team. Communication is facilitated by the encapsulation of knowledge as objects which represent interactions with the development environment. Higher level tasks, such as the visualization of the current state of a project under development or decision facilitation can also be automated. Through MultiMind and its underlying LifeStream, information regarding artifacts and project progress can easily be visualized, identifying the artifacts which required the most maintenance or debugging. This visualization can be used as a guide for business decisions, when queries to MultiMind are filtered to visualize information relevant to a decision.

An Architecture of Knowledge Information systems are built to satisfy business requirements. Sometimes they are undertaken to implement purely technical changes (Smith & Fingar, 2002). Poorly formulated and ill-managed requirements have led to many of the problems that Information Systems projects currently face (Bahill, & Dean, 1999). Our first task, therefore, is to understand the meaning and structure of requirements. Requirements flow from knowledge. Knowledge is encapsulated in configurations of atomic rules. Knowledge of Information Systems involves configurations of (atomic) rules of business as well as technology. A four-layered hierarchical approach can be used, as depicted in Figure 4. Table 1 contains brief descriptions of each layer of the architecture of business knowledge, examples of the kinds of policies that may be implemented at the layer, as well as examples of change that may occur in that layer along with examples of the effects of change within a particular layer. The top business layer helps to assemble components of knowledge into business concepts, such

644

as products, services, markets, regulations, and business practices. Consider a situation where a telephone services provider wishes to integrate cable TV and entertainment media into its business. Such changes in the Business Rules layer will impact business functions and systems functionality, whereas changes to process automation layers alone will impact only availability, timeliness, accuracy, reliability, and presentation of information. Changes in business process automation, in turn, can impose new requirements for performance, reliability and accuracy on technology platforms, which will impact the technology layer. The level of Business Process Automation is usually changed to leverage information technology or to focus on those processes that create most value while eliminating those of little value. Changes in this layer seldom impact the fundamental business of the firm. For example, the firm could deploy its ordering process on the Web, but not make any fundamental change in the nature of its products, services, or markets. Business Process Automation refers to process innovation and change that leverages information technology. The technology layer is changed primarily to improve computer performance in terms of speed, cost, reliability, availability or alignment, and support for business process automation. The fundamental ideas of separating systemspecific rules from software implementation, as in the case of 3GL, and separating system architecture and implementation, as in the case of System/360, are even more important today in the context of separating business rules from implementation technologies. The rules related to transporting and presenting the information would belong to the Business Process Automation layers, not the pure business layer. Figure 4 shows that Business Process Automation consists of two layers. The Information Logistics layer is the repository for rules related to the logistics of moving and storing information in files, and the Interface layer is concerned with how this infor-

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Figure 4. The architecture of knowledge BUSINESS OPPORTUNITY OR ENVIRONMENTAL CHANGE

BUSINESS

BUSINESS RULES

INFORMATION LOGISTICS

BUSINESS PROCESS AUTOMATION

INTERFACE RULES (HUMAN & AUTOMATION) TECHNOLOGY PLATFORM OPERATION

TECHNOLOGY RULES

Table 1. Layers of the architecture of knowledge Layer

Description

Example Policy

Example of Change

Business

Contains assertions about products and services and defines relationships between customers and products or services.

Obtain necessary market freedoms to effectively compete; purchase competitor fixed assets; penetrate untapped markets

Acquisition of new assets necessitates the addition of new relationships between customers and services.

Information Logistics

Contains the repository of rules related to the logistics of storage, transfer, and utilization of business information.

Digital artifacts under development will be stored using a versioning system; artifact access privileges are maintained at a fine granularity

A new employee joins an active team necessitating a change in the rules regarding access to a team-owned artifact.

Interface

Contains the rules for the presentation of business information to human entities.

Access to team-owned objects is controlled by an administrator in close contact with team members; GUI follows Microsoft’s Inductive User Interface guidelines.

A new employee joins an active team, necessitating the creation of additional security rules regarding artifact access privileges.

Technology

Contains low-level operational and strategic rules regarding the operation of technology.

Hardware and systems software is standardized through a single reputed vendor.

A change of hardware or systems software vendor necessitates change of legacy software developed for obsolete system.

645

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

mation is presented to human operators. Creating a business knowledge hierarchy such as the one depicted in Figure 4 facilitates the flow of information between the business entities responsible for managing knowledge. Organizing knowledge and information, as described in previous sections, is essential for realizing the flow of information between the layers and creating meaningful and useful relationships between objects within each layer. Efforts to process and integrate information based on meaning have been made by the W3C consortium, which recommended two modeling standards in 2004: RDF, the Resource Description Framework for metadata, and OWL, the Web ontology language for integrating information. We have seen examples of how some meanings are

derived from others by constraining patterns of information they convey to create new meanings. These constrained patterns are subtypes of the meanings they constrain, and every meaning is a polymorphism of the universal object, an unknown pattern in information space that means everything and anything, and conveys nothing. Every object in the inventory of components is a polymorphism of the universal metaobject. RDF and OWL are tailored for the Web and applications of the Semantic Web. Tables 2, 3, and 4 show that the various elements of RDF and OWL as well as their metaobject inventory equivalents, showing that, in effect, the Metaobject Inventory provides a more general framework than either RDF or OWL, and that either of the restricted frameworks are special cases of the types of ontology frame-

Table 2. RDF Classes (retreived from http://www.w3schools.com/rdf/default.asp) and their Metaobject Inventory Equivalents Element

646

Class of

Subclass of

Metaobject Inventory Equivalent

Class

All classes

Datatype

All Data types

Class

All value Domain, Meaning

Resource

All resources

Class

Resource

Container (set of objects)

All Containers

Resource

Aggregate Object

Collection(set membership is restricted by some criteria)

All Collections

Resource

Object Class

Literal

Values of text and numbers

Resource

Subtype of Symbol

List

All Lists

Resource

List of

Property

All Properties

Resource

Property, Feature

Statement

All RDF Statements

Resource

Irreducible fact, rule, atomic rule

Alt

Containers of alternatives

Container

Mutability; Liskov’s principle, aggregation of mutable resources

Bag

Unordered containers

Container

Aggregate Object

Seq

Ordered containers

Container

Subtype of Aggregate Object

ContainerMembershipProperty

All Container membership properties

Property

Subtype of Relationship

XMLLiteral

XML literal values

Literal

Subtype of symbol. XML is a subtype of language.

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Table 3. RDF properties (retrieved from http://www.w3schools.com/rdf/default.asp) and their metaobject inventory equivalents Property

Operates on

Produces

Description

Metaobject Inventory Equivalent

Domain

Property

Class

The domain of the resource The domain defines what a property may apply to (operate on).

Domain

Range

Property

Class

The range of the resource. It defines what the property may map to (produce).

co-domain

subPropertyOf

Property

Property

The property of a property

Feature

subClassOf

Class

Class

Subtyping property

Polymorphism

Comment

Resource

Literal

User friendly resource description

Elaboration, description, synonym

Label

Resource

Literal

User friendly resource name

Name, synonym

isDefinedBy

Resource

Resource

Resource definition

Id

seeAlso

Resource

Resource

Additional information about a resource

Elaboration, reference

Member

Resource

Resource

The property of being an instance of a kind of resource

Instance of

First

List

Resource

The property of being the first member of a list

A demiliting role: Lower Limit

Rest

List

List

The second and subsequent members of a list

Subtype of List

Subject

Statement

Resource

The subject of an assertion, i.e., the subject of a resource in an RDF statement

The source of a relationship

predicate

Statement

Resource

Similar to “subject”: The predicate of an assertion

Relationship, function

object

Statement

Resource

The object of the resource (in an RDF) Statement

The target of a relationship

value

Resource

Resource

The value of a property

Value

Type

Resource

Class

An instance of a class

Member of a class of classes

works that can be realized through the various polymorphisms of the universal object.

Conclusion In an effort to provide a framework for surmounting the temporal and spatial separations in collaborative, distributed environments, this article

presented a framework for knowledge object management that can facilitate reuse of knowledge. The encapsulation of knowledge for distributed environments is also highlighted. The knowledge encapsulation uses a four-tier architecture that facilitates knowledge transfer and reuse, as well as enables better understanding of the problem domain under consideration. Differences in training, knowledge, and skills that exist across the distributed teams can be surmounted by use of a

647

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Table 4. OWL dlasses (retrieved from: http://www.w3.org/TR/owl-ref/) and their metaobject inventory equivalents Class

Description

Metaobject Inventory Equivalent

AllDifferent

all listed individuals are mutually different

Subtype of Exclusion partition, exclusivity constraint. The concept of distinctions emerges as a polymorphism of the concept of class as information is added o an object/pattern.

allValuesFrom

All values of a property of class X are drawn from class Y (or Y is a description of X)

Domain, Inclusion Set, inclusion partition

Subtypes of Elaboration

AnnotationProperty

Describes an annotation. OWL has predefined the following kinds of annotations, and users may add more: • Versioninfo • Label • Comment • Seealso • Isdefinedby OWL DL limits the object of an annotation to data literals, a URI, or individuals (not an exhaustive set of restrictions

Version is implicit in temporal objects. Audit properties are implicit in object histories: • The process, person, event, rule, reason and automation that caused a state to change • Time of state change • Who made the change (all the dimensions of process ownership: Responsibility, Authority, Consultation, Work, Facilitation, Information/ knowledge of transition) • When the change was made • The instance of the process that caused the change and the (instances of resources) that were used • Why it was made (the causal chain that led to the process) • How long it took to make the change Label is implicit in synonym, name Comment may be elaboration or reference. The two are distinct in the metamodel of knowledge See also: same remarks as comment. IsDefinedBy may be elaboration, Object ID, or existence dependency. Each is a distinct concept in the metamodel of knowledge

backwardCompatibleWith

The ontology is a prior version of a containing ontology, and is backward compatible with it. All identifiers from the previous version have the same interpretations in the new version.

Part of Relationship between models or structures

cardinality

Describes a class has exactly N semantically distinct values of a property (N is the value of the cardinality constraint).

Cardinality

Class

Asserts the existence of a class

Object Class

complementOf

Analogous to the Boolean “not” operator. Asserts the existence of a class that consists of individuals that are NOT members of the class it is operating on.

Set negation, Excludes, Exclusion set, Exclusion partition

continued on following page

648

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Table 4. continued Class

Description

Metaobject Inventory Equivalent

DataRange

Describes a data type by exhaustively enumerating its instances (this construct is not found in RDF or OWL Lite)

Inclusion set, exhaustive partition

DatatypeProperty

Asserts the existence of a property

Feature, relationship with a domain

DeprecatedClass

Indicates that the class has been preserved to ensure backward compatibility and may be phased out in the future. It should not be used in new documents, but has been preserved to make it easier for old data and applications to migrate to the new version

Interpretation. However, the specific OWL interpretation of depreciated class is considered to be a physical implementation of a real life business meaning, outside the scope of a model of knowledge that applies on the plane of pure meanings.

DeprecatedProperty

Similar to depreciated class

See Depreciated Class

differentFrom

Asserts that two individuals are not the same

The concept of distinctions emerging as a polymorphism of the concept of class as information is added o an object/pattern.; subtype of exclusion partition

disjointWith

Asserts that the disjoint classes have no common members

Exclusion partition

distinctMembers

Members are all different from each other

Exclusion Set, List

equivalentClass

The classes have exactly the same set of members. This is subtly different from class equality, which asserts that two or more classes have the same meaning (asserted by the “sameAs” construct). Class equivalence is a constraint that forces members of one class to also belong to another and vice versa.

Mutual inclusion constraint/equality between partitions or objects.

equivalentProperty

Similar to equivalent class: i.e., different properties must have the same values, even if their meanings are different (for instance, the length of a square must equal its width).

Equality constraint

FunctionalProperty

A property that can have only one, unique value. For example, a property that restricts the height to be nonzero is not a functional property because it maps to an infinite number of values for height.

Value of a property, singleton relationship between an object and the domain of a property

hasValue

Links a class to a value, which could be an individual fact or identity, or a data value (see RDF data types)

relationship with a domain

imports

References another OWL ontology. Meanings in the imported ontology become a part of the importing ontology. Each importing reference has a URI that locates the imported ontology. If ontologies import each other, they become identical, and imports are transitive.

Subtype of Composed of. Note that the metamodel of knowledge does not reference URIs. This is an implementation specific to the Web. The Metamodel of Knowledge deals with meanings.

continued on following page

649

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Table 4. continued Class

Description

Metaobject Inventory Equivalent

incompatibleWith

The opposite of backward compatibility. Documents must be changed to comply with the new ontology.

Reinterpretation, Intransitive Relationship, asymmetrical relationships

intersectionOf

Similar to set intersection. Members are common to all intersecting classes.

Subtype of Partition, subtype with multiple parents, set intersection

InverseFunctionalProperty

Inverses must map back to a unique value. Inverse Functional properties cannot be many-to-one or many-to-many mappings

Inverse of an injective or bijective relationship

inverseOf

The inverse relationship (mapping) of a property from the target (result) to the source (argument)

Inverse of

maxCardinality

An upper bound on cardinality (may be “many”, i.e., any finite value)

Cardinality constraint:, upper bound on cardinality (subtype of cardinality constraint and upper bound)

minCardinality

A lower bound on cardinality

Cardinality constraint: Lower bound on cardinality (subtype of cardinality constraint and lower bound)

Nothing

The empty set

of the empty set, null value

Instances of properties are not single elements, but may be subject-object pairs of property statements, and properties may be subtyped (extended). ObjectProperty asserts the existence and characteristics of properties:

ObjectProperty

•

RDF Schema constructs: rdfs:subPropertyOf, rdfs:domain and rdfs:range

•

relations to other properties: owl:equivalentProperty and owl:inverseOf

•

global cardinality constraints: owl:FunctionalProperty and owl:InverseFunctionalProperty

•

logical property characteristics: owl:SymmetricProperty and owl:TransitiveProperty

Property, a generalized constraint, which implies an information payload added to a meaning.

oneOf

The only individuals, no more and no less, that are the instances of the class

members of a class, the property of exhaustivity of a partition

onProperty

Asserts a restriction on a property

constraint on a Feature (makes the feature (object) a subtype of the unconstrained, or less constrained feature (object)

Ontology

An ontology is a resource, so it may be described using OWL and non-OWL ontologies

The concept of deriving subclasses by adding information to parent classes

OntologyProperty

A property of the ontolology in question. See imports.

None, beyond the fact that the ontologoly is an object, which means that it inherits all properties of objects, and adds the property of interpretation

continued on following page

650

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Table 4. continued Class

Description

Metaobject Inventory Equivalent

priorVersion

Refers to a prior version of an ontology

An instance of Object Property where a relevant instance of ontology Object Class exists, containing a Temporal Succession of concepts. The property of reinterpretation is implicit between versions of an ontology.

Restriction

Restricts or constrains a property. May lead to property equivalence, polymorphisms, value constraints, set operations, etc.

Rule Constraint

sameAs

Asserts that individuals have the same identity. Naming differences are merely synonyms

Set Equality, Identity

someValuesFrom

Asserts that there exists at least one item that satisfies a criterion. Mathematically, it asserts that at least one individual in the domain of the “SomeValuesFrom” operator that maps to the range of that operator.

Subsetting constraint

SymmetricProperty

When a property and its inverse mean the same thing (e.g., if Jane is a relative of John, then John is also a relative of Jane)

Symmetry

Thing

The set of all individuals.

Instance of Object Class

TransitiveProperty

If A is related to B via property P1, and B is related to C via property P2, then A is also related to C via property P1. For example. If a person lives in a house, and the house is located in a town, it may be inferred that the person lives in the town because “Lives in” is transitive with “Located in”.

Transitive Relationship

unionOf

Set union. A member may belong to any of the sets in the union to be a member of the resulting set

offset Union, Aggregation

versionInfo

Provides information about the version

Instance of Attribute. Implicit in the concept of the history of a temporal object

common means of discourse about the problem domain under consideration. For Further Reading The concepts described here have been utilized and extended in this article to cater specifically to the special needs of offshoring and 24-Hour Knowledge Factory environments. For a detailed discussion of the basic concepts and their wider applications, please refer to the following books by Amit Mitra and Amar Gupta:

•

• •

Agile Systems with Reusable Patterns of Business Knowledge —a Component Based Approach (Artech House Press, Norwood, Massachusetts) Creating Agile Business Systems with Reusable Knowledge (Cambridge University Press, Cambridge, England) Knowledge Reuse and Agile Processes— Catalysts for Innovation (IGI-Global, Hershey, Pennsylvania [in press])

651

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

References Aggarwal, A., & Pandey, A. (2004). Offshoring of IT services—Present and future. Evalueserve. Retrieved from http://www.evalueserve.com Amdahl, G. M., Blaauw, G. A., & Brooks, F. P., Jr. (2000). Architecture of the IBM System/360. Retrieved November 12, 2007, from http://www. research.ibm.com/journal/rd/441/amdahl.pdf Baggot, J. (1992). The meaning of quantum theory. Oxford University Press. Bahill, A. T., & Dean, F. (1999). Discovering system requirements. In A. P. Sage & W. B. Rouse (Eds.), Handbook of systems engineering and management (pp. 175-220). New York: Wiley. Baldwin, C. Y., & Clark, K. B. (2000). Design rules, Vol. 1: The power of modularity. Cambridge, MA: The MIT Press. Beck, K. (1999). Extreme programming explained: Embrace change. Reading, MA: AddisonWesley. Boehm, B. (1988). A spiral model of software development and enhancement. Computer, 21(5), 61-72. Blanchard, E.. (2001). Introduction to networking and data communications. Commandprompt, Inc. Retrieved from http://www.w3.org/2004/12/ rules-ws/paper/105/ Carmel, E. (1999). Global software teams: Collaborating across borders and time zones. Upper Saddle River, NJ: Prentice Hall. Chang, E., Dillon T. S., Sommerville, I., & Wongthongtham, P. (2006). Ontology-based multi-site software development methodology and tools. Journal of Systems Architecture, 52(11). Coleman, G., & Verbrugge, R. (1998). A quality software process for rapid application development. Software Quality Journal, 7, 107-122.

652

Danait, A. (2005). Agile offshore techniques— A case study. In Proceedings of the IEEE Agile Conference (pp. 214-217). Denny, N., Mani, S., Sheshu, R., Swaminathan, M., Samdal, J., & Gupta, A. (in press). Hybrid offshoring: Composite personae and evolving collaboration technologies. Information Resources Management Journa. Fergusson, N. (2004, April 12). Survival of the biggest. Forbes 2000, p. 140. Finkbeiner, D. (1966). Matrices and linear transformations. Freeman. Freeman, E., & Gelertner, D. (1996). Lifestreams: A storage model for personal data. ACM SIGMOD Record, 25(1), 80-86. Gupta, A., & Seshasai, S. (2007). 24-hour knowledge factory: Using Internet technology to leverage spatial and temporal separations. ACM Transactions on Internet Technology, 7(3). Gupta, A., Seshasai, A., Mukherji, S., & Ganguly, A. (2007, April-June). Offshoring: The transition from economic drivers toward strategic global patnership and 24-hour knowledge factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. Kanka, M. (2001). A paper on semantics. Berlin, Germany: Institut für deutsche Sprache und Linguistik. Kingston, J. (2002). Merging top level ontologies for scientific knowledge management. Proceedings of the AAAI Workshop on Ontologies and the Semantic Web. Retrieved from http://www. inf.ed.ac.uk/publications/report /0171.html Kussmaul, C., Jack, R., & Sponsler, B. (2004). Outsourcing and offshoring with agility: A case study. In C. Zannier et al. (Eds.), XP/Agile Universe 2004 (LNCS 3132, pp. 147-154). Springer. López-Bassols, V. (1998). Y2K. The OECD Observer, 214.

Leveraging Knowledge Reuse and System Agility in the Outsourcing Era

Markus, L. M. (2001). Toward a theory of knowledge reuse: Types of knowledge reuse situations and factors in reuse success. Journal of Management Information Systems, 18(1), 57-93.

Suchan, & Hayzak. (2001). The communication characteristics of virtual teams: A case study. IEEE Transactions on Professional Communication, 44(3), 174-186.

Mitra, A., & Gupta, A. (2005). Agile systems with reusable patterns of business knowledge. Artech House.

Szyperski, C. (1997). Component software: Beyond object-oriented programming. ACM Press.

Mitra, A., & Gupta, A. (2006). Creating agile business systems with reusable knowledge. Cambridge University Press.

Treinen J. J., & Miller-Frost, S. L. (2006). Following the sun: Case studies in global software development. IBM Systems Journal, 45(4).

Myopolous, J. (1998). Information modeling in the time of revolution. Information Systems, 23(3-4).

Van Zyl, J., & Corbett, D. (2000). Framework for comparing methods for using or reusing multiple ontologies in an application. In Proceedings of the Eighth International Conference on Conceptual Structures.

O’Leary, D. E. (2001). How knowledge reuse informs effective system design and implementation. IEEE Intelligent Systems, 16(1), 44-49. Ravichandran, T. (2005). Organizational assimilation of complex technologies: An empirical study of component-based software development. IEEE Transactions on Engineering Management, 52(2)

Vanwelkenhuysen, J., & Mizoguchi, R. (1995). Workplace-adapted behaviors: Lessons learned for knowledge reuse. In Proceedings of KB&KS (pp 270-280). Verdu, S. (1998). IEEE Transactions on Information Theory, 44(6).

Ross, R. G. (1997). The business rule article: Classifying, defining and modeling rules. Database Research Group.

Vin, H. M., Chen, M.-S., & Barzilai, T. (1993). Collaboration management in DiCE. The Computer Journal, 36(1), 87-96.

Smith, H., & Fingar, P. (2002). The next fifty years. Retrieved from http://www.darwinmag. com/read/120102/bizproc.html

Xiahou, Y., Bin, X., Zhijun, H., & Maddineni, S. (2004, May). Extreme Programming in global software development. Canadian Conference on Electrical and Computer Engineering, 4.

Sparling, M. (2000). Lessons learned through six years of component-based development. Communications of the ACM, 43(10), 47-53.

Yap, M. (2005). Follow the sun: Distributed extreme programming environment. In Proceedings of the IEEE Agile Conference (pp. 218-224).

This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 2, edited by M. Khosrow-Pour, pp. 1-20, copyright 2008 by IGI Publishing (an imprint of IGI Global).

653

654

Chapter 2.16

A Multi-Agent System for Optimal Supply Chain Management Hyung Rim Choi Dong-A University, Korea Hyun Soo Kim Dong-A University, Korea Yong Sung Park Catholic University of Busan, Korea Byung Joo Park Dong-A University, Korea

AbstrAct Supply chain management recently has been developing into a dynamic environment that has to accept the changes in the formation of the supply chain. In other words, the supply chain is not static but varies dynamically according to the environmental changes. Therefore, under this dynamic supply chain environment, the priority is given not to the management of the existing supply chain but to the selection of new suppliers and outsourcing companies in order to organize

an optimal supply chain. The objective of this research is to develop a multi-agent system that enables the effective formation and management of an optimal supply chain. The multi agent system for optimal supply chain management developed in this research is a multi agent system based on the scheduling algorithm, a cooperative scheduling methodology, which enables the formation of an optimal supply chain and its management. By means of active communications among internal agents, a multi-agent system for optimal supply chain management makes it possible to quickly respond to the production environment changes such as the machine failure or outage of outsourc-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

A Multi-Agent System for Optimal Supply Chain Management

ing companies and the delivery delay of suppliers. This research has tried to suggest a new direction and new approach to the optimal supply chain management by means of a multi-agent system in dynamic supply chain environment

IntroductIon Many companies have tried to introduce SCM (supply chain management) in an effort to enhance competitiveness amid severe competition caused by market globalization. Now, the participating companies in the supply chain are not fixed but rather are dynamically being changed in response to the environmental changes. Under such a dynamic SCM, it is very important to determine with whom to cooperate in order to solve these problems coming from environmental changes. Instead of seeking to optimize the existing supply chains, this study has focused on optimizing the supply chain itself. The optimization of an existing supply chain can be efficient to a fixed supply chain, but it is difficult for a dynamic supply chain to respond flexibly under the environment that its member is always changing. When a company joins an existing optimal supply chain, or when a company, which is currently joining a supply chain, has to transfer to another supply chain, they have to change their systems or processes in order to join in the new supply chain. However, this is not an easy job. The optimization of a supply chain is not made only once. Rather, it is to be made continually in response to diverse environmental changes. That is, it needs to be made on a real-time basis. By the way, the supply chain, which consists of a lot of companies, is likely to meet with various complex problems for entire optimization, and these problems bring a significant influence on making the optimal supply chain. For example, machine failure of one participating company affects not only its related member companies but also the whole supply chain that the com-

pany belongs to. Therefore, this problem must be coordinated or adjusted not as a problem of one company, but as a problem of whole supply chain. To this end, each member of the supply chain has to cooperate and exchange information between members on a real-time basis. A multi-agent system can provide a useful tool for this purpose. Many preceding studies have emphasized that the multi-agent system is the best way in solving many complicated problems under diverse environmental changes (Bussmann, 1999; Choi, Kim, Park, & Park, 2004; Fox, Barbuceanu, & Teigen, 2000; Julka, Karimi, & Srinivasan, 2002; Shen & Norrie, 1998; Shen, Norrie, & Kremer, 1999). Also, this is an efficient way of exchanging and sharing information without integration of its applications among companies. That is to say, it enables relevant companies to move smoothly to another supply chain without changing their systems and processes. Accordingly, only by the transfer of the agent alone, which represents the relevant company, cooperation, and information exchange among members within the supply chain can this be made possible. In this study, we developed an integrated scheduling method in order to organize and manage an optimal supply chain and a multi-agent system in order to solve the various problems occurring on a real-time basis in the optimal supply chain. The integrated scheduling method enables the scheduling for the entire supply chain in cooperation with related members in a supply chain, thus it is possible for a manufacturing company to make scheduling by taking into consideration the production environments of outsourcing companies and the delivery status of suppliers. And the multi-agent system shares the information on production environment and supply capacity of both outsourcing companies and suppliers, making it possible to respond to the dynamic environmental changes such as a delay in supplying parts or raw materials, power stoppage, or machine failure of the outsourcing companies for an optimal supply chain management.

655

A Multi-Agent System for Optimal Supply Chain Management

bAcKground A multi-agent system has been considered the best way to solve complicated problems under the diverse environmental changes (Shen et al., 1999). In fact, it is not easy for manufacturing companies to be flexible for dynamic changes. A number of researchers have attempted to apply agent technology to manufacturing enterprise integration, supply chain management, manufacturing planning, scheduling, and control (Bussmann, 1999; Maturana & Norrie, 1996; Parunak, 1987; Parunak, Baker, & Clark, 1997). This trend is well described in Shen et al.’s studies on agent-based production system (1999). Shen et al. developed in their studies many production-related agents with diverse functions and configurations. Their studies mainly focused on making new a manufacturing system using an agent technology for automation and efficiency in the process planning and scheduling. Also, the AARIA (Autonomous Agents for Rock Island Arsenal) project of Intelligent Automation company (Baker, Parunak, & Erol, 1997), ABCDE (Agent-Based Concurrent Design Environment) system developed by KSI (Knowledge Science Institute) of University of Calgary (Balasubramanian & Norrie, 1995), a virtual manufacturing agent made by LIPS institute of the University of Texas at Austin (Chuter, Ramaswamy, & Baber, 1995) and MASCOT (Multi-Agent Supply Chain cOordination Tool) agent of Intelligent Coordination and Logistics team of Carnegie-Mellon University (Norman, David, Dag, & Allen, 1999) are representative studies that have used a multi-agent system for development of intelligent manufacturing system. While making intensive studies on the intelligent manufacturing system by means of an agent system, the scope of this research has been extended to the study on a multi-agent system for supply chain management. Shen et al. (1999) emphasized that there are a lot of complexities and changes in the manufacturing environment under supply chain, and that the agent system can be the

656

best way for effective supply chain management. Also, they said that a multi-agent system can be the best method to integrate the activities of suppliers, customers, and business partners with internal activities of a company (Shen & Norrie, 1998). Meanwhile, more active research has been done on the agent-based supply chain models. Wu, Cobzaru, Ulieru, and Norrie (2000) suggested a new method that one participating member is connected via a Web system to the agents of its related business partners in the manufacturing, distribution, and service field. When an event happens, each agent cooperates to organize a virtual cluster to solve a specified problem. Julka et al. (2002) suggested an SCM model based on an agent while emphasizing the importance of a more flexible and efficient system. Shen et al. (1999) divided production management into five divisions such as design, process planning, scheduling, marketing, and coordination. And then they established a mediator agent for each division and a mediator agent for each mediator agent. Through this mediator-based multi-agent system, they suggested the possibility that if the scope of manufacturing activities within a factory is extended to its suppliers or business partners, an effective SCM could be established. MetaMorph II system suggested by ISG has a mediator-based multi agent structure, suggesting a supply chain network model where the agents for suppliers, business partners, and customers are connected to the mediator of the system via Internet (Shen et al., 1999). Most existing research has tried to solve the complex and difficult problems, which cannot be solved by individual application programs, by means of mutual cooperation among agents. That is to say, the existing studies have focused on solving various problems occurring within a supply chain by way of communicating among agents. But this study has tried to organize an optimal supply chain by means of communicating among agents, while focusing on maintaining and managing the optimal supply chains. The existing

A Multi-Agent System for Optimal Supply Chain Management

studies and this study are similar in the sense that both have made use of a multi-agent system, but differences between them are in where and how the multi-agent system has been used. Also, it can be said that the studies on the optimization of supply chain by means of a multi-agent system have not yet been made much.

A Method For oPtIMAl suPPly chAIn MAnAgeMent organization of optimal supply chain This study focuses on the following problems: How to organize an optimal supply chain under the dynamic supply chain environment? When environmental changes have occurred to the optimal supply chain, how to respond to it? As an object of our research, this study chose a molding company among many make-to-order manufacturers. When a molding company tries to select a supplier and an outsourcing company, such factors as delivery date, cost, and productivity are to taken into consideration. In particular, owing to its industrial characteristics, the due date is the most important factor. A molding company is a typical make-toorder manufacturer, and so if it fails to meet the due date required by a customer, it is impossible for the company to sell its product. Also, as most products of the molding companies are standard-

ized, their price and quality are almost the same, thus showing no much difference. Because of this, instead of the price and quality, the delivery date becomes a critical factor in choosing a supplier or an outsourcing company. When there are many outsourcing companies and suppliers, as illustrated in Figure 1, this study has selected the supplier and outsourcing company that can meet the due date demanded by customers in order to organize an optimal supply chain. If an outsourcing company participating in the optimal supply chain is unable to perform operation due to its machine failure, or a supplier fails to provide the specified parts on the due date, the manufacturer has to reorganize the supply chain. Like this, when environmental changes occur, it is absolutely necessary to automatically obtain, exchange, or share information in order to speedily respond to the sudden environmental changes.

An Integrated and dynamic scheduling Method for optimal supply chain Management This research uses genetic algorithm to establish integrated and dynamic scheduling. This algorithm integrates process planning and scheduling in order to consider alternative machines of outsourcing companies and operation sequences, and also can perform rescheduling in response to the changes in the production environment. Traditionally, process planning and scheduling were

Figure 1. Optimal supply chain Outsourcing companies A

Suppliers A

Suppliers B

Suppliers C

manufacturer

Outsourcing companies B Outsourcing companies C

657

A Multi-Agent System for Optimal Supply Chain Management

achieved sequentially. However, the integration of process planning and scheduling brings not only best effective use of production resources but also practical process planning without frequent changes. Choi, Kim, Park, and Park (2004) have proved that this integration of process planning and scheduling is far superior to the sequential process of planning and scheduling in the aspect of completion time of jobs. We used a genetic algorithm with flexible representation structure for the integrated and dynamic scheduling method. Genetic algorithm enables integrated scheduling, considering alternative machines of outsourcing companies and operation sequences. Also, it enables rescheduling when changes have been made to the suppliers, outsourcing companies, and producer. In order to design genetic algorithm, first of all, the attribute of the problem should be analyzed, and then the presentation proper to the problem, performance measure, genetic operator, and genetic parameter should be decided. The following is genetic algorithm for the establishment of integrated scheduling considering alternative machines and operation sequence under the dynamic situation.

Representation To achieve integrated production plan through genetic algorithm considering alternative machines and operation sequences, first of all, the problem should be represented in chromosome. The representation should be made in the way that

Figure 2. Chromosome representation 3 2 2 2 3 1 1 1 3 2 3 3 3 2 1 1 1 2

Selection Method

3 2 2 1 1 2 1 1 2 (1 1 2 3 2 1 2 3 3)

658

all the processing sequence, alternative operation sequences, and alternative machines could be decided. First, to represent processing sequence, the pattern to repeat the number of the job as many as the number of operation is used. One gene means one operation, and in the represented order it will be allocated to the machines. For example, the problem of three jobs and three machines is represented in sequence as shown in Figure 2. The threefold repeated number in the first row is the number of the job, and the reason that each job number has been repeated three times is that each job has three operations. The first repeat of the job number means the first operation of the job, and the second repeat means the second job operation. If the job number continues to represent the number of job operation, this chromosome will always maintain its feasibility. The second row is the random numbers that will be used to decide alternative operation sequence. As each job is done in the one-operation sequence, each job produces the same random number within the number of maximum alternative operation sequence. For example, as job 2 in Table 1 has three alternative operation sequences, the random figure has to be produced within three. The third row has the random numbers to decide the alternative machine, producing them within the number of maximum alternative machines. In Table 1, the second operation of job 1 is to be done in the M2 but also can be done in the M1 and M3. In this case, the number of machines that can handle the second operation of job 1 is 3. As there are no more alternative machines than this in Table 1, the random figures for all alternative machines will be produced within three. The index in the last row means the repeat number of job numbers, namely showing the ordinal operation of each job.

… (Index)

The seed selection is used as a way of selection (Park, Choi, & Kim, 2001). Seed selection, as

A Multi-Agent System for Optimal Supply Chain Management

Table 1. Alternative machines and alternative operation sequences of each job

Job 1

Operation sequence 1 (alternative machine) Operation sequence 2 (alternative machine) Operation sequence 1 (alternative machine)

Job 2

Operation sequence 2 (alternative machine)

Operation sequence 2 (alternative machine)

M1 (M3)

M2

M3

(M1) (M3)

M1

M3

(M3)

M2 (M1) (M3)

M1 (M3)

M2

M3 (M1) (M2)

M1

M3

M2

(M3)

(M1) (M2)

M3

M1

(M1)

(M3)

M2

(M2)

Job 3

Operation sequence 1 (alternative machine)

M1

M3

(M3)

(M1)

Operation sequence 2 (alternative machine)

(M3)

a way of individual selection that is used in the propagation of cattle and the preservation of the individual, has been introduced to the evolution of genetic algorithm. If the random value of the individual, which belongs to the father among parents, comes within the figure of probability (0.9), the best individual will be selected from within superior individuals from ranking population. But, if not, the individual will be randomly selected from among the entire group. The mother will be selected randomly among the entire group, but in this case, first two individuals will be selected randomly, and then the better individual based on the value of probability will be selected. These will be used as parents, and then returned

M2

(M2) M1

M2

M3 (M1) (M2)

to the individual groups, so that they will be used again later.

Genetic Operator Crossover operator should maintain and evolve the good order relationship of chromosome. The crossover operator used in this research has a process as follows:   

Produce a random section Insert all the genes inside the random section into parent 2 All genes with the same index as the genes in the random section will be deleted in parent 2

659

A Multi-Agent System for Optimal Supply Chain Management





a chromosome is represented as a permutation type, the makespan is produced by the process that assigns operations to the machines according to sequence of gene from left to right, while maintaining the technological order of jobs and considering its alternative operation sequence and alternative machine. The process is shown in Figure 3. The next generation will be formed by the selection among the current generation and with the help of genetic operator. The new individuals will be produced as many as the number of initial population and form the next generation. By using elitism, bad individuals will be replaced with good individuals. Also, because of crossover rate and mutation rate, some individuals will be moved to the next generation without getting through the genetic operator.

It will be corrected according to the alternative operations sequence of the initial job number to make alternative operation sequence coincide to the same job number These processes will be performed alternating parent 1 and parent 2

The position of insertion is just before the gene where the random section has started. If in parent 1 the random section starts in the fourth place, then the position of insertion will be before the fourth gene in parent 2. This crossover operator produces two children. After two offspring are evaluated, the better one will be sent as a next generation. The mutation operator gives a change to the chromosome, thus maintaining diversity within the group. This research uses the mutation operator based on the neighborhood searching method (Park et al., 2001).

Genetic Algorithm for Dynamic Scheduling

Objective Function and Replacement

The genetic algorithm suggested in this paper reflects the dynamic changes in the suppliers and outsourcing companies along with the produc-

The minimum makespan in the scheduling often means the highest efficiency of a machine. When

Figure 3. The example of crossover ¤ |- random section-|

Parent 1 3 2 3 (index)

2 3 2

Parent 2 1 1 2 (index) 1

1 1 1 2

2 3 2 ¤Ł

3 1 3 1

2 3 1 3

3 2 1 2

1 1 2 1

1 1 1 2

1 1 1

3 2 2

2 2 2 1

2 2 2 2

1 1 1 3

2 2 1 3

3 1 1 2

3 1 3 3

¤Ø

Parent 1 2 1 2 index 1 Child 1 ¤º

Child 2

660

1 1 1 2

3 2 3 1 1 2 2 1 1 3 2 1 1 2 2 1 3 1 1 2 1 2 2 1 1 1 2 3

2 2 1 3

3 1 1 2

3 1 3 3

3 1 3

2 3 1

3 1 1 ¤Œ1 1 2

1 1 1

2 3 2

2 3 2

1 1 1

3 1 3

3 2 3

2 2 2

2 2 2

2 2 1

3 2 1

1 1 2

1 1 1

3 2 2

1 1 1

A Multi-Agent System for Optimal Supply Chain Management

tion changes of the producer. When the changes of production environment have happened in suppliers or outsourcing companies—the acceptance of new orders, machine failure, outage, and the absence of the worker in duty—all these changes will be reflected in the rescheduling. For example, when a machine cannot be operated for 10 hours because of its failure, or a supplier cannot keep the lead-time, thus delaying 10 hours, the integrated scheduling will reflect the usable time of each machine and the possible starting time of each job. Figure 4 shows the process of rescheduling when a new order has been accepted at the time of t1. In the process of rescheduling, the remaining jobs and the new jobs to be done by the new orders will be considered in the new production planning. It also considers the starting time of jobs and the usable time of machines. The starting time of jobs can be changed by the delay of supply or the operation delay of its prior process. The usable time of machines, as shown in the black shade of Figure 4, can be changed by when the machine has already been allotted to other job, machine

failure, and the absence of the worker on duty. All these dynamic changes will be reflected in the rescheduling (Park, 1999). In the rescheduling process, the chromosome is to be modified, and a new objective function is to be produced in response to the environmental changes. Based on this rescheduling, a new supplier or an outsourcing company is to be selected, and the information of rescheduling is to be transmitted through the multi-agent system. In order to solve several problems simultaneously, the genetic algorithm in this study has been represented in a chromosome and has been designed for better evolution, so that it can more effectively solve the complex problems of integrated scheduling. Like this, the strong point of genetic algorithm lies in its approach based on the problem-centered chromosome design. Also, thanks to its flexible representation, speedy performance, and excellent performance capability, the genetic algorithm makes it possible to reflect in the rescheduling all the information about suppliers and outsourcing companies, which comes from the multi-agent system on a real-time basis. In this respect, the

Figure 4. Example of dynamic scheduling

when a new order has been accepted

Rescheduling

661

A Multi-Agent System for Optimal Supply Chain Management

genetic algorithm is considered to be best suited to the dynamic supply chain management.

A MultI-Agent systeM For oPtIMAl suPPly chAIn MAnAgeMent the whole structure of a Multi-Agent system The key factor in the development of a multi-agent system is how the roles should be assigned to each agent. In the multi-agent system, one agent doesn’t perform all functions. Rather, each agent has an individual function, and so they mutually

communicate with each other to jointly solve complicated matters. Because of this reason, how to classify each agent is a key factor to designing a multi-agent system. For the development of a multi-agent system, all the activities from a customer’s order to manufacturing were reviewed, and then these activities were assigned to each agent. Each agent is given a specified function so as not to have many functions. As illustrated in Figure 5, the multi-agent system can be divided in two subsystems: virtual manufacturing system and SCM system. The virtual manufacturing system is composed of an inventory analysis agent, manufacturability analysis agent, process planning agent, and scheduling agent. This system makes a decision on whether it will be able to manufacture or

Figure 5. Structure of multi-agent system of an optimal supply chain

662

A Multi-Agent System for Optimal Supply Chain Management

not, makes scheduling in consideration of the production environments of both suppliers and outsourcing companies, and makes a decision on the necessity of parts or materials through inventory analysis. This activity is directly related to the selection of suppliers. The SCM system consists of an outsourcing management agent, supplier management agent, outsourcing company communication agent, supplier communication agent, and registry server agent. This system organizes and manages the optimal supply chain based on the integrated scheduling that is the result of virtual manufacturing. Based on the exact scheduling, the virtual manufacturing system makes a decision on whether it can manufacture within the due date. The SCM system’s main function is to respond to the manufacturing environment changes occurring in the optimal supply chain. To this end, the mediator of the manufacturing company has to exchange information on a real-time basis with both the supplier’s and outsourcing company’s agent. The multi-agent system has a mediator-centered structure. All the agents are connected to the mediator, which takes control of each agent, and also are responsible for smooth information exchange with suppliers and outsourcing companies.

Function of each Agent All agents own their basic function to communicate with each other, and each one has diverse kinds of engines according to his role.

Mediator The mediator plays the role of controlling and coordinating the message exchange among agents within the system. The agent in charge of controlling and coordination is necessary in order to perform harmoniously the various jobs of many agents, to remove the bottlenecks occurring within the system, and to prevent the collision

between each agent. For this purpose, the mediator has a knowledge base for agent coordination and message exchange as well as information on each agent. For example, when the SMA (supplier management agent) received from the SCA (supplier communication agent) the information on production environment change, that is, “The material delivery from the supplier is delayed,” the mediator is to send this information speedily to the SA (scheduling agent) so that it may make rescheduling according to the production environment changes. The roles of mediator are as follows: • • • • •

Message transmission between internal agents Function control of internal agents Function of filtering the messages Knowledge of mediator’s behaviors Knowledge of internal agents

The mediator is in charge of controlling and coordinating each agent, and has diverse knowledge base to help the message exchanges between agents, which are illustrated in Table 2. As illustrated, the knowledge is expressed in the form of rules. Case 1 shows that when OMA (order management agent) receives an order, the mediator is to send the message asking the MAA (manufacturing analysis agent) to make a decision whether it can be produced or not. See Case 1. Case 2 shows that when it receives the message that it can produce the ordered product from MAA, the mediator is to send PPA (process planning agent) the message asking for scheduling. See Case 2. Diverse messages from internal agents converge to the mediator. The mediator is to perform the function of operating its system smoothly, so that it can remove bottlenecks and prevent collisions between each agent. This study adopted the FIFO (first in first out) method in handling

663

A Multi-Agent System for Optimal Supply Chain Management

Table 2. The knowledge in the mediator Knowledge of agent role Knowledge of message exchange Knowledge of problem solution

Knowledge of subagent composition Knowledge of subagent role Knowledge of job handling procedures Knowledge of how to handle the contents of message Knowledge of how to handle message in case of no answer Knowledge of how to express in time of trouble

the messages. If messages from the agents come to the message queue, those messages will be handled in sequence.

Registry Server Agent Buyer agent, outsourcing company agent, and supplier agent are to be registered in the registry server agent (RSA). Registered agents are to obtain position information from RSA so as to be able to communicate to his or her partner agent. The agents registered in the RSA can be candidates for the participating member of the optimal supply chain. In principle, the optimal supply chain needs to be organized through communication with the agents of all the suppliers and outsourcing companies. But in reality, for mutual communication among agents, each agent has to obtain information about his or her partner agent. For this reason, only the agents who can communicate via RSA can be candidates for the optimal supply chain organization. The outsourcing companies and suppliers have to register the information on their agent’s position and basic data of their companies. The basic data of the companies includes their name and role. Their role is whether they are outsourcing companies or suppliers. Outsourcing company and supplier have a different role. Because of this, they have to register additional information besides basic data. That is, the outsourcing company has to provide information on machines and facilities, and the supplier has to include information on the parts and materials that it can provide. In particular, in

664

case of an outsourcing company, as an outsourcing company executes some parts of an ordered product, information on its production facilities such as a mill or a drill has to be registered.

Order Management Agent (OrderMA) An order management agent receives orders and confirms them. It keeps order information and analyzes and classifies buyers through data mining and statistic analysis.

Supplier Management Agent A supplier management agent provides the information on the environmental changes in the suppliers to the inside system and also transmits the information on supply schedule to the suppliers. This agent also keeps the suppliers’ priority on the basis of their capability and confidence. This data will be used at the time of selecting suppliers when they all can keep the same due date.

Outsourcing Management Agent (OMA) An outsourcing management agent provides the information on the machine situation of outsourcing companies for the sake of scheduling, and also, based on the scheduling, it makes a decision on the necessity of outsourcing. The criteria for the decision-making are whether the outsourcing company can keep the due date or not. When the producer cannot keep the due date for itself, this agent sends the message containing the necessity

A Multi-Agent System for Optimal Supply Chain Management

Case 1. [ case 1 ] rule name Accept Order if contents_name = order then send product_width and product_length and product_height and raw_material and part_width and part_length and part_height to ManufacturabilityAnalysisAgent

Case 2. [ case 2 ] rule name Accept ManufacturabilityAnalysisResult if contents_name = ManufacturabilityAnalysisResult and ManufacturabilityAnalysisResult = yes then send use_for and model_name and number_of_part and process_time and product_width and product_length and product_height and raw_material and part_width and part_length and part_height to Process Planning Agent.

of outsourcing. The following is the agent’s action knowledge represented in the form of IF-THEN, saying, “If the due date based on the production planning is not satisfactory, inform the mediator of the necessity of outsourcing.” Here, Last_time is the finishing time of the last operation in the production planning. IF Last_time > due_date Then send yes_message to Mediator

This agent has the priority information on outsourcing companies, and this information will be used for selecting outsourcing companies.

Inventory Analysis Agent (IAA) An inventory analysis agent analyzes the inventory level and makes a decision on the purchase of materials. The information on the inventory level is to be secured from the inside of the system. The inventory analysis agent makes a decision based on the purchase necessity analysis knowledge.

Manufacturability Analysis Agent (MAA) Based on the information on products and parts, MAA checks up the constraints related to the manufacturing process in order to make a decision on its manufacturability. Constraints usually come from the size and weight. In case the size of an ordered product is too large or the weight is too heavy, the small manufacturer cannot produce it. For example, if the size and weight surpass the capacity of the cranes of the manufacturer, it cannot execute the order. The judgment on manufacturability can be made by the knowledge base. This knowledge base includes information on various kinds of size and weight as well as the cases making it impossible to execute an order. The knowledge in Box 1 shows how the judgment on manufacturability can be expressed in JESS, that is, a language of java-based rule expression.

Process Planning Agent (PPA) A process planning agent performs the role of process planning. This paper used CBR (case-based

665

A Multi-Agent System for Optimal Supply Chain Management

Box 1. “The mold size of cavity plate is a>600, b>270, c>400, it is impossible to execute the order.” (constraint_rule_002 (size_a

?a)

(size_b

?b)

(size_c

?c)

=> (if (&& (>=?a600) (>=?b270) (>=?c400))) then (assert (manufacturability no)))

reasoning) based on a process planning engine. The reason is that if the products of order-based producers are similar, the same process will be used (Kolodner, 1993). Choi, Kim, and Park (2002) have proved the availability of this methodology by applying it to molding industry.

Scheduling Agent A scheduling agent performs the role of scheduling based on a genetic algorithm-based engine, considering alternative machines and operation sequence. This agent plays the critical role in the multi-agent system, and based on this scheduling, the supplier and outsourcing company will be selected.

Supplier and Outsourcing Company Communication Agent A supplier and outsourcing company communication agent performs the role of communications between multi-agent system and suppliers and outsourcing companies. For the establishment of scheduling, the supplier communication agent provides the possible due date of raw materials, and the outsourcing company communication agent provides the information on the machine situation. These two agents provide multi-agent systems with the information on the production environment changes through user interface.

666

the Process of the Multi-Agent system The process of the multi-agent system is composed of the followings: the process of scheduling for self-production, the process of scheduling for selecting outsourcing company, the process of scheduling for selecting supplier, and the process for rescheduling in case the production environments of suppliers and outsourcing companies have been changed. If necessary, based on the rescheduling, the supplier and outsourcing company should be reselected.

The Process of Scheduling for Self-Production Figure 6 shows the case that a producer can make for order-based products at his own factory without the help of suppliers and outsourcing companies. The producer establishes the scheduling for accepted orders, and provides the result to the buyer agent.

The Process of Scheduling for Selecting Outsourcing Company Figure 7 shows the case that if a producer cannot meet the required due date by self-production, he has to select an outsourcing company.

A Multi-Agent System for Optimal Supply Chain Management

Figure 6.The process of scheduling for self-production

Figure 7. The process of scheduling for selecting outsourcing company

Figure 8. The process of scheduling for selecting supplier

667

A Multi-Agent System for Optimal Supply Chain Management

The outsourcing management agent analyzes the necessity of outsourcing based on the scheduling, and if necessary, it asks for the information on the machine situation of outsourcing companies. Based on this information on machine situation, the scheduling agent establishes rescheduling. Based on this rescheduling and outsourcing company priority, the outsourcing management agent selects an outsourcing company.

The Process of Scheduling for Selecting Supplier Figure 8 shows how to select the supplier in case that the producer doesn’t have enough inventory of raw materials. The inventory analysis agent analyzes the inventory of the inside system and required raw materials for orders. If it thinks the supplier should be selected, the supplier management agent will ask the suppliers for a possible due date, and based on this information, it will select a supplier.

The Process of Rescheduling for Production Environment Changes Figure 9 shows how to respond to the changes in the production environment. When there are changes in the production environments of outsourcing companies, the outsourcing communication agent provides this information to the outsourcing management agent. And based on this changed production environment, the scheduling agent achieves rescheduling, and the outsourcing management agent analyzes this rescheduling. However, if this rescheduling cannot meet the required due date, other outsourcing company should be selected. To testify to the availability of the above processes of the multi agent system, this research adopts a molding company as a case study.

Figure 9. The process of rescheduling for production environment changes

668

A Multi-Agent System for Optimal Supply Chain Management

cAse study oF MultI-Agent systeM Case Definition In order to test the validity and practicality of the multi-agent system developed by this study, we made a prototype and applied it to real field cases. We visited the small “J molding company,” the domain of this study, and reviewed and analyzed the facilities of the factory and its field situation. J molding company has such machines as a large mill, medium and small mill, drill, and lathe to perform milling, drilling, grinding, and electric discharge machining. Meanwhile, due to the constraint of facility of this company, there are some molds that cannot be manufactured. That is, the cranes of this company cannot handle the mold exceeding the weight of five tons. But there

are no other difficulties in the resources, like manpower or machines, and in technologies. The knowledge base of MMA defines the constraints and uses them in judging manufacturability. The J molding company was maintaining a close relationship with its outsourcing companies and suppliers while outsourcing some part of milling and electric discharge machining. As illustrated in Figure 10, J molding company has a supply chain consisting of material suppliers, outsourcing companies, and customers. Also, in order to meet the due date of the order, it tries to organize an optimal supply chain. The company keeps a good business relationship with three outsourcing companies and three suppliers. This case study is for the mold production of a “cake box.”

Figure 10. Supply chain of J molding company

669

A Multi-Agent System for Optimal Supply Chain Management

case study The case study has two stages: The first stage is how to organize an optimal supply chain according to the procedures as illustrated in Figure 11. The second stage is how to respond to the environmental changes such as a machine failure or power stoppage after organizing an optimal supply chain. As illustrated in Figure 11, the organization of an optimal supply chain needs two steps: The first step is to perform virtual manufacturing for

an ordered product. The second step is to select an optimal supplier and outsourcing company according to the result of virtual manufacturing. Step 1. Virtual manufacturing If the mediator receives from OMA a message that a client order “cake box” within six days from order date, it sends necessary information to the MAA so as to make judgment on manufacturability. If the mediator receives a “yes” message from MAA, it sends order-related information to the

Figure 11. Procedure for organizing an optimal supply chain

670

A Multi-Agent System for Optimal Supply Chain Management

Figure 12. Manufacturability analysis-related message interface

Figure 13. Process planning-related message interface

Figure 14. Scheduling-related message interface

671

A Multi-Agent System for Optimal Supply Chain Management

Figure 15. Outsourcing necessity-related message interface

Figure 16. Message interface asking for information on the machine situation of outsourcing companies

Figure 17. Rescheduling-related message interface in consideration of outsourcing companies’ situation

672

A Multi-Agent System for Optimal Supply Chain Management

PPA and SA so that both agents may prepare for process planning and scheduling respectively. The mediator sends scheduling information from SA to the OMA to make a decision on whether there it is necessary to outsource. “Makespan 61” is the result of scheduling for an ordered “cake box” mold. This means that if the factory operates eight hours per day, it takes eight days. In this case, as the customer’s due date request is within six days from his or her order date, J molding company cannot satisfy the customer’s due date. Accordingly, the OMA sends the message of outsourcing necessity to the mediator. Step 2. The organization of an optimal supply chain In order to select an optimal outsourcing company that can meet the due date, the mediator asks OMA for the information on the machine situation of outsourcing companies registered in the RSA. OMA asks the OCCA (outsourcing company communication agent) of each outsourcing company for the information on machine situation, which includes the machine schedule. If the machine is now in operation, that machine cannot be used for another order until the current operation is over. When the mediator receives the following information on machine schedule from outsourcing companies, it sends this information to the SA so that it may prepare for rescheduling. • • •

A outsourcing company: two units of mill are now not in operation. (AM 1 0, AM 2 0) B outsourcing company: one unit of mill can be used after six hours. (BM 6) C outsourcing company: one unit of mill can be used after three hours, and another one unit is now not in operation. (CM 3, CM 0)

As illustrated in Figure 17, rescheduling was made by considering outsourcing companies’ machine situation. As a result of rescheduling,

in case of A and C outsourcing companies, possible due date is October 18, 2005, thus satisfying customer’s request. But B outsourcing company’s possible due date is October 20, consequently not meeting the requested due date. This means that A and C can be a participating member of the optimal supply chain. Therefore, the mediator asks OMA to choose one company between these two outsourcing companies. Based on the priority information, OMA chooses A outsourcing company, and then notifies the mediator and OCCA of it. By selecting A outsourcing company, the optimal supply chain for a “cake box” mold was organized. In this case study, the case of selecting a supplier was excluded, but the supplier also can be selected in the same way as the above-mentioned outsourcing company. Meanwhile, the optimal supply chain is not fixed, rather it can be changed in response to the changes of a manufacturing environment. But even if such environmental changes take place repeatedly, an optimal supply chain can be organized in the same way as the first organization of an optimal supply chain. As illustrated in Figure 19, this study performed the tests for two kinds of environmental changes. The first environmental change is: A outsourcing company, which is chosen as a member of the optimal supply chain, is unable to work because of milling machine failure. The second one is: A supplier becomes unable to provide the parts within the requested date. Figure 19 shows the process to solve the environmental changes. The above two environmental changes can affect J molding company in the following two ways: one is that the delay of work doesn’t directly affect the due date requested by the customer, and the other is that it affects the due date. In the first case, the company’s manufacturing activity will be continued according to the rescheduling, but in the second case, it has to reselect a new outsourcing company or supplier. As shown in the above tests, the optimal supply chain can be reorganized in response to

673

A Multi-Agent System for Optimal Supply Chain Management

Figure 18. Message interface related to the notification of the result of outsourcing company selection

Figure 19. The test procedures of optimal SCM cases

the dynamic changes in the manufacturing environment, so that the manufacturing company may smoothly maintain and manage its optimal supply chain.

review of case study In order to test the validity and practicality of the developed multi-agent system, this study produced

674

a prototype performing key functions and applied it to the field for case study. Unfortunately, the multi-agent system has not yet commercialized because of many difficulties in realizing its knowledge base. Likewise, the multi agent system’s prototype made by this study is not enough to be commercialized, and so we couldn’t measure the performance and effect by means of application. Instead, as a way to test its validity and practicality,

A Multi-Agent System for Optimal Supply Chain Management

we had interviews with the experts in charge of scheduling at the make-to-order manufacturing companies, including the J molding company and 15 software developers related to agent development. The experts in charge at the make-to-order manufacturing companies testified to the validity of the multi-agent system, and those software developers evaluated the systemic performance of the multi-agent system. Evaluation was performed on a five-point scale on the next major items. •



•

Experts in charge at the make-to-order manufacturers ° Is the scheduling of this system correct and accurate? ° Is it reasonable that the optimal supply chain consisting of suppliers and outsourcing companies focused on due date for supply chain organization? ° Does the work process for calculating the possible due date reflect well the reality? ° Does this system smoothly react to the environmental change occurring in the supply chain? Software developers ° Is communications among agents smoothly performing? ° Is the role of each individual agent well assigned? And is the multi-agent structure appropriate? ° Is the handling speed of the system satisfactory? ° Is the agent development method reasonable? ° Is there any serious mistake in the system?

As a result of evaluation, the experts in charge at the make-to-order manufacturers gave a score of 3.8 on the overage, and software developers gave a score of 4.2. The experts in charge gave a relatively higher score to the capability to react to the environmental changes and well-reflected

work process, but a somewhat low score to the accuracy of scheduling. This seems to come from the fact that the current algorithm is not fully enough, because of the complex scheduling of the molding industry. However, they put a high value on the automation of scheduling and the possibility of job handling without human intervention and believed that commercialization of the multiagent system will be able to bring cost reduction and productivity improvement. They also added that many efforts were being made to maintain a solid relationship with outsourcing companies and suppliers that satisfy the due date. These efforts mean that the core point of satisfaction of due date in the organization of optimal supply chain has validity. The agent software developers, who gave a higher score, seem to value the current high level of agent development. The evaluation team as a whole rated the validity and practicality of the multi-agent system very high. In particular, they have paid attention to the new approach to SCM.

Future trends Owing to the characteristics of the domain of this research, we organized an optimal supply chain based on the satisfaction of due date. From now on, however, further research on the optimal supply chain, which has two different objectives, or considers two key factors simultaneously, will be made. Many companies consider the problem of price to be very important as well as due date. For example, when we consider the two factors of price and due date simultaneously, as the due date is the same but the price is different like Figure 20, it is easy to select its business partner. But as shown on the right side of Figure 20, if the price and due date are respectively different, it is not easy to evaluate them because the two have different worth. Therefore, the method to evaluate due date and price simultaneously has to be developed.

675

A Multi-Agent System for Optimal Supply Chain Management

Figure 20. Evaluation of due date and price

Furthermore, as due date and price have a trade-off relationship, negotiation is possible. That is, the following negotiation can be made: Instead of lowering the price, the due date can be lengthened, or if an earlier due date is required, the price will be higher. In these cases, a new negotiation protocol as well as a new negotiation method needs to be developed.

conclusIon Owing to the increasing importance of quick response to the rapid changes of business environments, the supply chain also needs dynamic changes according to its environmental changes. In the dynamic supply chain environment, it is a key factor to decide who to cooperate with for effective manufacturing. This study developed a system to efficiently select an optimal business partner under the dynamic supply chain environment. To this end, this study developed an algorithm for both scheduling and rescheduling, which is to be made by taking into consideration the manufacturing environments of both suppliers and outsourcing companies. Also, by using a multi-agent system, this study made it possible to organize and manage an optimal supply chain on a real-time basis in response to the dynamic changes in the supply chain environment.

676

Like this, instead of trying to optimize an existing, fixed supply chain, we have tried to organize a new supply chain that can dynamically respond to the environmental changes, so that it can bring diverse effects such as cost saving, productivity enhancement, and speedy job handling. These effects are well presented in the results of our case study. Finally, we expect that this multi-agent system will be usefully applied to the complex supply chain environment and also have expectations that the agents realized in the wrapper method through a new development framework will be used in diverse fields.

reFerences Baker, A. D., Parunak, H. V. D., & Erol, K. (1997). Manufacturing over the Internet and into your living room: Perspectives from the AARIA project (Tech. Rep. TR208-08-97). ECECS Dept. Balasubramanian, S., & Norrie, D. H. (1995). A multi-agent intelligent design system integrating manufacturing and ship-floor control. Proceedings of the First International Conference on Multi-Agent Systems. San Francisco: The AAAI press/The MIT Press. Bussmann, S. (1999). An agent-oriented architec-

A Multi-Agent System for Optimal Supply Chain Management

ture for holonic manufacturing control. Proceedings of the First International Workshop on IMS, Lausanne, Switzerland.

algorithms for scheduling of static and dynamic job shop. Unpublished doctoral thesis, Dong-A University, Busan, Korea.

Choi, H. R., Kim, H. S., & Park, Y. S. (2002). Intelligent injection mold process planning system using case-based reasoning. Journal of Korea Intelligent Information Systems Society, 8(1), 159-171.

Park, B. J., Choi, H. R., & Kim, H. S. (2001). A hybrid genetic algorithms for job shop scheduling problems. Computers & Industrial Engineering, 45(4), 597-613.

Choi, H. S., Kim, H. S., Park, B. J., & Park, Y. S. (2004). Multi-agent based integration scheduling system under supply chain management environment. Lecture Notes in Artificial Intelligence, 3029, 249-263. Chuter, C. J., Ramaswamy, S., & Baber, K. S. (1995). A virtual environment for construction and analysis of manufacturing prototypes. Retrieved from http://ksi.cpsc.ucalgaly.ca/projects/ mediator Fox, M. S., Barbuceanu, M., & Teigen, R. (2000). Agent-oriented supply chain management. The International Journal of Flexible Manufacturing Systems, 12, 165-188. Julka, N., Karimi, I., & Srinivasan, R. (2002). Agent-based supply chain management-2: A refinery application. Computers and Chemical Engineering, 26, 1771-1781. Kolodner, J. (1993). Case-based reasoning. Morgan Kaufmann Publishers. Maturana, F., & Norrie, D. H. (1996). Multi agent mediator architecture for distributed manufacturing. Journal of Intelligent Manufacturing, 7, 257-270. Norman, M. S., David, W. H., Dag, K., & Allen, T. (1999). MASCOT: an agent-based architecture for coordinated mixed-initiative supply chain planning and scheduling. Proceedings of the Third International Conference on Autonomous Agent (Agents ’99), Seattle, WA. Park, B. J. (1999). A development of hybrid genetic

Parunak, V. D. (1987). Manufacturing experience with the contract net. In M. N. Huhns (Ed.), Distributed artificial intelligence (pp. 285-310). Pitman. Parunak, V. D., Baker, A. D., & Clark, S. J. (1997). The AARIA agent architecture: An example of requirements-driven agent-based system design. Proceedings of the First International Conference on Autonomous Agent, Marina del Rey, CA. Shen, W., & Norrie, D. H. (1998). An agent-based approach for distributed manufacturing and supply chain management. In G. Jacucci (Ed.), Globalization of manufacturing in the digital communications era of the 21st century: Innovation (pp. 579-590). Kluwer Academic Publisher. Shen, W., & Norrie, D.H. (1999a). Developing intelligent manufacturing systems using collaborative agents. Proceedings of the Second International Workshop on Intelligent Manufacturing Systems (pp. 157-166). Shen, W., & Norrie, D. H. (1999b). Agent-based systems for intelligent manufacturing: A stateof-the-art survey. The International Journal of Knowledge and Information System Shen, W., & Norrie, D. H. (1999c). An agent-based approach for manufacturing enterprise integration and supply chain management. Shen, W., Norrie, D. H., & Kremer, R. (1999). Implementing Internet enabled virtual enterprises using collaborative agents, infrastructures for virtual enterprises. Kluwer Academic Publisher. Shen, W., Ulieru, M., Norrie, D. H., & Kremer,

677

A Multi-Agent System for Optimal Supply Chain Management

R. (1999). Implementing the Internet enabled supply chain through a collaborative agent system. Proceedings of Workshop on Agent Based Decision-Support for Managing the InternetEnabled Supply-Chain, Seattle. Wu, J., Cobzaru, M., Ulieru, M., & Norrie, D. H. (2000). SC-web-CS: Supply chain Web-centric systems. Proceedings of the IASTED International Conference on Artificial Intelligence and Soft Computing (pp. 501-507).

Xue, D., Yadav, S., & Norrie, D. H. (1999). Development of an intelligent system for building product design and manufacturing - Part I: Product modeling and design. Proceedings of the 2nd International Workshop on Intelligent Manufacturing Systems (pp. 367-376).

This work was previously published in Architectural Design of Multi-Agent Systems: Technologies and Techniques, edited by H. Lin, pp. 281-304, copyright 2007 by Information Science Reference (an imprint of IGI Global).

678

679

Chapter 2.17

Integration of Global Supply Chain Management with Small and Medium Suppliers Asghar Sabbaghi Indiana University South Bend, USA Ganesh Vaidyanathan Indiana University South Bend, USA

AbstrAct The purpose of this chapter is to develop a conceptual insight and an integrated framework to global supply chain management through strategic aspects of business philosophy as it pertains to the small- to mid-sized supplier. Primary consideration is given to characteristics of the integrated supply chain and the necessity of adaptation in managing the supply chain in order to attain competitive advantage. A review of the current literature and an analysis of the supply chain in changing global markets emphasize the relative importance of strategically managing the supply chain process given the limited resources of the small- to mid-sized firm. It is argued that managing the supply chain through the development of market specific strategies allows the small to mid-sized firm to be anticipatory as opposed to being reactive in its strategic planning, which can greatly benefit customer satisfaction levels and

thus enhance the performance of the firm.

IntroductIon Supply chain management (SCM) as a strategy for competitive advantage has gained prominence in both large and small organizations. An understanding of the supply chain management concept from the perspective of suppliers and, in particular, small and medium enterprises (SMEs) is crucial to the study of vertical integration of global SCM. This understanding will better formulate internal business strategies of suppliers by supporting both the objectives of the supply chain and their own businesses. About 80% of the supply chain members are SMEs, and a major impact and savings may well be found with the SMEs within the supply chain (Smeltzer, 2002). By taking advantage of their position and criticality in the supply chain, SMEs can add value and

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Integration of Global Supply Chain Management with Small and Medium Suppliers

contribute to the vertical integration essential in the supply chain. This creates advantages not just for themselves, but also for other members within their supply chain. By some definitions, a supply chain is a network of facilities that performs the functions of procurement of material, transformation of material to intermediate and finished products, and distribution of finished products to customers (Lee & Billington, 1995). The supply opportunity analysis technique (SOAT) moves away from a reactive to a proactive mode by taking (determining) the suppliers’ perspective (Bhattacharya, Coleman, & Brace, 1995). When customers demand customized products, products often become increasingly complex. In addition, the development and manufacturing of such products demand even greater resources that need to be shared by the supply chain members. In addition, the development and manufacturing of such products by the original equipment manufacturing (OEM) partners require supply chain members to increasingly share available resources as virtual partners (Rota, Thierry, & Bel, 2002). To the suppliers, these virtual partnerships can provide both opportunities of growth and threats of becoming obsolete from the supply chain. A supplier is usually involved with multiple customers and therefore in several supply chains. The supplier receives both firm orders and forecast orders. To be successful, the supplier needs to negotiate these firm orders and the forecast orders with its suppliers. To deliver customized products with short delivery times and high due-date observance, to plan for the supplier’s own raw material requirements, it is important for the customer to effectively share information (Rota et al., 2002). The transformation from reactive to proactive procurement parallels a transformation in relationships between suppliers and buyers. Suppliers have developed partnerships with customer firms. This partnership has turned into collaborative relationships or strategic alliances (Burt, Dobler, & Starling, 2003). The rising cost

680

of product development, globalization, and shorter product lead times have been cited as important reasons for supplier collaboration (Bruce, Fiona, & Dominic, 1995; Helper, 1991; Lamming, 1993). The involvement by partners has a positive impact on strategic purchasing, and strategic purchasing has a positive impact on a firm’s financial performance (Masella & Rangone, 2000). Even though there are many benefits from this collaborative or alliance network between suppliers and customers, there are obstacles. Trust plays a critical role in such collaborative or alliance relationships between suppliers and customers (Burt et al., 2003). However, such collaborations and alliances enable information flow across the supply chain. To answer questions such as why a supplier was not treated according to its capabilities or why did engineering think it had capabilities when it did not, the characteristics of the suppler has to be clearly articulated (Nellore, 2001). Developing visions for suppliers can help OEMs to create clear expectations and thus better the core capabilities of the buyer and supplier firms (Nellore, 2001). OEMs also increase supplier involvement in product development and the share of inbound just-in-time (JIT) deliveries. However, while suppliers increase their outsourcing and globalization of production and product development activities, OEMs do not (von Corswant & Fredriksson, 2002). By outsourcing certain activities to specialized suppliers, companies can focus on those products and activities that they are distinctively good at (Venkatesan, 1992). This specialization, enabling a reduction of the capital base, implies improved return on invested capital (Quinn & Hilmer, 1994) and the possibility to benefit from economies of scale. However, outsourcing means that important activities are placed outside the boundaries of the firm (Richardson, 1972). In addition, coordination of these activities demands vast resources, and many companies therefore strive to reduce their supply bases (Cousins, 1999). A cooperative strategy between OEMs and suppliers is needed

Integration of Global Supply Chain Management with Small and Medium Suppliers

to ensure efficient coordination of these activities. Information flow enables such cooperative strategies. A significant portion of product nonconformance costs can be directly attributed to variation in supplier processes. To mitigate the effects of variation in the near term it may be tactically prudent to assess tolerances to influential supplier processes. Such tolerance allocation strategies tend to be adversarial in nature, since the cost associated with a nonconforming product is principally borne by suppliers via scrap and repair costs, not to mention costs associated with safety stock increases, and so on. However, a more appropriate long-term strategy for reducing nonconformance costs is to consider ways to achieve a reduction of variation in supplier processes (Plante, 2000). Variance reduction of a supplier’s processes requires knowledge of what influences the process variation so that appropriate improvement action can be undertaken in an informed manner. Gaining such knowledge requires that organizations invest in and commit to continuous learning (Plante, 2000). Companies such as Raytheon finds that 50% to 70% of its product costs are represented by outside purchases, with a majority of the material dollars spent on a few key parts provided by a few key suppliers. To address this conundrum, the Raytheon Six Sigma with Suppliers process was created, providing a set of tools and resources to help reduce supplier costs. The Raytheon Six Sigma with suppliers process has six steps (visualize, commit, prioritize, characterize, improve, and achieve), including an intense two-day workshop, which requires a heavy involvement and commitment by the supplier. Information flow between suppliers and customers can enable acquisition and use of this process knowledge to reduce supplier costs. Measures related to quality, cost, delivery, and flexibility have been used to evaluate how well the suppliers are performing. Companies track supplier performance over time to detect problems early. It is imperative for even small businesses

to establish performance measures (Knechtges & Watts, 2000). Performance cannot be measured solely by past or current levels of sales and profitability but should also include quantitative indicators of how the firm will do in the future. A recent study showed that in a supply chain, the supplier management practices adopted by first-tier suppliers affected second-tier suppliers’ performance. Second-tier suppliers’ performance consequently influenced both first-tier suppliers’ quality and delivery performance (Park & Hartley, 2002). As performances of suppliers are evaluated regularly and frequently, these problems can be mitigated easily and at an earlier stage. The implementation of a successful supplier performance measurement system not only clarifies supplier understanding of performance expectations, consequences for poor performance, and rewards for performance excellence, but it also provides documentation of actual supplier performance. Supplier performance metrics can be used for a wide range of continuous improvement efforts. For example, they can be the basis for a establishing a proactive supplier development process, or making critical decisions when rationalizing the supply base, or even for determining how to distribute costs over several suppliers to better manage risk. Information flow of performance plays a critical part for maintaining supplier relationships. Supplier process, performance, strategy, and relationships can be made effective and efficient using information technology. Given the symbiotic relationship existing between supplier and customer, all participants of the global supply chain need to be educated and trained to facilitate IT adoption (Kirby & Turner, 1993). In the next section, we present the characteristics, opportunities and challenges for SME companies and suppliers in general. Based on that discussion, we illustrate a conceptual framework consisting of five dimensions for suppliers in the third section. The remaining sections expand these five dimensions. The final section presents a summary and conclusions of the five dimensions.

681

Integration of Global Supply Chain Management with Small and Medium Suppliers

small- to Medium-sized companies: their characteristics, opportunities, and challenges Small and medium enterprises (SMEs) have played a significant role in the global supply chain management in various countries and in the landscape of global business competition (Chapman, Ettkin, & Helms, 2000). As reported by the U.S. Small Business Administration (USSBA, 1999), SMEs are an integral part of the renewal process that pervades and defines market and economies. New and small firms play a critical role in experimental and innovation that leads to technological changes and productivity growth. With the emergence of the new technologies, new products, new services, new markets, and new management concepts, the pattern of competitive advantage for companies— particularly for small- to medium-sized organizations—has changed and has subsequently led to new opportunities and new challenges. There is no universally accepted definition of a small and medium enterprise (SME). In the literature, the definition of SME varies based on the number of employees, ownership of the shares capital investment, or financial turnover, among others (Reed, 1998; Taylor & Adair, 1994). In order to better understand the strategic roles of SMEs in the global business, it is important to recognize their inherent characteristics. SMEs are often independently owned and operated and closely controlled by the owners/managers who are the principal investors and decision makers having entrepreneurial behavior. The attitude and expression of values (cultural and personal) of owners can play a significant role in the adoption of new technology and strategy development (Stansfield & Grant, 2003). The decision maker, often an entrepreneur or small network of associates, formulates attitudes based on perception of its environment. The entrepreneur’s attitudes influence his/her own behavior, such as decision making, and thereby have a direct impact on the

682

SME’s capability. They also influence an employee’s attitudes and behaviors and thus affect the internal environment through the organizational culture factor, and further indirectly affect the SME’s capability through that mechanism. SMEs are also characterized by an absence of standardization and formal working relationships, having a flat organizational structure. Thus, they have a more organic organizational structure when compared to a more bureaucratic structure in large firms (Ghobadian & Gallear, 1996). These characteristics make SMEs more flexible to environmental changes (Levy, 1998; Storey & Gressy, 1995) as well as incurring lower overhead expenses and thus are perceived more innovative. Consequently, they have the potential of playing a significant role in global competition. In particular, SMEs who possess/ exhibit entrepreneurial behavior can use the new information technologies as the strategic tools to generate new products and services, and as driving force behind new processes, new forms of business organization, new scope for consumers, and new market opportunities and supply chain management. The characteristics of an SME can determine the strategic opportunities and challenges available to these companies, particularly in the area of supply chain management. The entrepreneurial behavior of SMEs differentiates them from larger companies in supply chain management, particularly in a cross-cultural dimension and global market. While SMEs’ managers are more sales oriented, they do not have a well-developed overall strategic plan. According to Dodge and Robbins (1992), 64% of SMEs that failed did not have a business plan. SME managers tend to rely on their tacit knowledge rather than systematic techniques in supply chain management planning activities, such as vendor selection (Park & Krishnan, 2001). The competitiveness of an SME is defined by its flexibility to environmental changes and dependent on its owner/manager (OECD, 1993), since the adoption of a strategic planning approach is

Integration of Global Supply Chain Management with Small and Medium Suppliers

affected by its ownership structure (O’Regan & Ghobadian, 2002). However, they may have limited resources required for efficient supply chain management and find themselves encountering more barriers due to increased competition at national and international levels, particularly when they do not have the resources to meet the demands of their trading partners in the supply chain. SMEs that are subsidiaries of larger organizations may be able to access resources from their parent organizations (O’Regan & Ghobadian, 2002) and be able to overcome these challenges of limited resources. However, they are typically responsible for their local strategies and limited flexibility in their national and international strategies. Furthermore, as managers of SMEs are usually holding multiple roles as entrepreneur, and owner/manager, the management focus tends to be operational rather than strategic. However, in order to take advantage of supply chain management as a means for competitive advantage and succeed, these companies need to take a strategic approach of supply chain management. In particular,

SMEs are challenged to balance their short-term operational focus with long-term strategies and technological innovations. This in turn requires greater financial and technical resources. The lack of resources required for effectiveness and efficiency is another major challenge for SMEs in adopting appropriate strategies for their supply chain management, particularly in their quest for global competition. Small to medium suppliers are less resourceful and often play niche roles within the supply chain as a commodity supplier, collaboration specialist, technology specialist, and problem-solving supplier (Kaufman, Wood, & Theyel, 2000) as shown in Table 1. The supplier topology divides along two dimensions: technology and collaboration. By dividing these dimensions into high and low categories, Kaufman et al. (2000) create four distinct supplier strategies. The top left quadrant defines suppliers who use standard technologies and relate to customers through standard market contracts. These suppliers compete on the basis of low cost. These suppliers can be replaced since

Table 1. Strategic supplier typology High Collaboration

Low Collaboration

Low Technology

High Collaboration

Commodity Supplier

Collaboration Specialist

•

Spot m arket s upplier

•

Detailed control parts supplier

•

Low c ost, l ow p rice p riorities

•

•

Little o r no d ifferentiation

Uses a c losed network i n each industry

•

Can b e in many i ndustries to maintain c ustomer product i nformation

Technology Specialist

Problem-solving Supplier

•

Proprietary p arts supplier

•

Black box supplier

•

Innovation in p roduct technology u sed to p roduce h igh barriers t o entry

•

High differentiation

•

Cost less i mportant

•

Small r uns, h igh process a nd labor flexibility

•

First m over advantages

•

Uses design capabilities for competitive advantage

683

Integration of Global Supply Chain Management with Small and Medium Suppliers

switching costs are low. These commodity suppliers design and sell parts to their customers as specified by their customers. The top right quadrant describes collaboration specialists. These suppliers use standard technologies that meet customer specifications and delivery schedules. However, these firms develop enhanced collaborative techniques to fulfill current and to anticipate future customer needs. These suppliers use vendor managed inventory (VMI) strategy. The collaboration essentially requires accurate and timely information. They reduce the customers’ internal monitoring or administrative costs. The suppliers in the lower right quadrant are the problem-solver suppliers. They help their customers to avoid costly investments in specific resources. They employ both advanced technologies and collaborative methods in promoting innovative design and manufacture of supplied parts. The bottom left quadrant defines the technology specialists. They supply proprietary parts using advanced technologies. However, they have weak relationships with customers and the customers benefit from acquiring high technology parts without having to invest in resources. These different suppliers can also be classified as subcontractors who are connected to their customers through supply networks and play coordinating roles between both domestic and foreign players (Andersen & Christensen, 2005). The common theme in this four dimensional topology is information technology (IT). Information technology is perceived as a critical enabler for efficient exchange of information between the SMEs and the members of supply chain management, and to improve organizational performance and enhance competitive advantage. However, due to resource constraints, SMEs place lower priority on IT investments. Thus, SMEs differ from large companies in their supply chain management practices and technology. Large companies have a greater scope of operation and thus are more likely to be involved in diverse markets. They can spread costly new systems over large units

684

of production, and have internal technical development and maintenance capabilities (Smeltzer, 2001). SME managers and, in particular, small business entrepreneurs, tend to lack or not value many of the basic skills needed to adopt and implement networked processes. They are not operationally inclined or concerned with issues of managing their supply base methodically. They are keen to sell more. Larger firms have invested time and money in implementing their enterprise resource planning (ERP) and e-commerce strategies, including e-procurement and online selling, integrating with these firms can be frustrating. SMEs must develop the business planning skills to identify, select, and implement the supporting technology. Particularly, SMEs must adopt an integrated system such as ERP, e-commerce, and e-procurement systems to support their supply chain management and be able to “pull through” from downstream customers. In the context of Porter’s framework of competitive advantage strategies, and given the characteristics, opportunities, and challenges facing SMEs, the competitive success of these companies may not critically depend on price leadership or differentiation strategies but on how they are unique and critical to their trading partners (Quayle, 2002). In this context, SMEs could focus on meeting ultimate customers’ needs, strive to supply quality products/services, and add value to meet the demands of their supply chains. Thus, it is essential that SMEs can link their business strategies to that of the supply chain. The organic organizational structure of SMEs should enable them to develop strategic alliances with their trading partners in the supply chain so that they are able to leverage the skills and expertise of supply chain partners to gain strategic advantage for the whole chain.

conceptual Framework Forrester (1958) viewed a supply chain as part of industrial dynamics, alternatively known as system dynamics and management system dynamics;

Integration of Global Supply Chain Management with Small and Medium Suppliers

it is broadly defined as the application of feedback thinking and control engineering concepts to the study of economic, business, and organizational systems. System dynamics is concerned with problem solving in living systems that bring together machines, people, and organizations. It links together the system theory and the control theory so that we are able to generate added insight into system dynamic behavior and, particularly, into the underlying causal relationships in the context of global performance of the system and internal control. In this context, supply chain is defined as a system of business enterprises that link together to satisfy customer demands and to provide value to the end customer in terms of product and services. We can discern a distinct generic procedure as part of the production/ operation process in a supply chain that is called an echelon. In their most basic form, materials/ goods flow from one echelon to the next until they reach the end customer. In reality, however,

supply chains do not exist in isolation, but form part of a network of supply chains satisfying different demands. Figure 1 describes a framework for suppliers in the global integrated supply chain. The four major dimensions of the framework include strategy, process, partnership, and performance. These dimensions are enabled by the fifth dimension, global information flow. The ultimate goal in supply chain management is to create value for the end customers and the firms in the supply chain network. To accomplish this, firms in the supply chain network must integrate all their supply chain process activities both internally and with other firms in the network. This integrated supply chain process needs a supply chain strategy. The strategic fit requires the firm to achieve a balance between its responsiveness and its efficiency in its supply chain that best meets the requirements of its competitive strategy. The supply chain performance of the firm with respect to its supply

Figure 1. Integration framework for supplier network

685

Integration of Global Supply Chain Management with Small and Medium Suppliers

chain strategy is in terms of its responsiveness and efficiency (Chopra & Meindl, 2004). Furthermore, to create value for the supply chain network, it is critical that suppliers and customers develop strong relationships and partnerships based on a strategic perspective. Good supplier relationships are a key ingredient necessary for developing an integrated supply chain network (Wisner, Leong, & Tan, 2005). Good supplier and customer relationships and a great supply chain strategy are not enough to create value in an efficient, integrated supply chain process. The supportive role of information technology is essential along with the use of information technology to measure the supply chain performance. This provides the firm with the ability to make decisions about supply chain improvements. It is generally accepted in the literature that today’s forward thinking managers use an integrated approach to managing their business by using quantitative and technological tools to bring together multiple facets of the business including, but not limited to, procurement, inventory management, manufacturing, logistics, distribution, and sales. It has been argued that the next century’s paradigm for addressing challenges from increasingly demanding customers and global competition will rely on the effective use of information sharing and inventory control to streamline operations and coordinate activities throughout the supply chain. The conceptual integrated framework of the supply chain network brings collaboration and information sharing to fruition. The collaboration and information sharing results in reduced supply chain costs, greater flexibility to respond to market changes, less safety stock, higher quality, reduced time to market, and better utilization of resources (Wisner et al., 2005).

Integrated Process According to the Global Supply Chain Forum, supply chain management is defined as the integration of key business processes from end user

686

through original suppliers that provides products, services, and information that add value for customers and other stakeholders (Croxton, Garcia-Dastugue, & Lambert, 2001). This definition identifies eight key processes as the core of supply chain management. The eight processes include: (1) customer relationship management, (2) customer service management, (3) demand management, (4) order fulfillment management, (5) manufacturing flow management, (6) supplier relationship management, (7) product development and commercialization, and (8) returns management. These processes transcend the length of the supply chain cutting through firms and functional silos alike. These processes also provide a framework for various aspects of strategic and tactical issues present in the supply chain processes. The integration of such processes would allow successful management of the supply chain for the suppliers as well. Figure 2 shows a relatively simple and generic supply chain that links a company with its suppliers upstream and its distributors and customers downstream. Upstream supply chain includes the organization’s first-tier suppliers and their suppliers. Such a relationship can be extended in several tiers all the way to the origin of material. Downstream supply chain includes all the processes involved in delivering the product or service to the final customers. Thus, there are physical flows in the form of raw materials, workin-process inventories, and finished products/ services, between supply chain echelons, from suppliers/vendors to manufacturers to distributors and retailers, and to consumers. Supply chain also includes the movement of information and money, and the procedures that support the movement of a product/service. Managing these physical and informational flows effectively and efficiently requires an integration approach that promotes organizational relationship and fosters the sharing of strategic and technological efforts (Sabbaghi & Sabbaghi, 2004).

Integration of Global Supply Chain Management with Small and Medium Suppliers

Figure 2. Integrated supply chain process

An effective supply chain management has required an integrated approach and collaboration among the various tiers of suppliers and retailers, and has led to information sharing relations. In 1995, a pilot project between Wal-Mart, WarnerLambert, Benchmarking Partners, SAP, and Manugistics led to the concept of collaborative planning, forecasting and replenishment (CPFR) (Cooke, 1998). Skoett-Larsen, Thernoe, and Anderson (2003) have defined three levels of CPFR: (1) basic CPFR collaboration that only involves few business processes and a limited integration with trading partners, (2) developed CPFR collaboration that is characterized by increased integration in several collaboration areas, and (3) advanced CPFR collaboration that deals with synchronization of dialogue between the parties in addition to data exchange. While in basic CPFR, the supply chain partners will usually choose a few key processes relevant to precisely their form of collaboration with customers and suppliers, in developed CPFR the parties start to coordinate data and information exchange by making agreements about the type of information sharing and exchanges. In advanced CPFR, the collaboration will be expanded to coordinate

processes within forecasting, replenishment, and planning. The planning processes may in turn be decomposed into collaboration on production planning, product development, transport planning, and market activities. CPFR is a set of norms and procedures created by the Voluntary Inter-industry Commerce Standards (VICS) Association to drive companies toward common business planning procedures and to search for efficiency in the supply chain while establishing standards to facilitate the physical and informational flow. The CPER model is part of the integration mechanism among these processes and a valuable technological innovation tool to support the implementation of various types of transactions among the supply chain companies. These norms would provide the foundations for companies in the supply chain to collaborate in sharing data and information, in forecasting and ordering, in better production and distribution, and to achieve a global optimum of cost and services. Successful collaboration and implementation of CPFR norms would enhance the partnership in a supply chain. This would lead to lower costs, improved product or service quality, better customer service, quicker project results, reduced cycle

687

Integration of Global Supply Chain Management with Small and Medium Suppliers

time/lead time, and improved value to customers. Furthermore, managing business processes requires both internal and external knowledge about the company’s operations and its strategies, as the development of effective behavior standards influences operational processes among the partners in the supply chain. Thus, given the constant need for innovation in organizational processes and corresponding information technology, CPFR can be viewed as a tool for competitive advantage in the supply chain. The effective competitiveness of supply chain between supplier and customer partly depends on the effectiveness and efficiency of the flow of order and information between various parties in the supply chain. Participating organizations need to adopt an appropriate business model and culture that facilitate inter-organizational integration, sharing of skills and knowledge, and enable change in response to market forces. The challenge at the front end, before the order, is to have relationships with suppliers over time using as much electronic technology as possible to be able to source product availability in real time, to meet the customers’ requirements. At the back end, the challenge is to understand and identify the best way to integrate with all their suppliers. This requires system standardization that allows suppliers to easily connect into their IT systems to improve not only their data communication facilities but also improve their business processes and facilitate collaboration between partners. This can be supported by the use of an integrated enterprise-wide information system such as enterprise resource planning (ERP) system. Enterprises, particularly SMEs within a supply chain, must then be evaluated as to added value in this process provided to customers and by their working relationships and partnerships to improve their performance and competitiveness. Where material and component suppliers are regarded as partners in the activity of satisfying customers, the adversarial approach to supplier auditing is not appropriate. All aspects of the supplier’s business

688

process, from receiving and reviewing an order, through manufacture to delivery, needs to be reviewed by the auditor to ensure that they meet minimum acceptable standards and to identify opportunities to improve. The auditor acts as an independent observer in reviewing the SCM system. This method aims to identify opportunities for improvement in the customer-supplier relationship that will improve quality, delivery, and service (Saunders, 1994). In a move to remain competitive, many OEMs have resorted to outsourcing a large amount of design and manufacturing work. In so doing, they have repositioned themselves as customer-focused market players instead of design and manufacturing experts. This repositioning has consequently led to an increased reliance on the Tier 1 suppliers. With increased reliance comes increased pressure. Because of these new market changes, today’s suppliers are facing a significant shift in responsibilities: while their share of the design and development responsibilities has increased, there is a concomitant expectation that costs will decrease. Furthermore, suppliers have multiple OEMs and consequently need to respond to multiple process integration. There is an increased focus on suppliers becoming leaner, as well as a push for heightened investment in rigorous processes that focus on innovation in close collaboration with OEM customers. A significant factor contributing to the length of product development is the time and process required in responding to design changes. Communicating design changes in language relevant to or understood by both the manufacturer and supplier is difficult, time consuming, and expensive. Evaluating the impact of change, reaching agreement on options, and implementing the change can take months due to the back and forth communication between all parties involved in the project. This complex communication process involves exchanging and remastering design information in a variety of formats during product design, analysis, and change. This can be improved by using a collaboration tool that shares

Integration of Global Supply Chain Management with Small and Medium Suppliers

design intelligence between these departments, dramatically shortening the time to communicate change, evaluate tradeoffs, and make decisions. Engineering supply chain collaboration also results in early problem detection, saving time and money for all involved, and making it easy to tie and integrate processes from various OEMs and respond to them individually. SMEs need to identify a number of factors that can impede external process integration along the supply chain, causing information distortion, longer cycle times, stock-outs, and the bullwhip effect, resulting in higher overall costs and reduced customer service capabilities (Wisner et al., 2005). Failing to see the big picture and acting only in regard to a single department within the firm or a single tier in the supply chain can create quality, cost delivery timing, and other service problems. To overcome this silo mentality, firms must strive to align their supply chain processes and strategy to the overall vision of the supply chain network. The inability to easily share information from all the members of the supply chain is a common process integration problem. Using information technology, one of the dimensions discussed in this chapter, can solve this problem. Successful process integration between the members of the supply chain requires trust. Trust and commitment may be improved by collaborating on a small scale, better communication, and going for a win-win situation. Lack of process knowledge within the firm and among partners can lead to the downfall of supply chain activities. Educating and training the employees can improve their process knowledge. Finally, reducing the length of supply chain, making demand data available to suppliers, improving order batching efficiency, reducing price fluctuations, and eliminating short gaming can improve the supply chain integrated process (Wisner et al., 2005).

Integrated strategy The integration of business processes in supply chain management from suppliers would add value first to original equipment manufacturers (OEM) and finally to their customers. This integrated strategic process is enhanced through the use of logistics management. According to the Council of Logistics Management (Cooper, Lambers, & Pagh, 1997), logistics management is defined as the process of planning, implementing, and controlling the efficient, cost-effective, flow and storage of raw materials, in-process inventory, finished goods, and related information flow from pointof-origin to point-of-consumption for the purpose of conforming to customer requirements. The scope of the supply chain management expands further upstream to the source of supply and downstream to the point of consumption, involving the integrated strategic process. The need for integration of information systems, planning, and control activities exceeds the level of integration necessary in the management of logistics alone (Cooper et al., 1997). Although not all efforts toward integration are successful, companies are increasingly using an integrated, strategic approach not only to manage the supply chain, but as a general philosophy in managing the business due to the perceived benefits of improved performance (Tan, 2001). In fact, one study completed in 1998 supports a positive impact to performance by correlating supplier performance and firm performance (Tan, Kannan, & Handfield, 1998). The study summarizes literature available to that point. The study also concludes that a company’s customer relations and purchasing practices—as major components of supply chain management strategy—have a positive impact on the effectiveness of supply chain management as a whole. Furthermore, through empirical analysis, the same study lays a foundation for the premise that additional practices of concurrent engineering, customer focus, strategic alliances, and quality-driven production improve the strategic management of the supply

689

Integration of Global Supply Chain Management with Small and Medium Suppliers

chain management function as a whole (Tan et al., 1998). However, in slight contrast to these findings, companies should be further interested in the firm’s overall performance and their ability to attain competitive advantage, as opposed to merely positively impacting the supply chain management strategic process. Since the concept of supply chain management as a strategic tool for business planning is relatively new, there is less clear data on the effect of “overall” performance of the corporation given a successful supply chain management strategy. A statistical study on the impact of purchasing and supply chain management of activities relating to corporate success was published in 2002 (Ellram, Zsidisin, Siferd, & Stanly, 2002) that attempted to answer many of the questions concerning overall firm performance by stratifying companies into three categories using a number of different financial and benchmarking criteria. The results determined that above-average firms showed no increased use of supply chain management processes when compared to average and below-average firms and that below-average firms had higher perceptions of actually practicing this strategic process. The reasons for this are partially explained by realizing that firms with average and below-average performance levels may be facing market pressures and declining profitability and must seek ways to improve performance and lower costs. In other words, above-average performing firms may not seek the advantages of strategically managing the supply chain given the relative success of the corporation despite additional opportunities to increase the firm’s performance. These results heavily support many of the underlying principles developed later in this analysis when looking closer at the scarce resources available to the small firm and any attempts at using supply chain management as a replacement for corporate strategy, as some of the supply chain management literature suggests. Although many companies are moving toward such strategies due

690

to the far-reaching effects of overall customer satisfaction, supply chain management should not be confused with, and cannot make up for, broader corporate strategy and the need for managing effective strategic processes in areas such as marketing, financing, and distribution, just to name a few (Ellram et al., 2002). Small- to medium-sized firms are confronted with the issue of scarce resources to a greater extent than are larger corporations. In fact, often in such companies, it is the same individual(s) developing the strategic initiative, which means focusing too heavily on any one strategic area, inclusive of supply chain management, may actually lead the company to greater risk. Product and technology life cycles have shortened significantly and competitive product introductions make life cycle demand difficult to predict. At the same time, the vulnerability of supply chains to disturbance or disruption has increased, not only to the effect of external events such as wars, strikes or terrorist attacks, but also to the impact of changes in business strategy. Many companies have experienced a change in their supply chain risk profile as a result of changes in their business models, for example, the adoption of “lean” practices, the move to outsourcing, and a general tendency to reduce the size of the supplier base. A research study (Christopher & Lee, 2004) suggests that one key element in any strategy designed to mitigate supply chain risk is improved “end-to-end” visibility. It is argued that supply chain “confidence” will increase in proportion to the quality of supply chain information. Rather, it is the balance of strategic planning and execution within these organizations that is the common denominator among successful firms of small- to mid-size. Consequently, it is the successful management of the supply chain for any firm in context of its overall business strategy that can provide it with a competitive advantage, but doing so with a poor business strategy or a weak marketing plan is not likely to provide the firm an advantage in the marketplace. It is clear that the uncertainty of global market conditions leave companies on the edge with respect to their strategic thought process in all

Integration of Global Supply Chain Management with Small and Medium Suppliers

aspects of strategic planning; yet it is the responsibility and opportunity of the enterprise to interpret, comprehend, and even predict circumstances relevant to the global market that determines its effectiveness. Global supply chain management provides a key element to understanding these conditions of uncertainty and is one of the primary reasons that the strategy is being so well accepted across organizations of all types and sizes. However, some unique problems and opportunities arise for smaller companies who are able to redefine, adapt, and redesign the supply chain. Managing each defining component of the supply chain is difficult for the small to mid-sized entity due to scarce resources. However, given the knowledge base and the in-depth understanding of the supply chain processes by limited individuals in the smaller firm, it seems reasonable to change and make necessary adjustments to the supply chain management processes. For the smaller corporation, supply chain performance is based on the flexibility of the management strategy practiced by the entity to reduce the level of risk provided by factors of global market uncertainty. A company’s performance in the marketplace has been specifically linked to flexibilities involving volume, product launch, and target markets (Vickery, Calantone, & Droge, 1999). This empirical study looks at the furniture trade and is extremely relevant given the trend toward overseas production and a declining U.S. market for producers. It reveals that companies able to adapt to changing market conditions performed more favorably in terms of financial measures and marketability by exhibiting performance in areas of volume flexibility and product launch flexibility over all others. Volume flexibility is the ability to increase or decrease aggregate production of a good or service, and launch flexibility refers to the ability to introduce new products, as well as variations of existing products, involving the entire supply chain. Both provide excellent examples of ways small companies should be able to pursue competitive

advantages, given their ability to control these processes initiating with the need to do so. In other words, they do not require direction from other “functional” departments, but rather respond to immediate needs of the market as opposed to reacting too late. Clearly, flexibility can be used as a strategic tool for the smaller enterprise.

Partnerships Partnerships are business relationships based on mutual trust and openness as companies share risks and rewards leading to such an advantage (Muskin, 2000). The ability of a firm to extend beyond traditional corporate boundaries by working with partners will increase efficiencies and success. Traditionally, in the market economy, products and services are produced to meet the forecasted demand. Firms in a supply chain are tightly integrated and focused on high-volume, maximum utilization of working capital, and cost efficiency in their supply of products/services. The optimum competitive decision is often accepted as achieving economies of scale and/or economies of scope. Productive processes are arranged so as to optimize the utilization of production and distribution capacity. In this economy, sharing technology and expertise with customers or suppliers was considered risky and thus unacceptable. There has been much emphasis on in-sourcing and vertical integration in supply chain strategies and little emphasis on outsourcing and cooperative and strategic buyer-supplier partnership (Sabbaghi & Sabbaghi, 2004). For example, in the computer industry, companies such as IBM or Digital Equipment Corporation tended to provide most of the key elements of their own computer systems, from operating system and application software to the peripherals and electronic hardware, rather than sourcing bundles of subsystem modules acquired from third parties. Products and computer systems typically exhibited closed, integral architectures, and there was little or no

691

Integration of Global Supply Chain Management with Small and Medium Suppliers

interchangeability across different companies’ systems, keeping existing customers hostage. Each company maintained technological competencies across many elements in the chain and emphasized the value of its overall systems-and-service package, determined to stave off competitors who might offer better performance on one or another piece of the package. The supply chain strategy in the market economy has been designed to “push” products to the customer based on forecasted demand. It focuses on supporting a tightly integrated enterprise geared toward mass production of goods at the lowest possible price. The production processes across the supply chain are synchronized for efficient utilization of all resources. Information technology, however, acts as an enabler for operational optimization across the supply chain by offering better forecasts that are customer driven in addition to robustly synchronizing the sourcing, production, and processes across the supply chain to achieve optimal performance, even if the forecasts are not perfect. For example, in car manufacturing, cars are traditionally manufactured to match forecasted demand that lacks much customer input. However, in the new information economy, also called the Internet economy or the Web economy, the focus is exclusively on customer needs. To this end, the firms collaborate in a network of trading partners, each specializing in one or more core competencies (be it shipping, manufacturing, marketing, billing, order entry, or procurement services) and divesting itself of non-core activities beyond those associated with sourcing, manufacturing, or distributing products/services. In this network economy, information technologies, digital networking, and communication infrastructures provide a global platform over which people and organizations interact, communicate, collaborate, and search for information. The Internet has created more sophisticated customers who demand innovative, personalized products/services delivered at

692

their convenience. It has also expanded the very definition of the word “customer,” so that it now includes employees, distributors, suppliers, business partners, and shareholders. As a result of these changes, a company’s competitive position in this Internet economy depends on its ability to deliver customized, relevant, highly responsive service to every participant in these networks of economic relationships. This new economy has led to the rapid emergence of business networks and new business models within and outside the firm to satisfy the strategic need for competitive flexibility. In this new economy, the supply chain is geared toward the customer “pulling” products customized to their specific needs, and the firm’s resources are organized to meet the unpredictable demand patterns of the customer. Therefore, the benefits of supply chain management integration promote organizational relationships that in turn foster the sharing of information technology and strategic efforts. Partnership in supply chain management, in this network economy, has led to the development of various cooperative arrangements among various supplier and retailers. Jagdev and Thoben (2001) identify three types of collaboration and partnership between independent companies: 1.

2.

3.

Supply chain type of collaboration based on long-term collaboration where the participating companies in the supply chain must operate synchronously to meet customer demands; Extended enterprise type of collaboration, most integrated form of collaboration, where the information and decision systems and respective production processes are integrated; and Virtual enterprise type of collaboration, as a short-term collaboration where the participating companies, without system integration, are loosely related to bundle their competencies to meet customer demand.

Integration of Global Supply Chain Management with Small and Medium Suppliers

The type of partnership would determine the effective strategies that SMEs may consider and the perceived value added in the supply chain. For example, in vendor-managed inventory system, the responsibility of stock management is handed over to the supplier (Hvolby & Trienekens, 2002). This would make it possible for the supplier to adjust production and distribution planning to changes in consumer demand. In this system, SMEs as the suppliers would be able to access the retailer’s information systems to view stock levels and future requirements. On the other hand, advanced planning systems (APSs) make it possible to include suppliers and customer relations in the planning procedure to optimize the whole supply chain on a real-time basis (Kennerly & Neely, 2001). They would support collaborative planning among several partners in a network by shared access to information about known and expected material requirements and resources (Hvolby & Trienekens, 2002). Quantity flexibility (QF) contract is an arrangement between supplier and retailer that responds effectively to the demand fluctuations over time and divides the risk of excess capacity. A retailer in this model is committed to purchasing a percentage of its forecasted demand. However, the supplier is committed to delivering more than the forecast. For example, if they agree to a 25% of QF contract, the retailer is committed to purchase 75% of the forecast while the supplier is committed to delivering up to 125% of the forecast should the retailer need more than forecast. If demand turns out to be low, the supplier is protected by the lower limit, whereas if demand turns out to be high, the retailer can take advantage of that upside by knowing that the supplier has some additional capacity. Thus, both supplier and retailer can be better off in a QF contract. As another type of arrangement, revenuesharing contracts between suppliers and retailers, for example, in the video rental industry, would allow retailers to increase their stock of newly released movies, thereby substantially improving

the availability of popular movies. Under a typical revenue-sharing contract, a supplier charges a retailer a wholesale price per unit plus a percentage of the revenue the retailer generates from the unit. This revenue-sharing model has been practiced for quite some time in the distribution of films to theaters, where the studio charges the theater a small up-front fee and then takes a certain fraction of the box-office revenues. Cachon and Lariviere (2005) examined the revenue-sharing contract model in supply chain management where the partnership between supplier and retailer would improve the performance of any supply chain toward a global optimization. They have cited Blockbuster, a video rental chain, as a successful case to illustrate the effectiveness of revenue-sharing strategy in collaborative supply chain management. Traditionally, video rental stores have to spend typically $60 to purchase a tape from a distributor and then rent that tape to customers for $3 to $4. However, demand for new releases drops dramatically after the first few weeks, and video retailers have a hard time making any money on the rentals. Consequently, they can only afford to buy a few cassettes to accommodate that initial surge in demand. Customers consistently complained about the poor availability of new release videos. Blockbuster decided in 1998 to enter into revenuesharing agreements with the major studios. The rental company agreed to pay its suppliers 30 to 45% of its rental income in exchange for a reduction in the initial price per tape from $60 to $8. The introduction of revenue-sharing model at Blockbuster coincided with a significant improvement in performance in the supply chain. It has been reported that Blockbuster’s market share of video rentals increased from 24% in 1997 to 40% in 2002 after a revenue-sharing contract was adopted (Warren & Peers, 2002). The increase in the industry’s total profit due to revenue-sharing strategy has been estimated at 7% (Moretimer, 2000). However, there are some limitations and drawbacks in revenue-sharing model. The first is

693

Integration of Global Supply Chain Management with Small and Medium Suppliers

that it is administratively burdensome compared with the straightforward wholesale price-only contract. Revenue sharing takes an organizational effort to set up the deal and follow its progress. If profits are only increasing by a very small percentage so that the revenue sharing does not cover the extra administrative expenses, then there is no incentive for the retailer to enter into a revenue-sharing contract. The second limitation, according to Cachon and Lariviere (2005), is when the retailer actions influence demand. Specifically, it is assumed that the retailer can increase demand by exerting costly effort, and that this effort is non-contractible. If a retailer is taking in only a small fraction of the generated revenue, this may not be sufficient incentive to improve sales. On the other hand, a supplier wants the retailer to buy the right quantity and to sell at a higher rate. The model may help to make sure the retailer buys the right quantity, but it may hurt its sales effort. Collaborative computer-based information systems have become a major trend in today’s business (Grossman, 2004). SCM evolved with the aim of integrating disparate functions like forecasting, purchasing, manufacturing, distribution, sales, and marketing into a harmonious ecosystem that would envelop the company’s suppliers and customers. SCM promised to align all participants to act in unison to serve the end customer. Collaboration would enable managers to stop optimizing their individual silos to work together with partners—both internal and external—to achieve efficiency and effectiveness across the value chain. A truly collaborative partnership would encompass multiple customers and suppliers. OEMs would regularly communicate product availability, supply plans, and product content changes to distributors and other channel partners. Based on upstream forecasts and product changes, the channel partners would communicate demand requirements to manufacturing service providers. In this fashion, members of the outsourced supply chain would be assured of accurate, up-to-date

694

information to help them make decisions that elicit common, supply chain-wide benefits. While collaborating, there is distinction between big and small companies; it is between big, aggressive, large muscled organizations and agile, flexible, adaptable organizations that can survive in an environment of rapid change, constant uncertainty, and disruptive technologies. Involving suppliers early and giving them influence over design is associated with greater contributions of suppliers to cost reduction, quality improvement, and design for manufacturability (Liker, Kamath, & Wasti, 1998). Increasing competitive parity in the areas of cost and quality has forced global manufacturers to seek other sources of competitive advantage, with new product development rapidly becoming the focal point in the quest for sustained growth and profitability. The essence of today’s new product development strategies is the simultaneous development of the new product and the accompanying manufacturing process such that quality is enhanced, costs reduced, and lead times shortened. The implementation of the integrated product development (IPD) process has come to depend on the use of multifunctional teams. Supplier involvement promotes better resource utilization, the development and sharing of technological expertise, and network effectiveness (Birou & Fawcett, 1994). Evaluation and monitoring of performance metrics are key aspects of the integration process, partnerships, and strategy. In the next section, we will discuss how customers evaluate suppliers’ performance, how SMEs respond to their customers’ evaluation actions, and the impact of these performance evaluations.

PerForMAnce Buying firm respondents who reported their firms’ supplier development efforts to be satisfactory were more likely to have a proactive philosophy regarding suppliers’ performance, put more

Integration of Global Supply Chain Management with Small and Medium Suppliers

effort and resources into their supplier development efforts, and exhibit a greater willingness to share information with their suppliers than their counterparts, who were generally dissatisfied with their firms’ supplier development results (Krause & Ellram, 1997). On its Global Procurement Web site (http:// ch0107.whirlpool.com/SRM/generalhelp.htm), Whirlpool provides a list of requirements for potential companies wanting to become a Whirlpool supplier. All Whirlpool suppliers are required to pass a supplier quality audit. These requirements are based on ISO 9000, QS 9000, and ANSI/ ASQC Q90-94 standards. They are to ensure the best cost, quality, manufacturing efficiency, and continuous innovation in design and manufacturing. All Whirlpool suppliers are to meet the Integrated Supply Management (ISM) guidelines as a common process for doing business using electronic communication. Whirlpool is also committed to establishing and maintaining a capable, qualified, competitive, and diverse supply base providing minority-owned, disadvantaged, and small businesses. Whirlpool also provides each supplier with the plan year’s forecast, profit plan volume, and cost to be used later for total cost productivity targets. Information provided by the supplier performance will be used to assess efficiency in the supply chain (Wisner et al., 2005). FedEx not only has performance scorecards for its suppliers but also has developed a Web-based “reverse scorecard” that allows suppliers to provide constructive performance feedback to enhance the customer-supplier relationship. A supplier’s service level is, in general, insufficient for the manufacturer to warrant the desired service level at the customer end. The method by which the supplier achieves its service level to the manufacturer also affects the customer-service level. Procedures and metrics must be in place to collect and report performances of the eight processes that were discussed earlier in the integrated process section of this chapter. To assure

that the integrated process is supporting the integrated strategy and the working relationships of partners, performance is continuously measured using metrics for each of the eight processes. These performance measures need to be both internal and external. As process integration improves across the supply chain, the overall performance will improve. Over time, under-performing suppliers and unsuitable customers will be eliminated. Suppliers can then concentrate on establishing beneficial relationships and forming strategic alliances to create a win-win situation. As shown in Figure 3, evaluating and responding to the results of supply chain performance metrics and measurements have a huge impact on business performances. Four generic performance factors have been identified by Bozarth and Handfield (2005) as relevant to the supply chain management. These factors include quality, time, flexibility, and cost, as illustrated in Figure 3. Performance quality includes the basic operations characteristics of the product or service, conformance quality questions whether the product was made or service was performed to specifications, and reliability quality explores whether the product or service will perform consistently over a period of time and without failing or high maintenance costs. Time has two basic characteristics: speed and reliability. Delivery speed refers to how quickly the supply chain can fulfill a requirement, while delivery reliability refers to the ability to deliver products or services when promised. The ability to produce a wide range of products and services is the mix flexibility, while changeover flexibility questions the ability to provide a new product with minimal delay, and volume flexibility is the ability to produce whatever volume the customer needs. Cost categories include labor costs, material costs, engineering costs, quality-related costs, average delivery costs, rush order costs, carrying costs, safety stock costs, returned order costs, and spoilage costs (Bozarth & Handfield, 2005; Wisner et al., 2005).

695

Integration of Global Supply Chain Management with Small and Medium Suppliers

Figure 3. Supply chain performance factors Performance

Quality

Time

Cost

Flexibility

•Performance quality

•Delivery speed

•Mix flexibility

•Conformity quality

•Delivery

•Changeover

•Reliability quality

Reliability

flexibility •Volume flexibility

•Labor costs •Material costs •Engineering costs •Quality-related costs •Average delivery costs •Rush order costs •Carrying costs •Safety stock costs •Returned order costs •Spoilage costs

In a study by Purdy, Astad, and Safayeni (1994), automotive supply organizations were interviewed regarding their perceptions of the effectiveness of a North American automotive certification program. The major findings were that: •

•

•

•

suppliers viewed preparing for the performance evaluation as the most important aspects of the process; the evaluators detected only a small percentage of the suppliers’ significant business and manufacturing problems; suppliers perceived an overemphasis on procedures and documentation on the part of the evaluators; and suppliers felt that the performance evaluation did not accurately reflect their effectiveness.

The same study concluded that the supplier evaluation program reflected the management style of the large bureaucratic customer organization, which was not necessarily appropriate for the

696

size and nature of the supplier’s business. Further, good performance on the evaluation did not directly correspond with further business contracts (Lyn et al., 1994). In today’s world, definition of quality revolves around customer satisfaction, quality of product and service, timely delivery, and cost/price (Mehta, 2004).

InForMAtIon technology Information technology (IT) offers huge potential for large suppliers as well as SMEs to achieve effective SCM mechanisms. In today’s global marketplace, organizations are faced with everchanging customer requirements and intensifying competition. To succeed, companies are looking at streamlining their supply chain through the successful deployment of Information Technology. Supply chain management expands the notion of integration beyond a single company to encompass all related trading partners in the supply chain. Suppliers, customers, third-party lo-

Integration of Global Supply Chain Management with Small and Medium Suppliers

gistics providers, distribution centers, and relevant government agencies share the information and plans necessary to make the chain more efficient and competitive. Manufacturers increasingly rely on IT to streamline their business processes. By integrating business processes across the supply chains, companies can quickly move information and materials to their trading partners and respond quickly to market changes. Internet technology is considered to be the most promising network infrastructure for supply chain connectivity. By having an integrated network infrastructure, companies can now manage their operations anywhere by accessing information using the Internet. Most companies are positioning IT as one of the key components for enhancing supply chain management, and they want to be updated regularly on new technologies that they can apply in their work. Achieving integration in the global supply requires an enormous commitment by all members of the supply chain. In order to exploit competitive advantages by forming strategic alliances and partnerships and facilitating these relationships, companies must exchange information through increased communication and cooperation. The level of integration companies strive for now and in the future can only be possible through significant advances in information technology, which, in the past, has been costly and available only to larger companies with budgets that could support such endeavors. It has been argued that this helps explain the trend toward vertical integration as opposed to increasing horizontal communication efforts between suppliers, manufacturers, distributors, and customers. Information flow and sharing are essential in all components of supply chain. Supply chain information flow integrates all the facets of logistics as well (Vaidyanathan, 2005). Although companies utilize technological tools such as electronic data interchange (EDI), and enterprise resource planning (ERP), there are still many issues arising from incompatible systems (interoperability) that drive inefficiencies.

Additionally, as new technology develops, such as wireless networks, which still lack standard protocols, the problem does not appear to be going away too fast. This can be a major issue for the small- to mid-sized company, given budget restraints and the aggressive nature of larger budget companies to incorporate new technologies and information systems. Therefore, despite companies feeling they are actively sharing information with their supply chain partners, there continues to be inefficiencies and waste throughout the supply chain. The problem is further intensified when looking at partnerships on a global scale due to the traditional issues of cultural barriers and communication differences. Internet technology has been increasingly used to enhance global supply chain through electronic commerce functionalities. Many Internet-based systems have been designed and developed for SCM to interconnect suppliers and customers. A four-phase migration model with technical, security, and financial requirements as a plan for the migration of the procurement process onto the Internet has been proposed by Yen and Ng (2003). The first part of the migration is the digitization of data in a local area network (LAN) to manage the information storage and retrieval within the company. The second phase is deployment of communication infrastructures such as EDI. The third phase is the installation of electronic commerce front-end system to implement procurement business processes such as Web sites and search engines. The fourth phase is the integration of vertical portal, that is, information processing with third-party service providers for financial transactions and logistics. Small- and medium-sized enterprises are different than large enterprises in three primary ways that hinder e-commerce adoption (Smeltzer, 2002). SMEs seldom have mature technology. They usually emphasize product development and survival rather than supply chain integration. The large enterprises have costlier, mature integration software as well as internal technical

697

Integration of Global Supply Chain Management with Small and Medium Suppliers

development and maintenance capability (Smeltzer, 2002). Some of the large companies have integrated SMEs in their supply chain. As a $41 billion retailer, Sears has successfully connected every one of its 7000 suppliers by using a targeted technology, a proven process, and dedicated resources provided by a supply chain integration service (Smeltzer, 2002). The question confronting these suppliers is often not whether they should use SCM systems, but rather how they can take advantage of these systems and benefit from their use (Subramani, 2004). Suppliers use IT for many reasons that include: requests for quotation (RFQ) received electronically by suppliers, support documents such as detailed part drawings and quality specifications accessed online, electronic transmission of purchase orders, shipment notifications, scheduling delivery windows at warehouse loading docks, electronic payment, electronic notification of changes, and inventory alerts based on preset triggers to communicate stocking levels of products in warehouses (Subramani, 2004). Internet technology with its communication infrastructure has enhanced SCM initiatives. Companies are taking advantage of this technology and moving their procurement functions such as sourcing, negotiating with suppliers, payment, and other transactions onto the Internet. Such electronic procurement (e-procurement) results in control, flexibility, and cost savings. This provides suppliers with the ability to become proactive in doing their business. By implementing the supply chain onto the Internet, both suppliers and the customers will face both challenges and opportunities. Such challenges and opportunities include careful planning of the ways that people integrate changes and the benefits that the Internet can bring to the business, such as reduction in overall costs, respectively (Srinivasan, Reeve, & Singh, 2000). A large academic bookseller, Coop Bookshop, launched electronic commerce and faced difficulties when competing globally. The lesson learned from this launch is that a company

698

should study the existing customers and markets before it deploys e-commerce on the Internet (Loebbecke, Powell, & Gallagher, 1999). E-procurement is more than putting purchasing decisions online; its functions also include linking suppliers and buyers into the purchasing network and rethinking of business processes such as transactions (Fisher, 2000a). With efficient information, such product information is structured by electronic catalogs with which e-procurement can form a good basis in order to attract more buyers to the shopping site (Avery, 2000a). Shell Services International launched its e-procurement service as a cost-cutting driver, and its electronic catalogs contain a broad list of suppliers ranging from huge contract partners to small chemical producers with which Shell has pre-negotiated discounts and service contracts. When a purchasing order is received, it will be automatically forwarded to the appropriate suppliers (Fisher, 2000b). Eprocurement could reduce costs and cycle time by fostering a better relationship between buyers and sellers with a vertical supply chain Avery (2000b). The introduction of an e-procurement system in Texas Instruments has reduced the number of transactions in which purchasing was involved and replaced the internally based catalog system, saving a significant amount of cost (Atkinson, 2000a). The Texas-based Burlington Northern Santa Fe Railway planned to apply e-procurement for strategic sourcing and SCM, as it believed that collaboration with its suppliers could be facilitated in order to achieve full contract discount pricing (Atkinson, 2000b). Yen and Ng (2003) classified the impact of electronic commerce in the procurement process into buyer and seller, and then further divided it into individual and inter-organizational categories. Individual and inter-organization classifications represent the internal efficiency and external impact, respectively. With sourcing, buyers can search for quick and complete information of materials from suppliers’ online electronic catalogs while purchasing is enhanced. During quotation

Integration of Global Supply Chain Management with Small and Medium Suppliers

and negotiation, sending inquiries with the electronic and automated inquiry forms to suppliers can save time, and, in return, suppliers could direct the forms with quick and customizable responses, facilitating communication between buyers and sellers. With automated, synthesized, and modifiable order placement, cost and time are saved while purchase records can be viewed in a quick and timely fashion. Suppliers can benefit from efficient and error-free profiling management and more accurate demand forecasts in order to improve overall profitability. Again, communications between buyers and sellers can be enhanced while time is saved. Electronic transactions can take place without the need for physical forms of payment that are restricted by geographical and currency barriers. Suppliers can benefit from secure real-time collection of payment while the risk of unsuccessful receipt of payment is lowered, resulting in improved profitability. With delivery, uncertainty of receiving time is reduced by separated logistics and shipment, while information flow or communication between suppliers and logistic third parties is facilitated. Electronic data interchange (EDI) is a way of conducting inter-organizational transactions electronically (O’Callaghan & Turner, 1995). The key components of EDI are: the electronic transfer of data, the use of standards, and the exchange of data with minimal human intervention. An event in a customer company’s operational processes, for example, a purchase order, may trigger a computer application that generates an electronic message which is sent to, received, and processed by another computer application in a supplier’s company. This message will trigger another event in the receiving supplier organization, for example, the delivery of products. Enabled by standardization of the message exchange, this communication takes place without human intervention. The organizations involved have to agree on contents, grammar, and organizational actions resulting from the message exchange. SMEs can improve their competitiveness by integrating

their systems with their suppliers or other trading partners. Existing approaches to integration like EDI might help SMEs to overcome part of the integration problems, but they have their limitations (Themistocleous & Chen, 2004). The Dutch coordination center for EDI reported that around 25.000 out of a potential 400.000 companies in the Netherlands are currently using EDI. The number of users has grown by 10.000 companies since 1994, but despite this relatively high growth in the number of EDI users, the current number still falls short of expectations (van Heck & Ribbers, 1995). In the U.S., for instance, Oakie (1997) reports that only 100,000 out of a potential 1.9 million companies are currently participating in EDI. Therefore, the adoption and implementation of EDI is still not prevalent. There are different reasons for this apathy to the adoption of EDI. One of the difficulties in EDI adoption is that its full benefit can be reached only if enough critical mass is achieved. To transact EDI messages, one needs to have partners who also are willing to adopt EDI. The other reason is that some EDI implementations are costly. One of the critical factors is the availability of EDI standards. The use of commercially available standards reduces the development costs and time and decreases the risk linked to the new EDI application (Krcmar, Bjÿrn-Andersen, & O’Callaghan, 1995). SMEs will adopt EDI if EDI message formats are available, if they decrease the risk linked to the new EDI standards, and if they reduce the development cost and time (van Heck & Ribbers, 1995). As more competitors and trading partners become EDI-capable, small firms are more inclined to adopt EDI in order to maintain their own competitive position (van Heck & Ribbers, 1995). Another medium of e-procurement is the use of electronic business-to-business (B2B) commerce marketplaces. While there are many advantages to the use of B2B marketplaces, there are many disadvantages as well. The potential decrease in product quality is a big issue for B2B partici-

699

Integration of Global Supply Chain Management with Small and Medium Suppliers

pants. Expectations will vary from one buyer to another, and the definition of quality will vary across suppliers. B2B may not be of interest to suppliers since the forced price reduction of supplies by new suppliers trying to gain a share of the market will hurt the supplier’s margins and strain their ability to stay in the market (http:// www.primetechnologywatch.org.uk). Rovere (1996) argues that the role of SMEs should be investigated with regard to innovation and regional development studies with a focus on industrial districts. This argument is based upon the increasing importance of flexible organizations in today’s economic environment, with the main elements of the flexible specialization model being networks of small firms, flexibility of equipment, and human resources. Rovere further argues that these ideas must be thoroughly considered in defining an IT diffusion policy for SMEs. The relatively inexpensive availability of IT products and services serves to create many new business opportunities for SMEs. If flexible production capabilities do indeed lie within the environs of networked SMEs, IT increases in importance to ensure the platform to allow for efficient information flow within and outside of SME networks. Another problem posed to the SSM for the SMEs is integration. Enterprise resource planning (ERP) systems are an integrated software solution to manage a company’s resources and to integrate all business functions, such as planning, inventory/materials management, sales and distribution, finance, human resources, and services. The complexity of ERP systems and the nonflexible nature of ERP solutions, combined with their high cost of implementation have impeded many companies’ quest for integration. The major problem with ERP is integration, as ERP packages are not designed to tie up other autonomous applications (Cingil, Dogac, & Azgin, 2000). As a result, autonomous and heterogeneous applications coexist in companies with ERP systems, and integration problems have not been addressed. Therefore, the use of ERP systems no longer

700

supports or leads to competitive advantages for organizations, especially SMEs (Themistocleous & Chen, 2004). According to the United Nations report on ecommerce and development (avaliable at http:// www.unctad.org/en/docs/ecdr2004ch2_en.pdf), SMEs in Latin America have recognized the need to increase their capacity to differentiate their products and services, and to link electronically with their customers and suppliers. However, none of the enterprises surveyed had advanced beyond the first stage of information and communications technology (ICT) adoption. For example, while most of them were on a local area network (LAN) and some of them used the Internet for looking up information, none used EDI or an Intranet, and very few communicated with clients via electronic mail, preferring to use the telephone or fax. According to a study conducted by the World Wide Worx (http://www.theworx.biz/ download/Exec%20Summary%20%20SME%20 Survey%202003.doc), investment in information technology is having a major impact on the competitiveness of small and medium businesses in South Africa. Among the key findings of the survey was that SMEs are spending a higher proportion of their turnover on IT each year. In 2001, 47% of SMEs spent more than 1% of turnover on IT; in 2002, 48%; and in 2003, 49% expect to spend more than 1% of their turnover on IT. According to a Canadian net impact study (http://www.netimpactstudy.com/ca/pdf/ release_final.pdf), 50.2% of Canadian SMEs are currently using or implementing the Internet. The same study concludes that a firm with $10M in revenues, with a 20% gross margin and 10% net margin, can achieve increases in net profit of up to 154% in a “best case” scenario, that is, if these average changes in revenues and costs were realized together. In a recent survey, Deloitte Research undertook an exploratory study of IT purchasing by SMEs (available at http://www.deloitte.com/dtt/ research/0,1015,sid%253D16418%2536cid%25

Integration of Global Supply Chain Management with Small and Medium Suppliers

3D632D63293,00.html) in an effort to understand decision making in different stages of the information technology purchase process. The resulting study identifies the key factors impacting technology purchase decisions by small and medium enterprise owners. In particular, it found that: SMEs need information and help to manage their IT growing pains; price isn’t necessarily the bottom line when considering IT purchases; and vendor Web sites and reputations are extremely important in the minds of SME decision makers when looking for information and making purchase decisions. Various forms of SCM applications are arising among the enabling technologies. Prominent vendors in SCM applications market include i2 Technologies, SAP, Oracle, and Invensys, which produce a range of hardware and software components that span communication, optimization, and modeling systems. SMEs are becoming increasingly dependent on information technology to operate efficiently, serve customers effectively, and work with partners and suppliers more collaboratively. Faced with all the challenges and opportunities of competing in a fast-paced environment, growing companies must be especially confident that their networks can support business evolution. Building an effective network foundation is integral to, and an operational insurance policy for, achieving e-business transformation. It is vital that SMEs focus their attention on the critical success factors that drive growth in their particular market. They cannot afford to expend precious time rearchitecting, re-learning, and managing networks. Network infrastructures should be the invisible plumbing that enables the transport of company information and communications and enables efficient processes.

conclusIon The subject of global supply chain management is an important new frontier for businesses choosing to participate in the new global economy. The inherent processes range from raw material supplier to end-user and involve literally all functions in between. Consequently, the integration of these processes is crucial to achieving supply chain management success, which is only facilitated by adequate information exchange between partners within the supply chain—a task not easy to accomplish due to issues of interoperability. Yet, the ability for companies to successfully implement strategic relationships relies on their ability to develop or maintain an effective partnership strategy, as it is not always necessary to enter into full-scale partnerships with all suppliers perceived to be partners within the chain. Additionally, in today’s uncertain global economy and associated issues of security and trust, many companies continue to re-evaluate their partnerships and foster those relationships that are more likely to lead to a competitive advantage. The literature emphasizes the importance of trust in developing such partnerships, as firms will attempt to reduce risk by not entering into partnerships lacking trust. However, the need to leverage the resources of the supply base and revenue sharing cannot be overlooked, and companies will pursue such relationships. In a changing world, the subject of truth and ethics is important when discussing supply chain management strategy. Most discussions of supply chain management are presented in abstract terms and in ways that apply to product and service organizations alike. However, most small companies, and even larger corporations, focus on niche markets. Niche markets are where managers will correctly argue that profits are created and realized; therefore, the goal of many organizations is to develop business and market strategies to exploit these opportunities in the market. Similarly, as this chapter has detailed, it has been shown that an affective sup-

701

Integration of Global Supply Chain Management with Small and Medium Suppliers

ply chain management strategy can benefit these very initiatives. More specifically, the smaller firm in the supplier role has unique opportunities to develop business, market, and supply chain management strategies that are unique from those of the larger established companies. Realizing that the “buying” company within the supply chain—or enduser—is actively pursuing competitive advantage through marketing of its unique product or service, the small company is often better positioned to adapt to the needs of the customer. More precisely, the level of information available to key members of the smaller supplying organization and its integrated partners provide market opportunities that may not exist to larger corporations. Supply chain management strategies, because of the unique circumstances of specific markets, can not be characterized as “one size fits all.” In fact, global supply chain strategies are contingent upon market characteristics and business strategy, which seek to attain higher-level customer responsiveness at less total cost to the supply chain as a whole. Nowhere are the unique characteristics more prevalent than in the small- to mid-sized corporations, as each of these types of corporations seeks competitive advantage through management of the supply chain and, more specifically, management of the supply chain for a specific niche market. Moreover, there are some unique obstacles and challenges in managing the supply chain given the scarce resources of the small- to mid-sized supplying company. More specifically, because of the involvement of so few within the supply chain management process in the smaller firm, there is greater responsibility for those individuals to manage this very important strategic process given the unique opportunities to exploit niche markets. The ability of a small firm to offer flexibility in terms of volume and product differentiation provides the competitive advantage businesses of all size pursue. Supply chain management strategy, then, is applicable to all sized firms and

702

has unique characteristics for smaller entities. To maximize the Internet and supply chain management, SMEs must be included. The SMEs need to have the information technology capability to fully integrate into the supply chain. Only then will the supply chain management be effective to save time, decrease costs, improve relationships, and maximize overall responsiveness.

reFerences Andersen, P.H., & Christensen, P.R. (2005). Bridges over troubled water: Suppliers as connective nodes in global supply networks. Journal of Business Research, 58(9), 1261-1273. Atkinson, W. (2000a, September 21). Railway’s shift to strategic sourcing and SCM paves pathway for e-procurement. Purchasing. Atkinson, W. (2000b, September 21). Print firm uses e-buying to strengthen its supply chain. Purchasing. Avery, S. (2000a, September 21). E-procurement: A wealth of information for buyers. Purchasing. Avery, S. (2000b, September 21). E-procurement is one tool to reduce costs, cycle time. Purchasing. Bhattacharya, A. K., Coleman, J. L., & Brace, G. (1995). Re-positioning the suppler: An SME perspective. Production Planning and Control, 6, 218-226. Birou, L. M., & Fawcett, S. E. (1994). Supplier involvement in integrated product development: A comparison of U.S. and European practices. International Journal of Physical Distribution and Logistics Management, 24(5). Bozarth, C. C., & Handfield, R. B. (2005). Introduction to operations and supply chain

Integration of Global Supply Chain Management with Small and Medium Suppliers

management. Upper Saddle River, NJ: Pearson Prentice Hall. Bruce, M. L., Fiona, L. D., & Dominic, W. (1995). Success factors in collaborative product development. R&D Management, 25(1), 33-44. Burt, D. N., Dobler, D. W., & Starling, S. L. (2003). World class supply management: The key to supply chain management. Boston: McGraw-Hill. Cachon, G., & Lariviere, M. (2005). Supply chain coordination with revenue sharing contracts. Management Science, 51(1), 30-44. Chapman, C., Ettkin, S., & Helms, M. M. (2000). Do small businesses need supply chain management? IIE Solutions, 32(8), 31. Chopra, S., & Meindl, P. (2004). Supply chain management: Strategy, planning, and operation. Upper Saddle River, NJ: Pearson Prentice-Hall. Christopher, M., & Lee, H. (2004). Mitigating supply chain risk through improved confidence. International Journal of Physical Distribution & Logistics Management, 34(5), 388-396. Cingil, I., Dogac, A., & Azgin, A. (2000). A broader approach to personalization. Communications of the ACM, 43(8), 136-141. Cooke, J. A. (1998, December). VMI: Very mixed impact? Logistics Management Distribution Report, 37(12). Cooper, M. C., Lambers, D. M., & Pagh, J. D. (1997). Supply chain management: More than a new name for logistics. The International Journal of Logistics Management, 8(1), 1-8. Cousins, P. D. (1999). Supply base rationalization: Myth or reality? European Journal of Purchasing& Supply Management, 5(3-4), 143-55. Croxton, K. I., Garcia-Dastugue, S. J., & Lambert, D. M. (2001). The supply chain management processes. The International Journal of Logistics Management, 12(2), 13-36.

Dodge, H. R., & Robbins, J. E. (1992). Empirical investigation of the organizational life cycle. Journal of Small Business Management, 30(1), 8-30. Ellram, L. M., Zsidisin, G. A., Siferd, S. P., & Stanly, M. J. (2002). The impact of purchasing and supply management activities on corporate success. The Journal of Supply Chain Management, 38(1), 4-17. Fisher, A. (2000a, Winter). It’s a small world after all. Financial Times, 6-7. Fisher, A. (2000b, Winter). Playing catch up. Financial Times, 22-23. Forrester, J. W. (1958). Industrial dynamics: A major breakthrough for decision makers. Harvard Business Review, 36(4), 37-66. Forrester, J. W. (1961). Industrial dynamics. Cambridge, MA: MIT Press. Ghobadian, A., & Gallear, D. N. (1996). Total quality management in SMEs. Omega, 24(1), 83-106. Grossman, M. (2004, September). The role of trust and collaboration in the Internet-enabled supply chain. Journal of American Academy of Business, 391-396. Helper, S. (1991). How much has really changed between U.S. automakers and their suppliers? Sloan Management Review, 33(3), 114-135. Hoyt, D. (2000). Lucent Technologies: Global supply chain management. Graduate School of Business, Stanford University, GS-01. Hvolby, H.-H., & Trienekens, J. (2002). Supply chain planning opportunities for small and medium sized companies. Computers in Industry, 3-8. Jagdev, H. S., & Thoben, K. D. (2001). Anatomy of enterprise collaborations. Production Planning & Control, 12(5), 437-451. Kaufman, A., Wood, C.H., & Theyel, G. (2000). Collaboration and technology linkages: A stra-

703

Integration of Global Supply Chain Management with Small and Medium Suppliers

tegic supplier typology. Strategic Management Journal, 21(6), 649-663. Kennerly, M., & Neely, A. (2001). Enterprise resource planning: Analyzing and impact. Integrated Manufacturing System, 12(2), 103-113. Kirby, D. A., & Turner, M. J. S. (1993). IT and the small retail business. International Journal of Retail and Distribution Management, 21(7), 20-27. Knechtges, J. P., & Watts, C. A. (2000). Supply chain management for small business: How to avoid being part of the food chain. Hospital Material Management Quarterly, 22(1), 29-35. Krause, D. R., & Ellram, L. M. (1997). Success factors in supplier development. International Journal of Physical Distribution and Logistics Management, 27(1), 39-52. Krcmarc, H., Bjørn-Andersen, N., & O’Callaghan, R. (1995). EDI in Europe: How it works in practice. Chichester, UK: John Wiley & Sons Ltd. Lambert, M.D., & Cooper, M.C. (2000). Issues in supply chain management. Industrial Marketing Management, 29, 65-83. Lamming, R. (1993). Beyond partnership: Strategies for innovation and lean supply. Hertfordshire, UK: Prentice Hall International. Lee, H., & Amaral, J. (2002). Continuous and sustainable improvement through supply chain performance management. Stanford Global Supply Chain Management Forum SGSCMF-W. Lee, H. L., & Billington, C. (1995). The evolution of supply chain management models and practice at Hewlett-Packard. Interfaces, 25, 42-63. Levy, M. (1998). SME flexibility and the role of information systems. Small Business Economics, 11(2), 183-96. Liker, J. K., Kamath, R. R, & Wasti, S. N. (1998). Supplier involvement in design: A comparative

704

survey of automotive suppliers in the USA, UK and Japan. International Journal of Quality Science, 3(3), 214-238. Loebbecke, C., Powell, P., & Gallagher, C. (1999). Electronic commerce in the book trade. Journal of Information Technology, 14(3), 295-301. Magretta, J., & Rollins, K. (1998). The power of virtual integration: An interview with Dell Computer’s Michael Dell. Harvard Business Review, 76(2), 72-83. Manrody, K. B., Holcomb, M. C., & Thompson, R. H. (1997, Fall). What’s missing in supply chain management? Supply Chain Management Review, 80-86. Masella, C., & Rangone, A. (2000). A contingent approach to the design of vendor selection systems for different types of co-operative customer/ supplier relationships. International Journal of Operations and Production Management, 20(1), 70-84. Mehta, J. (2004). Supply chain management in a global economy. Total Quality Management, 15(5-6), 841-848. Moretimer, J. H. (2000). The effects of revenuesharing contract on welfare in vertically separated markets: Evidence from the video rental industry. Working Paper, University of California at Los Angeles. Muskin, J. B. (2000). Interorganizational ethics: Standards of behavior. Journal of Business Ethics, 24(4), 283-297. Nellore, R. (2001, Winter). The impact of supplier visions on product development. The Journal of Supply Chain Management, 27-36. Oakie, S. (1997, February). Making money on the Internet: The myths, the facts, the truth. EC World, 12-13. O’Callaghan, R., & Turner, J. A. (1995). Electronic data interchange: Concept and issues. In H. H.

Integration of Global Supply Chain Management with Small and Medium Suppliers

Krcmarc, N. Bjørn-Andersen, & R. O’Callaghan (Eds.), EDI in Europe: How it works in practice. Chichester, UK: John Wiley & Sons.

Reed, D.M. (1998). Using the business excellence model in small service business. British Quality Foundation.

OECD (1993). Small and medium-sized enterprises: Technology and competitiveness. Organization for Economic Co-operation and Development, Paris, France.

Richardson, G. B. (1972, September). The organization of industry. The Economic Journal, 883-896.

O’Regan, N., & Ghobadian, A. (2002). Effective strategic planning in small and medium sized firms. Management Decision, 40(7), 663-671. Park, D., & Krishnan, H. A. (2001). Supplier selection practices among small firms in the United States: Testing three models. Journal of Small Business Management, 259-272. Park, S., & Hartley, J. L. (2002, Spring). Exploring the effect of supplier management on performance in the Korean automotive supply chain. The Journal of Supply Chain Management, 46-52. Plante, R. (2000). Allocation of variance reduction targets under the influence of supplier interaction. International Journal of Production Research, 38(12), 2815-2827. Purdy, L., Astad, U., & Safayeni, F. (1994). Perceived effectiveness of the automotive supplier evaluation process. International Journal of Operations and Production Management, 14(6), 91-103. Qin, Z., & Yang, J. (2004, September). Analysis of a revenue-sharing contract in supply chain management, Working paper. Quayle, M. (2002). Supplier development and supply chain management in small and medium size enterprises. International Journal of Technology Management, 23(1-3), 172-188. Quinn, J. B., & Hilmer, F. G. (1994, summer). Strategic outsourcing. Sloan Management Review, 43-55. Reddy, R., & Reddy, S. (2001). Supply chains to virtual integration. New York: McGraw-Hill.

Rota, K., Thierry, C., & Bel, G. (2002). Supply chain management: A supplier perspective. Production Planning and Control, 13(4), 370-380. Rovere, R. L. (1996). IT diffusion in small and medium-sized enterprises: Elements for policy definition. Information Technology for Development, 7(4), 169-181. Sabbaghi, A., & Sabbaghi, N. (2004). Global supply-chain strategy and global competitiveness. International Business & Economics Research Journal, 3(7), 63-76. Saunders, A. (1994). Supplier audits as part of a supplier partnership. The TQM Magazine, 6(2), 41-42. Skoett-Larsen, T., Thernoe, C., & Anderson, C. (2003). Supply chain collaboration. International Journal of Physical Distribution & Logistics Management, 33(6), 531-549. Smeltzer, L. R. (2002). The five immutable laws of universal supply chain connectivity. Retrieved from http://itresearch.forbes.com/detail/ RES/991155741_679.html Srinivasan, M. M., Reeve, J. M., & Singh, M. P. (2000). E-business in the supply chain. In Proceedings of International Conference on Advances in Infrastructure for Electronic Business Science, and Education on the Internet, Italy. Stansfield, M., & Grant, K. (2003). An investigation into issues influencing the use of the Internet and electronic commerce among small-medium sized enterprises. Journal of Electronic Commerce Research, 4(1), 15-33. Storey, D. J., & Gressy, R. (1995). Small busi-

705

Integration of Global Supply Chain Management with Small and Medium Suppliers

ness risk: A firm and bank perspective. Working paper, SME Center, Warwick Business School, Coventry, UK. Subramani, M. (2004). Benefits from IT use in supply chain relationships. MIS Quarterly, 28(1), 45-73. Tan, K. C. (2001). A framework of supply chain management literature. European Journal of Purchasing and Supply Management, 7, 39-48. Tan, K. C., Kanan, V. J., & Handfield, R. B. (1998). Supply chain management: Supplier performance and firm performance. International Journal of Purchasing and Materials Management, 34(3), 2-9. Taylor, W. A., & Adair, R. G. (1994). Evolution of quality awards and self-assessment practices in Europe: A case for considering organization size. Total Quality Management, 5(4), 227-237. Themistocleous, M., & Chen, H. (2004). Investigating the integration of SMEs’ information systems: An exploratory case study. International Journal of Information Technology and Management, 3(2-4), 208-234.

Van Heck, E., & Ribbers, P. M. (1995). The adoption and impact of EDI in Dutch SMEs. In Proceedings of the 32n d Hawaii International Conference on System Sciences (pp. 1-9). Venkatesan, R. (1992, November-December). Sourcing: To make or not to make. Harvard Business Review, 98-107. Vickery, S., Calantone, R., & Droge, C. (1999). Supply chain flexibility: An empirical study. Journal of Supply Chain Management, 35(3), 16-24. Von Corswant, F., & Fredriksson, P. (2002). Sourcing trends in the car industry: A survey of car manufacturers’ and suppliers’ strategies and relations. International Journal of Operations & Production Management, 22(7-8), 741-758. Wang, Y., Li, J., & Shen, Z. (2004). Channel performance under consignment contract with revenue sharing. Management Science, 50(1), 34-47. Warren, A., & Peers, M. (2002, June 11). Video retailers have day in court— Plaintiffs say supply deals between Blockbuster Inc. and Studios Video violates the law. Wall Street Journal.

USSBA (1999). Ecommerce: Small business venture online. U.S. Small Business Administration, July. Retrieved from www.sba.gov/library/ reportsroom.html

Wisner, J. D., Leong, G. K., & Tan, K. (2005). Principles of supply chain management: A balanced approach. Stanford, CT: Thomson SouthWestern.

Vaidyanathan, G. (2005). A framework for evaluating third-party logistics. Communications of the ACM, 48(1), 89-94.

Yen, B. P. C., & Ng, E. O. S. (2003). The impact of electronic commerce on procurement. Journal of Organizational Computing and Electronic Commerce, 13(3-4), 167-189.

This work was previously published in Supply Chain Management: Issues in the New Era of Collaboration and Competition, edited by W. Wang; M. Heng; P. Chau, pp. 128-164, copyright 2007 by IGI Publishing (an imprint of IGI Global).

706

707

Chapter 2.18

An Application of Multi-Criteria Decision-Making Model to Strategic Outsourcing for Effective Supply-Chain Linkages N. K. Kwak Saint Louis University, USA Chang Won Lee Jinju National University, Korea

Abstract An appropriate outsourcing and supply-chain planning strategy needs to be based on compromise and more objective decision-making procedures. Although factors affecting business performance in manufacturing firms have been explored in the past, focuses are on financial performance and measurement, neglecting intangible and nonfinancial factors in the decision-making planning process. This study presents development of an integrated multi-criteria decision-making (MCDM) model. This model aids in allocating outsourcing and supply-chain resources pertinent to strategic planning by providing a satisfying solution. The model was developed based on the data obtained

from a business firm producing intelligent home system devices. This developed model will reinforce a firm’s ongoing outsourcing strategies to meet defined requirements while positioning the supply-chain system to respond to a new growth and innovation.

Introduction In today’s global age, business firms are no longer able to manage all supply-chain processes from new product development to retailing. In order to obtain a successful business performance, appropriate outsourcing and supply-chain practices should be identified, established, and implemented

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

An Application of Multi-Criteria Decision-Making Model

within the firm. The growth of business scale and scope forces business decision-makers to resolve many of the challenges confronting business firms. These tasks and activities are often not welldefined and ill-structured. This new paradigm in business practices can deliver unprecedented opportunities to establish the strategic outsourcing and supply-chain planning in business firms (Heikkila, 2002; Li & O’Brien, 2001). Due to the technology and market paradigm shift, strategic outsourcing and supply-chain planning process in business firms may become more tightly coupled with new product research and development, capacity and financial planning, product launching, project management, strategic business alliances, and revenue planning. Successful linkages of these complicated processes play a critical role affecting business performance in manufacturing settings (Cohen & Lee, 1988; Fisher, 1997; Min & Zhou, 2002; Quinn & Hilmer, 1994). Strategic outsourcing and supply-chain planning is a growing requirement for improving productivity and profitability. Many outsourcing studies have been conducted with supply-chain linkages directly and indirectly as follows: capacity planning (Lee & Hsu, 2004), downsizing (Schniederjans & Hoffman, 1999), dual sourcing (Klotz & Chatterjee, 1995), information system decision (Ngwenyama & Bryson, 1999), line balancing (Liu & Chen, 2002), service selection (Bertolini, Bevilacqua, Braglia, & Frosolini, 2004), transportation mode choice (Vannieuwenhuyse, Gelders, & Pintelon, 2003), and vendor selection (Karpak, Kumcu & Kasuganti, 1999). In spite of a plethora of outsourcing studies in the existing literature, multi-criteria decision making (MCDM) applications are scarce and seldom identified as the best practice in business areas. Especially, an integrated MCDM model comprising goal programming (GP) and analytic hierarchy process (AHP) is rarely applied to manage an emerging outsourcing and supply-chain concern. This chapter has dual purposes: (1) to

708

develop a decision-making model that aims at designing a strategic outsourcing and supply-chain plan, and (2) to provide the decision-makers with an implication for effectively managing strategic outsourcing and supply-chain planning in business firms and other similar settings. The chapter is organized in the following manner. The “Introduction” section presents current research issues in both strategic outsourcing and supply-chain planning and MCDM in a business setting. The next section “Multicriteria Decision Making” provides a review of MCDM models. After that, a problem statement of the case study along with description of data collection is described. The model development to a real-world setting and the model results and a sensitivity analysis are provided, followed by concluding remarks.

MultI-crIterIA decIsIon MAKIng Multi-criteria decision making (especially integrated MCDM) is defined as an applied linear programming model for a decision process that allows the decision-maker to evaluate various competing alternatives to achieve certain goals. Relative importance is assigned to the goal with respect to a set of chosen criteria. MCDM is appropriate for situations in which the decisionmaker needs to consider multiple criteria in arriving at the best overall decisions. In MCDM, a decision-makers select the best strategy among a number of alternatives that they evaluate on the basis of two or more criteria. The alternatives can involve risks and uncertainties; they may require sequential actions at different times; and a set of alternatives might be either finite or infinite. A decision-maker acts to maximize a value or utility function that depends on the chosen criteria. Since MCDM assumes that a decision-maker is to select among a set of alternatives, its objective function values are known with certainty. Many

An Application of Multi-Criteria Decision-Making Model

MCDM problems are formulated as multiple objective linear, integer, nonlinear, and/or interactive mathematical programming problems. One of the most widely used MCDM models is goal programming (GP). Charnes and Cooper (1961) conceptualized the GP technique and applied to an analytical process that solves multiple, conflicting, and noncommensurate problems. There are many different methods and models used to generate solutions for GP models. The natural decision-making heuristic is to concentrate initially on improving what appears to be the most critical problem area (criterion), until it has been improved to some satisfactory level of performance. Classical GP assumes that there are some absolute target levels that can be specified. This means that any solution cannot always satisfy all the goals. Thus, the objective of GP is to find a solution which comes as close as possible to the target. The formulation of a GP model assumes that all problem constraints become goals from which to determine the best possible solution. There are two types of constraints in GP: goal constraints and systems constraints. Goal constraints are called the goal equations or soft constraints. Systems constraints are called the ordinary linear programming constraints or hard constraints which cannot be violated. One major limitation of GP is that the decision-makers must subjectively prioritize goals in advance. The concept of nondominated (noninferior) solutions for noncommensurable goals cannot make an improvement of one goal without degrading other conflicting goals. Regardless of the weighting structures and the goals, GP can lead to inefficient and suboptimal solutions. These solutions are not necessarily optimal for the decision-maker to acquire so that a satisfying solution is provided. Among the MCDM models, the analytical hierarchy process (AHP) is another popular decisionmaking tool for multi-criteria decision-making

problems. AHP provides a method to assess goals and objectives by decomposing the problem into measurable pieces for evaluation using a hierarchical structure. The procedure requires the decision-maker to provide judgments about the relative importance of each criterion and then specify a preference on each criterion for decision alternatives. The output of AHP is a prioritized ranking indicating the overall preference for each of the decision alternatives. An advantage of AHP is that it enables the decision-maker to handle problems in which the subjective judgment of an individual decision-maker constitutes an important role of the decision-making process (see Saaty, 1980 for a detailed analysis).

ProbleM bAcKground Problem statement A consortium of seven different firms developing and manufacturing the related products of the smart home system for home security was established in Korea. The consortium firm has recently released the smart home system to the general public. The consortium firm secured $20 million for new product development in the 5-year period (2004-2008). It currently possesses a world-class frontier for developing a smart home system. Each member company has its own unique, special knowledge and human resources to carry on required manufacturing. There are five primary systems for making a smart home system: (1) multifunction home server with an Internet gateway function, (2) intelligent context awareness-based agent system, (3) digital video recorder for home security and applications, (4) biokey system with fingerprint access control solution, and (5) wireless digital home controller functions. It is intended to support a further growth and innovation in home security, home automation, remote controlling, and mobile multimedia functions. The infusion

709

An Application of Multi-Criteria Decision-Making Model

of additional information technology must be consistent with the business mission, strategic direction, business plans, and priorities of the consortium firm. This special project for an integrated intelligent information technology is intended to address the dramatic growth in information technology use, to foster continued innovation and adoption of new technologies, and to expand information technology foundation for the next-generation smart home system. Thus, the consortium’s information technology investment strategies throughout the next five years have been developed.

data collection The data utilized to formulate this MCDM model was collected from the consortium of business firms developing and manufacturing the smart home system for home security. All the necessary data on budget, technical services, and personnel resources was gathered through the consortium’s strategic business units. Additional data for establishing the consortium’s resource allocation model was collected through the consortium’s international business development directors who are in charge of outsourcing and supply-chain management. Project managers participated in the strategic planning process and identified the necessary goals and criteria derived from the proposal for strategic outsourcing and supplychain planning. The data was validated by the consortium decision-makers in the outsourcing and supplychain planning process. The validation of the consortium’s resource allocation model is critical to accept the model solutions and to implement the result. The validation process provides the management with a meaningful source to ensure the input, decision-making process, and the outcomes. The success of the model is based on the accurate measurement of the established goals and criteria. Decision-makers involved in the

710

current outsourcing and supply-chain planning process to complete the validation reviewed the results of both prioritization of the goals, as well as the related projects/alternatives. Figure 1 presents a framework for strategic goals and related criteria.

Model develoPMent goal decomposition and Prioritization In the MCDM model development of outsourcing and supply-chain planning process, the AHP has been utilized for establishing goal decomposition and prioritization. In order to obtain the overall relative importance of the seven goals, a synthesized priority is calculated for each goal. The proposed model requires the evaluation of goals with respect to how much these goals affect the overall effectiveness of strategic outsourcing and supply-chain planning for resource allocation in the consortium firm. Since no prior quantitative data exists for each goal combination, the decision-maker will make pairwise comparisons of each goal with all others, using the AHP judgment scale. The AHP values for goal prioritization provide their eigenvalue and consistency ratio. There are four derived criteria, such as financial (C1), customer (C2), internal business (C3), and innovation and learning criteria (C4). Strategic outsourcing and supply-chain management is prioritized with AHP weights as follows: quality improvement (G1), cost effectiveness (G2 ), customer satisfaction (G 3 ), customizing services (G4), manpower quality (G5), supplier competency (G6), and strategic partnership (G7).

An Application of Multi-Criteria Decision-Making Model

Figure 1. Strategic goals and criteria

Vision

Strategic Outsourcing Goals

Criteria

Quality Improvement (G1)

Financial Criteria (C1)

Cost Effectiveness (G2) Becoming the industry leader in smart home systems

→

Customer Satisfaction (G3) Customizing Services (G4)

→

Customer Criteria (C2) Internal Business Criteria (C3)

Manpower Quality (G5) Innovation and Learning Criteria (C4)

Supplier Competency (G6) Strategic Partnership (G7)

decision variables The integrated GP problem consists of two types of decision variables in this study. The consortium firm wants to contract for the supply of five different smart home system components. Five outsourcing suppliers are being considered for contracting on the system components. Tables 2 and 3 present the necessary information for decision variables and constraints. The decision variables are: Xs i j =

decision variables for demand levels assigned to different types of component i (i =1,2,..,5) to be selected with various suppliers j (j =1,2,..,5) in demand capacity

where Xs i ≥ 0 Xp i j = decision variables for project i (1, 2, 3, and 4) to which available amounts can be allocated over three-stage period j (1,2 and 3)

where: Xp i j =

1 if ith project is selected     0 otherwise

constraints The MCDM model has 37 constraints: 14 systems constraints and 23 goal constraints. Systems constraints for this consortium firm’s outsourcing and supply-chain planning are (1) demand-supply constraints for each system component, and (2) supply-chain linkages on the number of certain projects development. Systems constraint 1: Set the demand-supply constraints for five components. 14,400 units [displayed as 144(00)]. Xs 11 + Xs 1 2 + Xs 1 3 + Xs 14 + Xs 1 5 ≤ 144(00) (1) Xs 21 + Xs 2 2 + Xs 2 3 + Xs 2 4 + Xs 2 5 ≤ 360

(2)

Xs 31 + Xs 3 2 + Xs 3 3 + Xs 3 4 + Xs 3 5 ≤ 380

(3)

711

An Application of Multi-Criteria Decision-Making Model

Table 1. AHP results for goal prioritization Criteria

G1

G2

Goal Decomposition G3 G4 G5

G6

G7

GEV

C1 G1 G2 G3 G4 G5 G6 G7

4

3 2

4 2 3

6 4 3 3

8 6 5 4 2

8 7 6 5 3 2

.352 .218 .144 .139 .070 .044 .032

G1 G2 G3 G4 G5 G6 G7

4

3 2

4 2 3

6 4 3 3

8 6 5 4 2

8 7 6 5 3 2

.404 .200 .168 .110 .056 .035 .026

G1 G2 G3 G4 G5 G6 G7

4

3 2

4 2 3

6 4 3 3

8 6 5 4 2

8 7 6 5 3 2

.342 .238 .158 .116 .078 .034 .034

G1 G2 G3 G4 G5 G6 G7

4

3 2

4 2 3

6 4 3 3

8 6 5 4 2

8 7 6 5 3 2

.334 .258 .174 .099 .067 .041 .026

.244

.168

.106

.068

.040

.028

C2

C3

C4

Goal Priority

.347

CEV

CR

.165

.083

.620

.046

.142

.086

.073

.059

GEV: Goal Eigenvalue, CEV: Criteria Eigenvalue, CR: Consistency Ratio

Xs 41 + Xs 4 2 + Xs 4 3 + Xs 4 4 + Xs 4 5 ≤ 420

(4)

Xs 1 5 + Xs 2 5 + Xs 3 5 + Xs 4 5 + Xs 5 5 = 300

Xs 51 + Xs 5 2 + Xs 5 3 + Xs 5 4 + Xs 5 5 ≤ 320

(5)

Xs 11 + Xs 21 + Xs 31 + Xs 41 + Xs 51 = 300

(6)

Systems constraint 2: Select one project for supply-chain management perspectives in each development stage.

Xs 1 2 + Xs 2 2 + Xs 3 2 + Xs 4 2 + Xs 5 2 = 300

(7)

Xp 11 + Xp 1 2 + Xp 1 3 = 1

(11)

Xs 1 3 + Xs 2 3 + Xs 3 3 + Xs 4 3 + Xs 5 3 = 300

(8)

Xp 21 + Xp 2 2 + Xp 2 3 = 1

(12)

Xs 14 + Xs 2 4 + Xs 3 4 + Xs 4 4 + Xs 5 4 = 300

(9)

Xp 31 + Xp 3 2 + Xp 3 3 = 1

(13)

712

(10)

An Application of Multi-Criteria Decision-Making Model

Table 2. Estimated price ($) per system component in each supplier group Outsourcing Supplier Group System Component Home server Awareness agent Recorder database Biokey Controller box Monthly Supply Level (00 units)

1

2

3

4

5

80 90 75 85 90 300

75 85 90 80 85 300

90 75 80 90 75 300

90 80 90 75 80 300

85 90 75 90 90 300

Monthly Demand Level (00 units) 144 360 380 420 320

Table 3. Project categories and available budgets for three stages Project Category Security Automation Remote control Mobile multimedia Total

Xp 41 + Xp 4 2 + Xp 4 3 = 1

Product Development Stage 1

Stage 2

Stage 3

150 120 100 150 520

100 200 60 110 470

130 130 70 100 430

(14)

There are seven goals to achieve in this study. Necessary goal priorities are presented next. Priority 1 (P1 ): Avoid overachievement of the financial resource level by providing appropriate system resources in terms of a continuous quality improvement goal (G1), (See Table 3). 150Xp 11 + 120Xp 21 + 100Xp 31 + 150Xp 41 + 100Xp 1 2 + 200Xp 2 2 + 60Xp 3 2 + 110Xp 4 2 + 130Xp 1 3 + 130Xp 2 3 + 70Xp 3 3 + 100Xp 4 3 - d+ 1 = 1,420 (15) Priority 2 (P2 ): Avoid underachievement of the budget level meeting to all outsourcing suppliers of $138(00,000) in terms of cost effectiveness goal (G2), (See Table 2).

Available Project Budget ($000) 380 450 230 360 1,420

90Xs 21 + 85Xs 2 2 + 75Xs 2 3 + 80Xs 2 4 + 90Xs 2 5 + 75Xs 31 + 90Xs 3 2 + 80Xs 3 3 + 90Xs 3 4 + 75Xs 3 5 + 85Xs 41 + 80Xs 4 2 + 90Xs 4 3 + 75Xs 4 4 + 90Xs 4 5 + 90Xs 51 + 85Xs 5 2 + 75Xs 5 3 + 80Xs 5 4 + 90Xs 5 5 + d- 2 = 138 (16) Priority 3 (P3 ): Do not overutilize the available market resource level for each product development stage in terms of customer satisfaction goal (G3), (See Table 3). 150Xp 11 + 120Xp 21 + 100Xp 31 + 150Xp 41 – d+ 3 = 520 (17) 100Xp 1 2 + 200Xp 2 2 + 60Xp 3 2 + 110Xp 4 2 - d+ 4 = 470 (18) 130Xp 1 3 + 130Xp 2 3 + 70Xp 3 3 + 100Xp 4 3 - d+ 5 = 430 (19)

80Xs 11 + 75Xs 1 2 + 90Xs 1 3 + 90Xs 14 + 85Xs 1 5 +

713

An Application of Multi-Criteria Decision-Making Model

Priority 4 (P4 ): In terms of customizing services goal (G4), avoid underachievement of resources to select an outsourcing supplier by using a total budget amount ($000) for (1) a home server outsourcing of $1,200; (2) an awareness agent component outsourcing of $3,060; (3) a digital recorder database component outsourcing of $3,200; (4) a biokey component outsourcing of $3,500; and (5) a controller box component outsourcing of $2,700 (see Table 2). 80Xs 11 + 90Xs 21 + 75Xs 31 + 85Xs 41 + 90Xs 51 + d- 6 = 1,200 (20) 75Xs 1 2 + 85Xs 2 2 + 90Xs 3 2 + 80Xs 4 2 + 85Xs 5 2 + d- 7 = 3,060 (21)

Xs 11 + Xs 1 2 + Xs 1 3 + Xs 14 + Xs 1 5 + d- 14 – d+ 14 = 1 (28) Xs 21 + Xs 2 2 + Xs 2 3 + Xs 2 4 + Xs 2 5 + d- 1 5 – d+ 1 5 = 1 (29) Xs 31 + Xs 3 2 + Xs 3 3 + Xs 3 4 + Xs 3 5 + d- 16 – d+ 16 = 1 (30) Xs 41 + Xs 4 2 + Xs 4 3 + Xs 4 4 + Xs 4 5 + d- 17 – d+ 17 = 1 (31) Xs 51 + Xs 5 2 + Xs 5 3 + Xs 5 4 + Xs 5 5 + d- 18 – d+ 18 = 1 (32)

90Xs 1 3 + 75Xs 2 3 + 80Xs 3 3 + 90Xs 4 3 + 75Xs 5 3 + d- 8 = 3,200 (22)

Priority 7 (P7 ): In terms of strategic supplier partnership goal (G7), decision-makers in the consortium firm decide that all suppliers are assigned to supply a certain component.

90Xs 14 + 80Xs 2 4 + 90Xs 3 4 + 75Xs 4 4 + 80Xs 5 4 + d- 9 = 3,500 (23)

Xs 11 + Xs 21 + Xs 31 + Xs 41 + Xs 51 + d- 1 9 – d+ 1 9 = 1 (33)

85Xs 1 5 + 90Xs 2 5 + 75Xs 3 5 + 90Xs 4 5 + 90Xs 5 5 + d- 10 = 2,700 (24)

X s 1 2 + X s 2 2 + X s 3 2 + X s 4 2 + X s 5 2 + d - 2 0 – d+ 2 0 = 1 (34)

Priority 5 (P5 ): Implement projects in the three product development stages in terms of manpower balancing goal (G5).

Xs 1 3 + Xs 2 3 + Xs 3 3 + Xs 4 3 + Xs 5 3 + d- 21 – d+ 21 = 1 (35)

X

p

X

p

11

21

+X

p

+X

12

p 22

+X

p

+X

13

p 23

+X

p

+X

-

14

p

+ d 11 – d

-

24

+ d 12 - d

+ 11

+ 12

=1 (25) =1 (26)

Xs 14 + Xs 2 4 + Xs 3 4 + Xs 4 4 + Xs 5 4 + d- 2 2 – d+ 2 2 = 1 (36) X s 1 5 + X s 2 5 + X s 3 5 + X s 4 5 + X s 5 5 + d - 2 3 – d+ 2 3 = 1 (37)

objective Function Xp 31 + Xp 3 2 + Xp 3 3 + Xp 3 4 + d- 1 3 - d+ 1 3 = 1 (27) Priority 6 (P6 ): Determine the demand capacity in each supplier to assign an appropriate outsourcing supplier group in terms of supplier competency goal (G6).

714

The objective of this MCDM problem is to minimize the sum of the deviational variable values subject to constraints (1)-(37), satisfying the preemptive priority rules. The objective function depends on the preemptive priority sequence of the goals that have seven priorities.

An Application of Multi-Criteria Decision-Making Model

Minimize: Z = P1 d+ 1 + P2 d- 2 + P3 d+ i + P4 d- i + P5 (d+ i + d- i) + P6 (d+ i + d- i) + P7 (d+ i + d- i)

Model AnAlysIs Model solution and discussion In this MCDM model, decision-makers seek a solution that satisfies as close as possible a set of goals. Thus, GP requires the concept of measuring discrepancy from the goals. The concept of nondominated solutions for noncommensurable goals cannot make an improvement of one goal without a trade-off of other conflicting goals. In the GP problem, a nondominated solution is examined. A nondominated solution is defined in the following manner: a feasible solution to an MCDM problem which is efficient, if no other feasible solutions yield an improvement in one goal, without sacrificing another goal. This MCDM model was solved using AB: QM system software (Lee, 1996). Table 4 presents an analysis of the objective function. Table 5 exhibits the results of both decision and deviational variables. Priority 1 (P1) is to avoid overachievement of the financial resource level for continuous quality improvement (i.e., G1). Priority 1 is fully satisfied (P1 = 0). The related deviational variable (d+ 1) is zero.

Priority 2 (P2) is to avoid underutilization of the budget level for cost effectiveness. Priority 2 is fully satisfied (P2 = 0). The related deviational variable (d- 2) is zero. Priority 3 (P3) is to not overutilize the available market resource level in each product development period for customer satisfaction. The management desires that their market resource of outsourcing should not be overutilized in each development stage 1 (d+ 3), stage 2 (d+ 4), and stage 3 (d+ 5). This third priority goal is fully satisfied (P3 = 0), and its related deviational variables (d+ 3 , d+ 4 , and d+ 5 , ) are zero. Priority 4 (P4) is to avoid underachievement of resources to select outsourcing suppliers who have the industrial leading knowledge in five different smart home system components, since the management considers that all five technology resources are highly unattainable. This priority goal is fully satisfied (P4 = 0). Its related deviational variables are all zero: underachievement in home server technology outsourcing resources (d- 6 = 0); underachievement in awareness agent technology outsourcing resources (d- 7 = 0); underachievement in recorder database technology outsourcing resources (d- 8 = 0); underachievement in biokey technology outsourcing resources (d- 9 = 0); and underachievement in controller box technology outsourcing resources (d- 10 = 0). Priority 5 (P5) is to implement appropriately four projects in the three product development

Table 4. Analysis of the objective function

Priority

Goal Achievement

Values

P1 P2 P3 P4 P5 P6 P7

Satisfied Satisfied Satisfied Satisfied Partially satisfied Partially satisfied Partially satisfied

0 0 0 0 1 1,495 1,495

715

An Application of Multi-Criteria Decision-Making Model

Table 5. Analysis of decision and deviational variables

Decision Variable (supplier) Xs11 Xs12 Xs13 Xs14 Xs15 Xs21 Xs22 Xs23 Xs24 Xs25 Xs31 Xs32 Xs33 Xs34 Xs35 Xs41 Xs42 Xs43 Xs44 Xs45 Xs51 Xs52 Xs53 Xs54 Xs55

Solution Value 0 0 0 144 0 0 0 0 36 200 0 280 0 0 100 300 0 0 120 0 0 20 300 0 0

Decision Variable (project) Xp11 Xp12 Xp13 Xp21 Xp22 Xp23 Xp31 Xp32 Xp33 Xs41 Xs42 Xs43 Xs44

periods for securing outsourcing manpower balancing. This priority goal is partially satisfied (P5 = 1). Its related deviational variables are not all zero (d+ 11 = 1, d+ 1 2 = 0, d+ 1 3 = 0, d- 11 = 0, d- 1 2 = 0, d- 1 3 = 0). There is one project with overachievement. However, this does not mean that the goal is not achieved because four projects should be assigned in any product development stage. Priority 6 (P6) is to meet the demand-supply level to select an appropriate outsourcing supplier group for a supplier competency goal. This priority goal is partially satisfied (P6 = 1,495). Its related deviational variables are not all zero (d+ 14 = 143, d+ 1 5 = 235, d+ 16 = 379, d+ 17 = 419, d+ 18 =

716

Solution Value 0 0 1 0 1 0 1 0 0 1 0 0

Deviational Variable* 1,030 d-1 = d+2 = 125,102 d-3 = 420 d-4 = 310 d-5 = 300 d+6 = 24,300 d+7 = 23,840 d+8 = 19,300 d+9 = 21,340 d+10 = 22,800 1 d+11 = 143 d+14 = d+15 = 235 d+16 = 379 d+17 = 419 + d 18 = 319 d+19 = 299 d+20 = 299 d+21 = 299 d+22 = 299 299 d+23 = * All other deviational variables are zero.

319, d- 14 = 0, d- 1 5 = 0, d- 16 = 0, d- 17 = 0, d- 18 = 0). Table 6 indicates demand levels that are assigned to supplier groups for each system component. Supplier 1 is assigned to a demand level of 300 biokey components. Likewise, supplier 2 has demand levels of 280 recorder database and 20 control box components; supplier 3 for a demand level of 300 control box components; supplier 4 for demand levels of 144 home server, 36 awareness, and 120 biokey components; and supplier 5 for demand levels of 200 awareness agent and 100 recorder database components. Priority 7 (P7) is to assign certain contracts to supplier groups to achieve a strategic partnership

An Application of Multi-Criteria Decision-Making Model

Table 6. Demand level assigned supplier groups to system components

System Component Home server Awareness agent Recorder database Biokey Controller box

Outsourcing Supplier Group 2 3 4 144 36 280 120 20 300

1

300

5 200 100

Table 7. Assigned projects in each development stage

Project Category Security Automation Remote control Mobile multimedia

Product Development Stage 1 Stage 2 Stage 3 X X X X

goal. This priority goal is partially satisfied (P6 = 1,495). Its related deviational variables are not all zero (d+ 1 9 = 299, d+ 2 0 = 299, d+ 21 = 299, d+ 2 2 = 299, d+ 2 3 = 299, d- 1 9 = 0, d- 2 0 = 0, d- 21 = 0, d- 2 2 = 0, d- 2 3 = 0). Table 7 presents the selected projects assigned to each development stage. In stage 1, remote control function and mobile multimedia function will be recommended to develop. Home automation function will be developed in stage 2 and home security function in stage 3. Outsourcing and supply-chain planning in supply-chain management perspective has become a significant and integral activity of strategic planning in a firm. The goals surrounding outsourcing and supply-chain planning decisions are complex and conflicting. Like other business decision making problems, outsourcing problems cannot derive a single optimal solution. Most top decision-makers agree that this planning process ultimately depends on a firm’s business strategies, competitiveness roadmap, and business value and mission. In order to improve the system’s overall effectiveness, decision-makers should recognize

the ways to improve product quality, to enhance the internal and external customer satisfaction, to provide more strong commitment to manpower management, and to establish a sound alliance and collaboration with other business partners.

sensitivity Analysis Sensitivity analysis is an evaluation tool that is used once a satisfying solution has been found. It provides an insight into how satisfying solutions are affected by changes in the input data. Sensitivity analysis is performed with two scenarios. The management considers three goals (G1 , G6 , and G7) to be evaluated. Quality improvement goal (G1) and supplier competency goal (G6) are changed (i.e., P6 → P1 and P1 → P6); and quality improvement goal (G1) and strategic partnership goal (G7) are changed (i.e., P7 → P1 and P1 → P7). With sensitivity analysis available for the management, various scenarios can be evaluated more easily at less cost. Table 8 presents the results of two scenarios. It shows an important

717

An Application of Multi-Criteria Decision-Making Model

Table 8. Sensitivity analysis with two scenarios Original Option Decision Solution Variables Value 0 Xs11 Xs12 s

X 13 s

Revised Scenario 2 Decision Solution Variables Value 0 Xs11

0

Xs12

0

Xs12

64

0

s

0

Xs13

0

s

s

0

X 14

0

0

X 15

0

s

X 15

80

0

Xs21

0

Xs21

0

s

X 22

0

s

X 22

256

s

X 22

236

Xs23

0

Xs23

0

Xs23

0

s

s

s

X 15 Xs21

s

144

X 13 s

X 14

X 14

X 24

36

X 24

0

X 24

0

Xs25

200

Xs25

0

Xs25

0

s

s

s

X 31

0

X 31

80

X 31

0

Xs32

280

Xs32

0

Xs32

0

s

s

s

X 33

0

X 33

0

X 33

0

s

X 34

0

s

X 34

0

s

X 34

180

Xs35

100

Xs35

300

Xs35

200

X 41

300

s

X 41

76

s

X 41

300

Xs42

0

Xs42

44

Xs42

0

X 43

0

s

X 43

Xs44

120

Xs44

Xs45

0 0

s

s

s

X 51 s

X 52 s

20

0

s

X 43

0

300

Xs44

120

Xs45

0

Xs45

0

s

0

Xs51

0

0

s

X 52

0

s

X 51 s

X 52 s

X 53

300

X 53

300

X 53

300

Xs54

0

Xs54

0

Xs54

0

s

X 55

0

s

X 55

0

s

X 55

0

Xp11

0

Xp11

0

Xp11

0

12

0

Xp12

0

Xp12

0

Xp13

1

Xp13

1

Xp13

1

21

0

Xp21

0

Xp21

0

Xp22

1

Xp22

1

Xp22

1

23

0

Xp23

0

Xp23

0

Xp31

1

Xp31

1

Xp31

1

32

0

Xp32

0

Xp32

0

Xp33

0

Xp33

0

Xp33

0

s

X 41

1

s

X 41

1

s

X 41

1

Xs42

0

Xs42

0

Xs42

0

0

s

0

s

0

p

X

p

X

p

X

p

X

s

X 43

718

Revised Scenario 1 Decision Solution Variables Value 144 Xs11

X 43

X 43

An Application of Multi-Criteria Decision-Making Model

implication for strategic planning considering effective outsourcing and supplier management. Solution values of supplier decision variables in the original option and the revised scenarios indicate the new demand levels that are assigned to the supplier groups. The top decision-makers in the consortium firm have accepted the final results as valid and feasible for implementing the outsourcing planning in their real business setting. The consortium firm has started its strategic outsourcing and suppliercustomer management planning with ongoing base. The effects from these model outputs will be evaluated in the next fiscal year or two. The future outsourcing and supplier management planning agenda will be identified to compare with this proposed MCDM model for the strategic outsourcing planning. The strategic outsourcing planning based on the proposed MCDM model will provide the management with a significant insight to set an appropriate outsourcing strategy, while enhancing customer satisfaction and relationship management, and improving the firm’s global competitiveness. Thus, the consortium firm currently reviews all these alternatives as possible outsourcing strategies.

member organizations within the supply chain. This requires a performance measurement system that can not only operate at several different levels but also link or integrate the efforts of these different levels to meeting the objectives of the supply chain. When management considers several conflicting goals to achieve, subject to a set of constraints, MCDM models can provide effective decisionmaking results for strategic outsourcing and supply-chain planning in business operational environments. Subjective decision-making processes can make the multiple and complicated business problems into the worst situation of both business performance and business partnership due to the potential irrational decision-making. Thus, an appropriate use of MCDM models for effective decision-making is essential to create a long-term strategic plan for a competitive advantage and survival of any business organization in challenging environments.

AcKnowledgMent This work was supported by the Korea Research Foundation Grant (KRF 2003-041-B20171).

conclusIon reFerences This study presents an MCDM model for outsourcing and supply-chain planning in a smart home system components manufacturing industry in Korea. The proposed MCDM model will provide the management with better understanding of outsourcing and supply-chain planning. This proposed model would give a practical decisionmaking way for analyzing the outsourcing resource planning. This study indicates that the effective decision-making process in outsourcing and supply-chain planning can enforce the firm’s competitive advantages and improve the firm’s business performance. It is necessary to be able to assess the relative contribution of the individual

Bertolini, M., Bevilacqua, M., Braglia, M., & Frosolini, M. (2004). An analytical method for maintenance outsourcing service selection. International Journal of Quality & Reliability Management, 21(7), 772-788. Charnes, A., & Cooper, W. W. (1961). Management models and the industrial applications of linear programming. New York: Wiley. Cohen, M., & Lee, H. (1988). Strategic analysis of integrated production-distribution systems: Models and methods. Operations Research, 36(2), 216-228.

719

An Application of Multi-Criteria Decision-Making Model

Fisher, M. L. (1997). What is right supply chain for your product? Harvard Business Review, 75(2), 105-116. Heikkila, J. (2002). From supply to demand chain management: Efficiency and customer satisfaction. Journal of Operations Management, 20(6), 747-767.

Liu, C.-M., & Chen, C.-H. (2002). Multi-section electronic assembly line balancing problems: A case study. Production Planning & Control, 13(5), 451-461. Min, H., & Zhou, G. (2002). Supply chain modeling: Past, present, and future. Computers and Industrial Engineering, 4, 231-249.

Karpak, B., Kumcu, E., & Kasuganti, R. (1999). An application of visual interactive goal programming: A case in vendor selection decisions. Journal of Multi-Criteria Decision Analysis, 8(2), 93-105.

Ngwenyama, O. K., & Bryson, N. (1999). Making the information systems outsourcing decision: A transaction cost approach to analyzing outsourcing decision problems. European Journal of Operational Research, 115, 351-367.

Klotz, D., & Chatterjee, K. (1995). Dual sourcing in repeated procurement competition. Management Science, 41(8), 1317-1327.

Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55.

Lee, C.-E., & Hsu, S.-C. (2004). Outsourcing capacity planning for an IC design house. The International Journal of Advanced Manufacturing Technology, 24(3-4), 306-320.

Saaty, T. L. (1980). The analytic hierarchy process. New York: McGraw-Hill.

Lee, S. M. (1996). AB:QM system software. Englewood Cliffs, NJ: Prentice Hall. Li, D., & O’Brien, C. (2001). A quantitative analysis of relationships between product types and supply chain strategies. International Journal of Production Economics, 73(1), 29-39.

Schniederjans, M. J., & Hoffman, J. J. (1999). Downsizing production/operations with multiobjective programming. International Journal of Operations & Production Management, 19(1), 79-91. Vannieuwenhuyse, B., Gelders, G., & Pintelon, L. (2003). An online decision support system for transportation mode choice. Journal of Enterprise Information Management, 16(2), 125-133.

This work was previously published in Outsourcing Management Information Systems, edited by A. Schniederjans; D. Schniederjans, & M. Schniederjans, pp. 320-338, copyright 2007 by IGI Publishing (an imprint of IGI Global).

720

721

Chapter 2.19

Using Collaborative Transportation Management in Global Supply Chain Jonah C. Tyan Taiwan Semiconductor Manufacturing Company, Taiwan

IntroductIon Due to escalating global competition and a decline in profit margins, most multinational corporations pursue global sourcing through a global supply chain (GSC) in order to secure market share and improve profits. The practice of e-commerce and the business trend of mass customization force both manufacturers and retailers to shorten cycle time by managing GSCs more effectively. Successful applications of GSCs, such as that by Dell Computer, have been widely discussed and publicized in the supply chain literature. However, the physical distribution of GSC execution is recognized as its weakest link and can result in inefficient and unreliable product delivery. The collaborative integration with global third party logistics (3PL) to execute physical distribution dictates the success of any GSC application. This article introduces an application of logistic col-

laboration, namely collaborative transportation management (CTM), which is a new business model that includes the carrier as a strategic partner for information sharing and collaboration in a supply chain.

bAcKground The key reasons for the globalization trend are overcapacity in highly industrialized countries, significant disadvantages with respect to labor costs, and the emergence of worldwide information networks that connect corporate information systems (Arnold, 1999). An increasing number of firms are combining domestic and international sourcing through GSCs as a means of achieving a sustainable competitive advantage (Bonarth, Handfield, & Das, 1998). A GSC is currently viewed as a strategic weapon in the quest for

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Using Collaborative Transportation Management in Global Supply Chain

improved performance and profitability through greater availability, quality, delivery and price advantage (Lee, 2000; Smith, 1999). The principle and methodology of GSC management are similar to those of traditional supply chain management (SCM), except that multiple countries are taken into consideration. Traditional SCM is the integration of functions from the procurement of raw materials to final customer delivery. The GSC model is more complex than SCM, as it includes different taxes and duties, differential exchange rates, trade barriers, customs clearance, and a sophisticated international transportation network (Vidal & Goetschalckx, 1997). Most companies establish a virtual integrated enterprise with their suppliers by implementing an e-business model in order to address the information and the finance flow of a GSC. However, the integration of physical distribution in a GSC appears to be the weakest link, due to the high level of investment required when construct in a global distribution network. The traditional international shipping practice with extensive consolidation operations (Crainic, 2000) takes 8 to 14 business days, exclusive of manufacturing cycle time. The new economy calls for alliances to be made with 3PL providers in order to manage GSCs effectively by focusing on each player’s core competencies (Lieb & Randall,

1999). Most high-tech companies select global door-to-door 3PL providers such as FedEx, UPS, and DHL in order to streamline logistic operations and to reduce delivery cycle times. The typical benefits of a global door-to-door delivery service are shorter delivery cycle times, more reliable transit times, less complex customs clearance procedures, and real-time global tracking and tracing systems (Christopher, 1998). While the unit transportation cost is higher than that of traditional consolidated airfreight service, the total logistics cost is lower as a result of inventory and cycle time reduction throughout the GSC. The success of these integrated 3PL providers is determined by its global transportation network, warehousing network, and information network. Figure 1 depicts the international distribution cycle time by traditional consolidated airfreight model and a door-to-door service provided by a global 3PL provider can compress the distribution cycle from 8 to 14 days to 2 to 4 days.

descrIPtIon oF collAborAtIve trAnsPortAtIon MAnAgeMent The level of collaboration amongst all players in the chain, determines the success of a GSC. Classic supply chain collaboration is found in

Figure 1. International distribution cycle time of (a) a traditional international consolidated airfreight model and (b) a global door-to-door service model

722

Using Collaborative Transportation Management in Global Supply Chain

retailer-supplier partnership programs (Tyan & Wee, 2003) such as quick response, continuous replenishment policy, and vendor managed inventory, which aim to reduce inventory and provide a quick response to consumer demand. The most recent developments in collaborative planning, forecasting, and replenishment (CPFR) is designed to further improve the retailer-supplier relationship. However, the carrier relationship with supply chain players was not considered until the introduction of CTM, which extends the supply chain collaboration to physical distribution partners (Strozniak, 2003). CPFR, developed by the Voluntary Interindustry Commerce Standards Association (VICS), is a nine-step business process model permitting value chain partners to coordinate sales forecasting and replenishment processes in order to reduce the variance between supply and demand (Aichlymayr, 2000). Under CPFR, each party share information and compares calculations. Manufacturers and retailers exchange forecasts, including point of sale, on-hand and delivery data. They review the data and collaborate to resolve forecasting discrepancies. A VICS subcommittee recently initiated a new shipper-carrier partnership strategy, known as CTM, in order to reduce cycle times and inventory carrying costs for the retailer and its suppliers, while increasing asset utilization for motor carriers (Cooke, 2000; Tirschwell, 2004).

ctM business Model CTM is a new process for carriers, involving them in five key business activities: the creation of a joint business plan, order forecasting, order generation, freight order confirmation, and carrier payment processes (Browning & White, 2000). The CTM business model was proposed by VICS and consists of 14 steps. The CTM process can be further divided into three distinct phases: planning, forecasting, and execution, as shown in Figure 2.

The planning phase makes up steps 1 and 2. In step 1, the trading partners establish a collaborative agreement to define the relationship in terms of freight shipment, exception handling, and key performance indicators. Step 2 involves aggregative planning to determine resource and equipment requirements by matching the planned shipment. The forecasting phase includes steps 3 to 5. By sharing order and shipment forecasts in step 3, the carrier gains an insight into the planned volume changes and adjusts equipment requirements accordingly. Any exceptions caused by the manufacturer, distributor, or carrier are generated in step 4 and resolved collaboratively in step 5. Unlike the traditional 1- to 2-day advance notice of potential shipments, the carrier has ample time to handle the revised volume—1 to 4 weeks, depending on the forecasting horizon. The execution phase consists of four stages: shipment tenders, distribution, payment, and a review in order to manage the entire distribution cycle. The shipment tenders stage covers steps 6 to 8 of the CTM. Step 6 is the creation of order/ shipment tenders, based on the revised order forecast. Any exceptions based on the latest equipment availability or pickup and delivery requirements, are identified in step 7 and resolved collaboratively in step 8. The distribution stage—steps 9 through 11—involves the physical distribution and shipment status visibility. Step 9 is the creation of the final shipment contracts outlined in the collaborative tender acceptance and shipment terms. Shipment status is continually updated throughout the distribution cycle and any exception is identified during step 10. Step 11 is the resolution of delivery exceptions. The payment stage is covered by steps 12 and 13. Step 10 ensures that invoicing discrepancies between carriers and shippers are greatly reduced by the exchange of shipment attributes, such as weight, freight class, and destination. Any payment exceptions identified in step 12 are collaboratively resolved in step 13. Finally, the review phase in step 14 involves measuring the distribution performance against

723

Using Collaborative Transportation Management in Global Supply Chain

Figure 2. Generic CTM business model (From Browning & White, 2000)

1. develop Front-end Agreement

Manufacturere/distributor business development Activities

2. create Joint business Plan

carrier business development Activities equipment Planning

3. create order/shipment Forecast

4. Indentify exceptions for

5. resolve/collaborate on

6. order/shipment tenders

carrier equipment Planning

7. Indentify exceptions for

8. resolve/collaborate on

shipment status updates

shipment status

9. Freight Contract Confirmation

Pickup shipments

10. Identify delivery exceptions

shipment status

11. resolve delivery exceptions

deliver shipments

12. Identify Invoice exceptions

Invoice for shipments

13. resolve Invoice exceptions

14. Manage Performance

724

Using Collaborative Transportation Management in Global Supply Chain

the key performance indicators and seeking opportunities for continuous improvement.

ctM Implementation Issues The proposed CTM model is generic and can be modified to fit a specific supply chain application. We are interested in the application of CTM in GSC from the perspective of logistic operations. The benefit of CTM is the first issue to be addressed. The most obvious benefit to 3PL providers is the ability to develop business plans with their key customers in order to better fulfill distribution requirements. This is achieved through proactive participation in the planning, forecasting, and execution phases of CTM. The manufacturers and distributors, consequently benefit from better transportation transit times, shipment status visibility, and the payment process. The collaboration in execution between trading partners creates supply chain competitiveness and value. Other benefits include reduced costs, increased revenue, an improved service level, improved customer satisfaction, and increased asset utilization (Browning & White, 2000). CTM technology requirements for are the next issue to be discussed. In order to foster collaboration, new information technology (IT) is needed to link between the carrier and the manufacturer/ distributor. The CTM IT requirements proposed by VICS are vendor and platform independent, so that any trading partner entering into a collaborative relationship will not be hindered by technical limitations (Browning & White, 2000). The CTM information system integration across the entire supply chain can be achieved by the development of IT standards, IT infrastructure, e-commerce, and a supply chain system (Esper & Williams, 2003). Organizational infrastructure is another CTM implementation factor, and is identified as the most important enabler of successful SCM implementation (Marien, 2000). It sets commit-

ments and regulates all parties so they accept their responsibilities and share both the gains and risks, as outlined in step 1 of the CTM. GSC is a highly dynamic system and any changes may impact logistic activities. The core concept of CTM is to resolve these transportation exceptions collaboratively. In order to achieve the benefits of CTM, empowered designated personnel from each party are essential.

case study This study discusses the case of a global 3PL provider that provides door-to-door distribution services for major notebook (NB) manufacturers in Taiwan. Manufacturing capability as well as cost and quality advantages enables Taiwan to be one of the most competitive strategic NB computer suppliers for many of the major personal computer manufacturers, such as Apple, Compaq, Dell, HP, IBM, and Toshiba. About 50% of the world’s notebook computers are manufactured in Taiwan. In order to reduce cycle times and total costs simultaneously, Taiwan NB manufacturers transformed their international transportation from a consolidated airfreight mode to a door-todoor service. This practice is also called Taiwandirect-shipment. In order to enter the Taiwandirect-shipment distribution market, the global 3PL provider aligned with each NB manufacturer and formed a specific GSC with its retailer. The representative GSCs and transportation network are shown in Figure 3. The NBs are delivered to customers throughout North America using a door-to-door guaranteed service, with a cycle time of 3 to 5 business days. The partnership was started in late 1999. In the beginning, the 3PL provider experienced a major challenge in attempting to manage service levels and aircraft capacities due to the volume fluctuations of NB demands. For example, the aggregated daily shipment to the 3PL provider varied from 600 to 6,799 with a mean of 3,368

725

Using Collaborative Transportation Management in Global Supply Chain

Figure 3. Transportation network of the notebook computer global supply chain

and a standard deviation of 1,535. The daily available aircraft capacity, on the other hand, could only accommodate about 4,000 shipments in that particular month. In order to resolve the service level issue, the 3PL provider initiated a project to establish CTM partnership with key NB shippers in early 2000. The project objective was to achieve a 95% service level by the end of 2000 for all NB shipments. The project team—which consisted of personnel from sales, technology, engineering, customer service, and operation fields—was responsible for CTM implementation with respective NB shippers. In the CTM planning phase, shipping agreements were outlined to include rate, expected delivery cycle time, pickup cutoff time, and maximum daily guaranteed volume. If shipments were over the daily guaranteed volume, an additional transit day was added to the delivery cycle time. The 3PL provider performed capacity requirement planning based on the planned demands from shippers. In the forecasting phase, shippers updated monthly and weekly shipment forecasts to the 3PL provider for aircraft capacity planning. As a result, the 3PL provider gained sufficient time to acquire

726

additional aircraft capacities for month-end and quarter-end peak shipment demands. In the CTM execution phase, IT integration was first identified to facilitate the collaboration. A new CTM integrator was developed by the 3PL provider to link manufacturer ERP system in order to retrieve shipping information in the shipment tender stage. Outbound and inbound customs clearances are required processes for international shipping. The shipment manifest and commercial invoice were transmitted to the 3PL provider through the CTM integrator before the actual shipment pickup in order to process preclearance (i.e., to prepare and submit customs clearance before the actual shipment arrived at Customs) so as to eliminate customs delay. Once the shipments were picked up, a pickup confirmation notice was sent back to the manufacturer through the CTM integrator. A Web-API provided by the 3PL provider enabled the manufacturer to access the real-time tracking status via the Internet. The shipper would be notified of any delivery exceptions through e-mail and phone. The customer, as well, could then check the delivery status via the Internet or through customer

Using Collaborative Transportation Management in Global Supply Chain

Figure 4. Architecture of integration IT and CTM in a NB GSC

Figure 5. The 3PL provider shipment volume and delivery performance in the year 2000 service. The IT integration of the CTM model in the GSC is shown in Figure 4. The CTM project was implemented progressively and three key shippers had entered into collaboration with the 3PL provider by June 2000. Through an aggregate planning process, the 3PL provider acquired additional aircraft capacity in October in order to accommodate volume growth. The key performance indicator identified by the 3PL provider was the delivery service level, measured by percentage of on-time deliveries. The delivery volume and delivery performance of the 3PL provider in 2000 was shown in Figure 5. Apart from September 2000, the service level achieved a progressive improvement. This case also reported other findings such as the CTM implementation cost, total supply chain cost, and business growth. The CTM project incurred minimum cost for the 3PL provider by using existing IT systems and staff except for the CTM integrator that was developed by in-

house development team. On the other side, the retailer and manufacturer brought in cost saving since their shipping activities were taken over by the 3PL provider partially. Moreover, the total supply chain cost was reduced with a significant improvement in delivery cycle time. The shipment volume growth indicated the CTM approach was a positive business strategy for all parties.

727

Using Collaborative Transportation Management in Global Supply Chain

IMPAct oF collAborAtIve trAnsPortAtIon MAnAgeMent E-collaboration has emerged as the new focus for supply chains to seeking additional business and cost savings. Early adopters of e-collaboration such as retailer chains apply CPFR and CTM to synchronize manufacturing and shipping activities. Drug Store News (2001) reported a CPFR case that inventories for retailers have been reduced as much as 14%, whereas business has increased about 32%. Dutton (2003) reviewed a CTM application between Procter & Gamble and J. B. Hunt to include shipping into the supply chain. Carrier J. B. Hunt reported a 16% decrease in unloading time and a 3% drop in empty miles because of information sharing. The success of e-collaboration in retailing chains motivates other industries to follow. This application examines the case of a global 3PL provider engaging in e-collaboration through CTM in global supply chain across continents. The improved service level implies the CTM is a successful logistic alliance to both distributor and manufacturer. At the same time, this alliance also implies that 3PL provider can attain multiple cost saving opportunities such as improved fleet utilization through various freight consolidation policies and reduced labor cost by automating shipping operations. A maximum of 18% cost reduction was reported by the 3PL for a particular month after the implementation of the CTM (Tyan, Wang, & Du, 2003). The principles and process of the CTM application discussed can be generalized to cover other applications. A full scale CTM implementation as illustrated in the case requires a prerequisite of a well established IT infrastructure and streamlined business processes amongst supply chain participants. However, a reduced CTM model by eliminating unnecessary steps can be adapted to Small and Medium-sized Enterprises.

728

conclusIon The trends of globalization and mass customization challenge the traditional single enterprise to respond and meet market demand. The new economy calls for alliances to be made with 3PL providers in order to form a GSC that focuses on the core competencies of each player. Companies that have implemented a GSC, such as Dell and Compaq, have gained a higher market share, improved profit margins and services, and increased response times. GSC management has become a strategic tool for reducing costs as well as enhancing a company value. With the introduction of the CTM model, the carrier is able to establish collaboration with the manufacturer and retailer during the planning, forecasting, and execution phases of the GSC execution process. CTM brings to the carrier the benefits of better strategic capacity planning, increased asset utilization, and an improved delivery service level. In return, the manufacturer enjoys reduced costs, improved delivery reliability, increased visibility, and increased revenue. The illustrated NB GSC case shows that CTM is an effective approach for 3PL providers to deliver benefits to all parties in the supply chain. Freight consolidation is identified as another opportunity for the global 3PL provider to realize the full benefits of CTM application. In an attempt to minimize the system-wide cost, the global 3PL provider can apply various consolidation policies in order to maximize aircraft utilization while simultaneously maintaining their service commitments. With real time logistic information exchange of CTM model, the global 3PL provider gains the benefits by selecting an optimal consolidation policy to minimize the total cost under capacity and service requirement constraints.

Using Collaborative Transportation Management in Global Supply Chain

reFerences Aichlymayr, M. (2000). DC mart: Who manages inventory in a value chain? Transportation & Distribution, 41(10), 60-68. Arnold, U. (1999). Organization of global sourcing: Ways towards an optimal degree of centralization. European Journal of Purchasing & Supply Management, 5, 167-174. Bonarth, C., Handfield, R., & Das, A. (1998). Stages of global sourcing strategy evolution: An exploratory study. Journal of Operations Management, 16, 241-255. Browning, B., & White, A. (2000, April). Collaborative transportation management—A proposal. Logility, Inc. Retrieved January 2004, from http:// www.logility.com/news/logility_library.html Christopher, M. (1998). Logistics and supply chain management, strategies for reducing cost and improving service. Harlow, UK: Prentice Hall. Cooke, J. A. (2000). Bringing carriers into the loop. Logistics Management and Distribution Report, 39(9), 77-80. Crainic, T. G. (2000). Service network design in freight transportation. European Journal of Operational Research, 122(2), 272-288. Drug Store News. (2001). E-collaboration leads chains to e-savings. Drug Store News, 23(2), 13-14. Dutton, G. (2003). Collaborative transportation management. World Trade, 16(2), 40-43. Esper, T. L., & Williams, L. R. (2003). The value of collaborative transportation management (CTM). It’s relationship to CPFR and information technology. Transportation Journal, 42(4), 55-65.

Lee, H. L. (2000, September/October). Creating value through supply chain integration. Supply Chain Management Review, 30-39. Lieb, R. C., & Randall, H. L. (1999). 1997 CEO perspectives on the current status and future prospects of the third party logistics in the United States. Transportation Journal, 38(3), 28-41. Marien, E. J. (2000, March/April). The four supply chain enablers. Supply Chain Management Review, 60-68. Simchi-Livi, D., Kaminsky, P., & Simchi-Livi, E. (2000). Designing and managing the supply chain-concepts, strategies, and case studies. Singapore: McGraw-Hill. Smith, J. M. (1999). Item selection for global purchasing. European Journal of Purchasing & Supply Management, 5, 117-127. Strozniak, P. (2003). Collaborative logistics. Frontline Solutions, 4(8), 18-22. Vidal, C. J., & Goetschalckx, M. (1997). Strategic production-distribution models: A critical review with emphasis on global supply chain models. European Journal of Operational Research, 98(1), 1-18. Tirschwell, P. M. (2004, January 19). Demanding, extracting, uncompromising. Journal of Commerce, 19, 1-3. Tyan, J. C., Wang, F.-K., & Du, T. (2003). Evaluation of freight consolidation policies in global third party logistics. Omega, 31(1), 55-62. Tyan, J. C., & Wee, H.-M. (2003). Vendor managed inventory (VMI): A survey of the Taiwanese grocery industry. Journal of Purchasing and Supply Management, 9(1), 11-18.

729

Using Collaborative Transportation Management in Global Supply Chain

Key terMs Distribution Cycle Time: The span of time between the beginning of the shipment pickup and the end of the shipment delivery. Door-to-Door Delivery: Shipping service from shipper’s door to receiver’s door. Freight Consolidation: The combining of small shipments into a composite truckload or other unit of volume that is sent to a destination point. Inventory Carrying Costs: The costs associate with carrying the storage of supplies and final products.

Physical Distribution: A transportation service that accepts a shipment from a shipper and at destination separates and sorts the packages and distributes them to many receivers. Taiwan-Direct-Shipment: A distribution practice that Taiwan manufacturers sends their notebooks to buyers through door-to-door service in order to reduce distribution cycle time. Third Party Logistics: The activity of outsourcing activities to an independent company that perform client’s management function of the logistic operations.

This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 1126-1132, copyright 2006 by Information Science Reference (an imprint of IGI Global).

730

731

Chapter 2.20

A Reference Model for Strategic Supply Network Development Antonia Albani Delft University of Technology, The Netherlands Nikolaus Müssigmann University of Augsburg, Germany Johannes Maria Zaha Queensland University of Technology, Australia

AbstrAct Based on rapidly changing market conditions and increasing pressure on cost and productivity, companies in different industries have started to concentrate on their core competencies and to decrease vertical range of manufacture. This resulted in an increasing dependency between the producing companies and their suppliers. Enterprise networks are formed creating the necessity to focus on the strategic development of supply network partners. While currently strategic purchasing mainly deals with direct suppliers, future strategic purchasing needs to deal with flexible and dynamic supply networks. This results in a paradigm shift in the domain of strategic sourcing from a supplier-centric to a supply network scope. In order to support the paradigm shift,

the development of a reference model specifying the organizational and functional implications is necessary. This chapter therefore introduces a reference model for the domain of strategic supply network development extending the traditional frame of reference in strategic sourcing to a supply network perspective.

IntroductIon Driven by drastically changing market conditions, companies are facing an increasingly complex competitive landscape. Decisive factors such as globalization of sales and sourcing-markets, shortened product life cycles, innovative pressure on products, services and processes and customer requests for individual products are forcing

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

A Reference Model for Strategic Supply Network Development

companies to undergo a drastic transformation of business processes as well as organizational and managerial structures (Burtler et al., 1997). The shift from a function-oriented to a processoriented organization with a strong customer focus is essential in order to better adapt to fast changing market requirements and to become more flexible while meeting individualized customer demands (Osterloh & Frost, 2003, pp. 28-31). Within an enterprise, the core business processes (Prahalad & Gary, 1990) need to be identified, improved and (partly-) automated, while at the same time other processes are outsourced to business partners. As a consequence, business processes concerning, for example, product development, market research, sales, production, delivery and services, are affected and have to be adjusted and integrated not only within a single company but also with external partners, spanning multiple tiers of suppliers. As already recognized by Malone (Malone & Lautbacher, 1998, pp. 151-152), “the boundaries between enterprises will become much less important. Transactions within organizations will become indistinguishable from transactions between organizations and the business processes, once proprietary, will freely cross organizational boundaries.” Companies recognize that the source of their competitive strengths does not only lie in their core competences, but also in the cooperative relationships with their business partners (Jarillo, 1988, p. 31). To an increasing degree, traditional organizational structures are nowadays evolving towards hybrid and network structures ( Malone & Lautbacher, 1998, p. 166; Picot et al., 2003, p. 289), taking advantage of complementary competences of their external partners. In hybrid organizational structures, cooperation (Picot et al., 2003, pp. 303-304) describes the dependency between two firms, which are coequal and collaborate in order to exchange or share information, products or services. Cooperation has a symbiotic character, can take a variety of forms, such as strategic alliances, strategic partnerships, strategic cooperations, operative

732

cooperations and joint ventures and occurs across vertical and horizontal boundaries. Cooperation mainly occurs as a result of outsourcing nonspecific activities—necessary for the production of a product or service—which are of medium strategic relevance. If instead, idiosyncratic activities with low strategic relevance are outsourced to business partners, the degree of autonomy between the partners may change, depending on the level or importance of the single enterprises. If two or more companies are involved in inter-organizational collaboration, an enterprise network structure is created. Enterprise networks are formed to better fulfill specific customer requests providing customized products on time in the right quality and for a competitive price. Such networks can span over several tiers, especially in large manufacturing companies (e.g., in the automotive industry). Even if enterprise networks have been introduced many years ago by Jarillo, Malone and Miles, (Jarillo, 1988; Malone et al., 1987; Miles & Snow, 1984; Thorelli, 1986), there is no single, broadly accepted definition of an enterprise network today. Several expressions exist to define different, or sometimes similar, types of enterprise networks. Terms such as strategic networks (Gulati et al., 2000), alliance networks (Gulati, 1998), economic webs (Hagel III, 1996), business webs (Tapscott et al., 2000), value webs (Herman, 2002), virtual networks (Malone & Lautbacher, 1998) or dynamic networks (Pine et al., 1993), can be found in the literature. As defined by (Gulati et al., 2000, p. 203), “strategic networks potentially provide a firm with access to information, resources, markets, and technologies; with advantages from learning, scale, and scope economies; and allow firms to achieve strategic objectives, such as sharing risks and outsourcing value-chain stages and organizational functions.” Gulati uses strategic networks in a quite general manner, assigning several types of networks— which are composed of inter-organizational ties— for example, strategic alliances, joint ventures and long-term buyer-supplier partnerships to this

A Reference Model for Strategic Supply Network Development

term. More precisely, Gulati defines strategic alliances (Gulati, 1998, p. 293) as “voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services.” The authors of economic webs, business webs, value webs, virtual networks and dynamic networks all discuss the same basic idea of supporting enterprises by means of information and communication technology, primarily the Internet, in order to “shed functions in which they are not competitive to service providers and partners that may have far greater expertise, scale or geographical reach” (Herman, 2002, p. 35). Malone (Malone & Lautbacher, 1998, pp. 146148) mainly sees the increasing importance of “ad-hoc structures,” where single business units join together into virtual and temporary networkcompanies in order to produce or sell goods and services, and as soon as such projects finish, the temporary companies would become obsolete. Hermann (2002, p. 31) envisions, that “the traditional value chain, which optimized as sequence of functions for one business, is transforming into a global value web, which can optimize the supply, demand, and product design activities for an entire network of partners. (…) Rather than think in terms of a linear value chain, we think of a value web where material, information, and money flow in parallel, taking multiple separate path through a complex network of suppliers, service providers, distributors, and customers.” Pine additionally adds a dynamic aspect to the enterprise networks in order to make mass customization work, saying that “companies must break apart long-lasting, cross-functional teams and relationships and form dynamic networks” (Pine et al., 1993, p. 114). In mass-customization, where, for example, processes, technology and products need to be reconfigured in order to fulfill the individualized demands of customers, the corresponding enterprise networks cannot remain fixed, but need to be adjusted dynamically. Considering the network definitions introduced above, we use the term strategic supply

network in this chapter in order to define in the manufacturing industry (e.g., in the automotive industry) a network of suppliers spanning over several tiers and communicating among each other using the Internet. The network has a fixed part, namely the original equipment manufacturer (OEM), and a dynamic part, the suppliers, allowing flexible extension and modification of the network when additional competencies are needed. The OEM has a higher degree of autonomy, since it is the requestor for specific products and therefore the initiator of the identification of the network partners. The network has strategic relevance and focuses only on long-term relationships. Supply networks are gaining more and more importance, especially in the automotive industry. For example, Dodel (2004) cites in his research on the logistic criticality in the automotive industry a logistics manager of DaimlerChrysler AG, who states that “the processes and skills of the direct suppliers are well known. What is missing is the transparency on the complete supply network, which serves behind the direct suppliers. If a supply problem occurs, great efforts have to be taken to identify the cause of the problem.” Additionally, in spring 2004 DaimlerChrysler had to call back 1.3 million cars due to problems with the integration of system modules provided by different supply partners. Jürgen Schrempp, CEO of the company, stated during an interview prior to the annual general meeting, “the company underestimated the complexity of networking partners, who deliver complete system modules.” In order to gain competitive advantage in such supply networks, the selection, development, management and integration of respective suppliers, located not only in tier-1 but also in the subsequent tiers, are of major relevance. Modern information and communication technologies— like the Internet, semantic standards, distributed applications, component based, and respectively service-oriented architectures—are necessary in order to sustain the creation and management of supply networks (Kopanaki et al., 2000). However,

733

A Reference Model for Strategic Supply Network Development

at present IT-enabled networks can be largely found in form of rather small, flexible alliances of professionalized participants. The support of large networks with multiple tiers of suppliers still causes considerable difficulties. The high degree of complexity resulting from dynamic changes in supply networks is the main reason for the lack of practical implementation that is connected with the identification of supply network entities and the modeling of the supply network structure, as well as with the high coordination effort, as described by Lambert and Cooper (2000). Despite the fact that those are basic principles in order to succeed in supply networks, many research efforts have been based on more operative tasks primarily focusing on the optimization of forecast and planning accuracy and the optimization of material flows over the whole supply chain (Houlihan, 1985; Jones & Riley, 1985). Current enterprise resource planning (ERP) systems build the fundamentals for the management and controlling of supply networks but there is a lack of functionality to support dynamic identification, evaluation and qualification of competent partners (Angeli, 2002). In order to analyze the basic principles, such as network modeling, it is necessary to focus primarily on strategic tasks such as long-term supplier development before dealing with operative tasks of supply chain management. Strategic tasks have not been widely discussed in a network perspective yet, even if current research work, such as Carr and Smeltzer (1999), give an extended interpretation of supply chain management partly considering supplier relationships as part of that management. Therefore, the domain of strategic supply network development (SSND), which extends the traditional frame of reference in strategic sourcing from a supplier-centric to a supply-network scope, has been developed and described in a reference model, specifying the implications for the construction of the supporting IT-infrastructure.

734

According to vom Brocke (2004, p. 390), a reference model is understood as an information model, which is developed or used to support the construction of application models. Since this definition gives a very wide description of the reference model concept, a classification is needed in order to better understand the development and the purpose of a concrete reference model. The classification provided in Fettke and Loos (2004, p. 332), differentiates between reference models describing existing real world business aspects and reference models describing theoretical constructs of business challenges. The paradigm shift from a supplier-centric to a supply network perspective is an implication which became necessary due to massive changes in current markets. As described above, existing information models and systems do not sufficiently support the basic principles of the network perspective. The SSND reference model, as a theoretical construct, provides the relevant information for modeling complex and dynamic changing supply networks and builds the basis for the development of information systems for those value networks. Fettke and Loos (2004, p. 332), divides the class of reference models as a theoretical construct additionally into several sub classes. One of the sub classes defines reference models as a technique used for building supporting information systems in order to improve business efficiency such as increasing product quality and reducing costs and product development time. The SSND reference model is a contribution to this sub class since it describes functional, data and process aspects in strategic sourcing in order to optimize the purchasing function in a network perspective. The SSND reference model is therefore not based on empirical studies, but, as a first step, the efficiency of the model is evaluated by a prototype implementation. The work presented in this chapter summarizes different aspects of the SSND reference model, which have already individually been published in Albani et al. (2004a), Albani et al. (2003a, 2003b), Albani and Müssigmann (2005), Albani

A Reference Model for Strategic Supply Network Development

et al. (2004b), and focuses on two functional aspects, the strategic demand planning and the modeling of strategic supply networks. An overall description of the domain is introduced and an extract of corresponding process models and data diagrams of the functions mentioned is given. Additionally, the prototype implementation of SSND is shortly described.

the doMAIn oF strAtegIc suPPly networK develoPMent The relevance of the purchasing function in enterprises has increased steadily over the past two decades. Until the 70s, purchasing was widely considered an operational task with no apparent influence on long term planning and strategy development (McIvor et al., 1997, p. 166). This narrow perspective was broadened by research that documented the positive influence that a targeted supplier collaboration and qualification could bring to a company’s strategic options (Ammer, 1968). In the 80s, trends spurred the recognition

of the eminent importance of the development and management of supplier relationships for gaining competitive advantages. Such trends were, for example, the growing globalization, the focus on core competencies in the value chain with connected insourcing and outsourcing decisions, as well as new concepts in manufacturing. As a result, purchasing gradually gained strategic relevance on top of its operational and tactical relevance (Kaufmann, 2002). Based on these developments, purchasing has become a core function in the ’90s. Current empirical research shows a significant correlation between the establishment of a strategic purchasing function and the financial success of an enterprise, independent from the industry surveyed (Carr & Pearson, 1999, p. 513). One of the most important factors in this connection is the buyer-supplier relationship. At many of the surveyed companies, a close cooperation between buyer and supplier led to process improvements and resulting cost reductions that were shared between buyer and suppliers (Carr & Pearson, 1999, p. 516).

Figure 1. Functional decomposition diagram for strategic supply network development

735

A Reference Model for Strategic Supply Network Development

In practice, supplier development is widely limited to suppliers in tier-1 (i.e., the direct suppliers). With respect to the superior importance of supplier development, as mentioned above, we postulated the extension of the traditional frame of reference in strategic sourcing from a supplier-centric to a supply-network-scope (Albani et al., 2004a; Albani et al., 2003b; Albani et al., 2004b). That means the further development of the strategic supplier development to a strategic supply network development. This shifted the perspective in the field of strategic sourcing to analyze multi-tier supplier networks instead of single suppliers. The tasks within the strategic supply network development can be grouped into three main areas as illustrated in Figure 1: Strategic demand planning, strategic supply network modeling and strategic supply network qualification (Albani et al., 2004a). Those tasks are derived from the main tasks in strategic sourcing. The most evident changes apply for functions with cross-enterprise focus. Within the function strategic demand planning, a corporate framework for all purchasing-related activities is defined. This framework consists of a consistent and corporate-wide valid purchasing strategy (define purchasing strategy), a strategic demand planning and demand bundling function (plan strategic demand) and the definition of methods and tools to control performance and efficiency of purchasing and to establish a conflict management concept (define operational framework). The function strategic supply network modeling provides a methodology for the identification (identify strategic supply network), evaluation (evaluate strategic supply network) and selection (select strategic supply network) of potential suppliers, not only located in tier-1 but also in the subsequent tiers. Using evaluation criteria such as lowest cost, shortest delivery time or best quality, and corresponding evaluation methods, the

736

identified supply networks are evaluated. If there is a positive result on the evaluation, the supply network is selected and contractually linked to the company. Within the function strategic supply network qualification, the quality of a performing supplier network is evaluated using evaluation criteria and evaluation methods (evaluate quality of supply network). Dependent on the result of the evaluation, sanctions may be used to improve the quality of the supply network (improve quality of supply network).

strAtegIc deMAnd PlAnnIng Due to the positive effect that long-term and high-quality supplier relationships contribute to the success of a company (Ammer, 1968), the purchasing function was divided into a strategic and an operational domain. The field of responsibility of strategic purchasing comprises not only the selection and qualification of strategic suppliers but also the long-term strategic activities for demand planning. The paradigm shift in strategic purchasing has influenced the strategic tasks and led to different characteristics in the area of strategic supply network development. Figure 2 shows the sub- and elementaryfunctions of strategic demand planning which are described in detail in the following subsections.

Define Purchasing Strategy The purchasing strategy (a) describes the purchasing policy of the company, (b) determines whether consumption-oriented or safety-based purchasing will be accomplished and (c) declares the basic principles of the purchasing and sourcing strategy respectively (see elementary function in Figure 2).

A Reference Model for Strategic Supply Network Development

Figure 2. Function decomposition diagram of the function strategic demand planning

The corporate purchasing policy defines responsibilities and approaches, which need to be followed by the entire purchasing organization of a company (Strache, 1983, p. 76). This policy consists of the specification of a corporate purchasing organization, the definition of a consistent approach for (e.g., demand consolidation) and the adoption of corporate operational guidelines for implementation. An important task thereby is the creation of a corporate directive for agreements regarding the cooperation with suppliers and the propagation of business risks to suppliers in strategic supply networks. So far it was sufficient for strategic purchasing to check direct suppliers with regard to critical regions or political impact. Now all nodes of a strategic supply network have to be verified. Furthermore, it turned out that an involvement of strategic suppliers in product design and product development led to process improvements and increased efficiency for both the buyer and the supplier (Carr & Pearson, 1999, p. 513). Additionally, efficient agreements for environmental protection and recycling are needed. Environmental needs as well as the protection of

fundamental living conditions obtain more and more importance. Hence, efficient agreements comply not only with legal requirements but avoid cost significantly. All nodes of a supply network need therefore to be involved in an environmentfriendly purchasing strategy, including the usage of environmentally sound goods and transportation facilities as well as reusable packages and fillers. Criteria on environmental protection and recycling need therefore to be considered while selecting supply networks. Another important task of the purchasing strategy is the definition of a consumption or safety strategy. Consequential use of a company’s demand power on the purchasing market results in favorable prices and best conditions, whereas it is important to assure availability of purchasing goods (Jahns et al., 2001, p. 40). The decision whether a consumption or safety purchasing strategy is applied has an impact on the composition and development of supply networks. If the main focus is set on supply safety, then long-term and stable relationships with supply networks are desirable. In the case of a consumption strategy, it is

737

A Reference Model for Strategic Supply Network Development

important to identify comparable supply networks in order to select the one that fits best in the sense of prices and conditions in a concrete purchasing situation. Such a consumption strategy is used especially for standardized goods, allowing a good comparison of supply networks. In order to define a concrete sourcing strategy, it is necessary to distinguish between different sourcing strategies (e.g., single sourcing vs. multiple sourcing, local sourcing vs. global sourcing or insourcing vs. outsourcing). Single sourcing defines the supply of a good without using a contest between different supply networks. It is possible for strategic purchasing to ensure good prices, for example, by establishing long-term contracts with entire supply networks as it is managing direct suppliers. Multiple sourcing is aimed at the competition of existing and potentially new supply networks. Depending on which decision criteria (e.g., price, availability, lead time and quality) are used while comparing supply networks, the process of selecting a supply network is much more complex than selecting a single direct supplier. Local sourcing restricts purchasing on markets in the company’s home country—cost savings (e.g., because of a shorter route of transport) and higher reliability because of stronger control possibilities are the main advantages (Large, 1999)—whereas global sourcing describes international purchasing activities using worldwide resources. In the case of global sourcing, opportunity and risk profiles need to be elaborated. It is reasonable to use the strategic decision on local or global sourcing as a parameter while identifying and modeling supply networks. Decisions on make or buy (in- or outsourcing) need to be considered while sourcing entire modules or even systems (Large, 1999). Such a decision has significant influence on the company’s vertical range of manufacture and permits drastic reduction of internal costs. Choosing the right strategy for a purchasing good depends on the importance of the good for the corporate goods and services. With high quality, non-standardized goods the safety and single

738

sourcing strategy is desirable. On standardized goods with low complexity a company may choose a consumption strategy and use a multiple sourcing strategy to achieve low purchasing prices. Another important task area of strategic purchasing is the reduction of complexity and variety of goods while at the same time transparency needs to be increased. This can be achieved by using standardized goods and a corporate classification system.

calculate strategic demand In order to consolidate demands, the purchasing goods need to be categorized into a corporate classification system. The classification of purchasing goods therefore needs to be performed for goods which are already in use as well as for all new goods. Fuhry et al. (2002) suggests to classify the purchasing goods into three groups: indirect material, basic direct material and strategic direct material. Indirect materials are goods and services which are not directly necessary for the production of an end product (e.g., office equipment). The focus of such goods lies, therefore, on the optimization and increase of efficiency of the order management and invoice processes (e.g., by using e-procurement systems). The share of this group is about ten percent of the total purchasing volume. Basic direct materials are directly used in the end product (e.g., raw materials and prefabricated parts). With this group of material, the competition can be increased by standardization and transparency in the market, which results in a direct decrease of cost. The use of IT-Systems like online auctioning or automated bidding systems can significantly increase the efficiency of the purchasing process. The share of this group of material is about 30% of the total purchasing volume. Strategic direct materials are complex components, pre-fabricated goods and systems or extensive services, which are used in the end product (e.g., motors and car seats). With this group of material, it is important to develop and

A Reference Model for Strategic Supply Network Development

maintain long-term and high quality relationships with the suppliers, and therefore with the related strategic supply networks. In addition, it is necessary to involve the suppliers that are participating in such strategic supply networks at an early stage into product planning and product development. The share of this group of material is about 60% of the total purchasing volume. For the classification of goods it is possible to use classification standards (e.g., eClass and UN/ SPSC). The value based share of the purchasing volume of a good can be calculated by using the ABC- or the portfolio analysis (Hirschsteiner, 2000, p. 11). The extension of the view from a supplier-centric to a supply network approach has significant influence on the purchasing of strategic direct material. In most cases, these goods are purchased with a safety strategy and single sourcing. Selecting and qualifying of appropriate supply networks is hereby an important task. The transparency of a supply network is a prerequisite for the buyer to evaluate and develop a supply network. Demand consolidation combines demands of several divisions and locations of a company in order to use the appearance on the purchasing market to strengthen the negotiating position. Prerequisites for a successful demand consolidation are the standardization and consistent classification of goods as well as the explicit identification of supply networks. Demand consolidation can improve the purchasing conditions. Supply marketing has the responsibility to analyze purchasing markets and identify powerful supply networks on the supply markets (Schifferer, 2001, p. 68). The bases for it are the basic conditions defined within the supply policy, such as transfer of business risk to supply networks or the compliance with environmental regulations. Adequate supply networks can be found through Internet search engines, external service providers (e.g., international yellow and white pages) or other data sources, such as up-to-date company profiles and key performance indicators. Based on sup-

plier self service information, a concise profile is generated in order to decide for a supply network. With the help of supply market research, a transparency is established and continuously improved in order to provide information and outlook on future market trends and their interference with the decision strategy. A further task of supply market research is the exposure of competitors and their demand potential for specific services of a supply network. Thus, significant changes in the purchasing price can arise. Further important influencing factors are so called quantity or tool monopoly. It is necessary to recognize whether only one supply network can deliver the amount of goods or whether only one node of a specific supply network can implement and operate a special tool (Strache, 1983, p. 19). Furthermore, it is important to identify the critical path in a supply network in order to take appropriate action for adjustment if a node on this critical path fails.

Define operational Framework Methods and procedures for risk management, controlling of purchasing and conflict management are provided by strategic supply network development in order to manage operational purchasing. The perception of the purchasing market research needs to be applied in order to establish effective risk management. Risk management deals with early detection of market, service and financial risks. Based on the business objectives and the purchasing policy of the company, concrete risk strategies are defined (e.g., fundamental risk avoidance or risk degradation strategies). Subsequently, the actual purchasing situation is analyzed, considering risk types, risk areas and risk reasons. Thus, it is examined from which countries and which industries goods are to be purchased in order to identify high-risk regions. These can be countries having high political risk, high inflation rates, high currency risks or even companies with the risk of insolvency. Through

739

A Reference Model for Strategic Supply Network Development

the gathering of such information, it is possible to create and evaluate quantitative and qualitative predictions (Das & Teng, 1998, p. 22). The controlling of purchasing accompanies the purchasing process throughout the entire purchasing organization. It consists of the definition of operating figures and their target values. The actual values are periodically measured and compared with the target values. Deviations are analyzed and appropriate action is taken. Controlling therefore ensures the ability of a company to adapt and react as well as to coordinate and innovate. The definition and monitoring of these values is supported by design and safety goals. Regarding design goals, the controlling defines target values in order to reduce the maximum number of supply networks or the purchasing quote related to framework agreements (Schifferer, 2001, p. 62). The target values are monitored by analyzing whether the goods needed in the corporate processes are supplied in the right quantity and the right quality at the right time and the right place. Sample measures are: resource consumption, cost of purchasing staff and cost of handling the purchasing tasks but also adherence to delivery dates, quantity stipulations and the price behavior of supply networks. Furthermore, it is monitored that buying is based on a purchase order. It is recommended to use balanced score cards to compile the operating figures. The method of the balanced score card allows, with a limited number of operating figures, implementation of a very efficient and flexible mechanism to manage a purchasing organization. The introduction of conflict management processes is necessary in order to avoid conflicts in purchasing. Conflicts can occur while defining tasks and decision competency between the strategic and the operational parts of the purchasing organization. This may apply to selecting supply networks while conducting a single purchasing. A large conflict potential may also arise if operational purchasing does not adhere to strategic instructions, such as cost limitations,

740

amounts or dates. Companies having more than one production facility or having decentralized purchasing divisions may have the same problems while purchasing identical goods. Conflicts may also arise if the purchasing staff does not stick to corporate framework contracts with supply networks due to individual connections to suppliers. An effective incentive system helps to implement the objectives of strategic purchasing. This can be established by using the extensive data gathered by controlling. It is measured how the supply objectives are achieved. The cost savings reached by the employees involved are the basis for a bonus system. Besides the cost savings, a strategic purchaser can be measured as well on the quote of newly negotiated framework contracts. An operational purchaser can be measured on the adherence to supply lead time or the securing of a specific quality level on purchased goods (Schifferer, 2001, p. 90).

strategic demand Planning: business Process and data Models The elementary function classify purchasing goods (see Figure 2) is used to illustrate how the process organization is established and which information objects are used in the domain of strategic supply network development. The business processes for introducing material group codes and planned conversion of material strategies are modelled in Figure 3 and Figure 4, whereas the data model for purchasing goods can be found in Figure 5. For modeling the business domain, the ARIS (Scheer, 1999) method has been used. The classification of purchasing goods in the company builds the basis for a material-specific purchasing strategy and is a prerequisite for effective purchasing marketing, for a consolidation of demands as well as an optimized supply network management. Initially, all purchasing goods are listed in order to decide whether a proprietary material code is being used or whether a standardized method like eClass or UN/SPSC needs

A Reference Model for Strategic Supply Network Development

Figure 3. Business process for the introduction of a material group code

741

A Reference Model for Strategic Supply Network Development

Figure 4. Business process for planning conversion of material strategies

to be introduced (Figure 3). It is important that all existing and new goods are grouped with a consistent material code. While working with supply networks, the material code needs to be based on a standard such that all nodes of the supply network adhere to the same method. If it is necessary to use a proprietary material code, this code has to be distributed to the entire supply network. It may be necessary to provide assistance to the nodes of the supply network in order to show how to implement and use the material code. According to the strategic decision for a material group code, either a standardized method is adapted (preferred while working with supply networks) or a proprietary material group code is defined. This material group code is then implemented in the entire purchasing organization. The purchasing divisions are now asked to classify all

742

purchasing goods with this material group code. In doing so, purchase controlling needs to observe the progress of this process (e.g., supported by a balanced scorecard). Besides the material group code, other criteria (e.g., the purchasing volume or the importance) are used to further group the purchasing goods. The process of structuring goods according to their share of the total purchasing volume and starting specific actions is illustrated in the process flow plan conversion of material strategies in Figure 4. The consistent classification of purchasing goods allows for the standardization of products and recognition of product correlations. Such a consolidation of the material master can reduce the variety of goods, which are required in the company. Purchasing goods are of different importance for the success of a company. Therefore,

A Reference Model for Strategic Supply Network Development

Figure 5. Semantic data model for purchasing goods

purchasing goods are grouped according to their relevance and their purchasing volume in three groups: indirect material, basic direct material and strategic direct material. For each of the groups, individual activities are deduced. While purchasing indirect material, for example, it is important to design the purchasing process as efficiently as possible. This can be achieved by the use of e-procurement processes and systems. While purchasing basic direct material, a minimization of the purchasing costs can be achieved by arranging auctions or biddings. While purchasing strategic direct material, the main focus is set on the development and maintenance of long-term relationships with supply networks. Therefore, the modeling and qualification of supply networks is of great importance. In order to describe the information objects of the strategic supply network

development, a semantic data model is created within the scope of this reference model. An extract, showing the information objects of the process flows illustrated above, is presented in Figure 5 in an entity relationship diagram. Starting with the specification of the demand of a customer (e.g., the demand for strategic direct material), data are collected not only from the direct suppliers but also from all upstream suppliers in order to support the strategic supply network development. The specific demand (as shown in the upper center of the picture) consists either of services, purchasing goods or other requirement types which are subsumed to the term requirement type. Every requirement type has features, such as structural shape, weight, and so forth. A purchasing good belongs to exactly one material group, which is identified by a material

743

A Reference Model for Strategic Supply Network Development

group code. Features as well as material groups are provided by standardization information. A requirement type belongs to a classification (e.g., strategic direct material). A classification is defined by different criteria. The purchasing volume of a requirement category as well as the material groups or the purchasing goods can be criteria for the classification of requirement categories. The objects, which are shadowed, will later on be found again in the extension of the semantic data model.

strAtegIc suPPly networK ModelIng To model a supply network in a structured way, potential supply networks need to be identified, evaluated and then selected. Figure 6 shows the sub- and elementary-functions of model strategic supply networks, which are described in detail in the following sub sections.

Identify strategic supply networks For the identification of potential supply networks, a specific strategic demand for an offer to a product to be built is specified and communicated from the OEM to existing and/or potential suppliers. Figure 7 illustrates an example for an identification process and its results. In the example, the OEM is connected to a potential network of suppliers as shown in the left part of Figure 7. It is assumed that the OEM needs to order two products externally, product 1 and product 2. During the identification process, the OEM sends out demands for these products to its strategic suppliers in tier-1. In the example, it is assumed that supplier 1-1 and supplier 1-2 get the demand for product 1 while supplier 1-3, supplier 1-4 and supplier 1-5 receive the demand for product 2. These suppliers check whether they can fulfill the demand internally and, if not, send out subsequent demands to their respective suppliers. Each node executes the same process as

Figure 6. Function decomposition diagram of the function model strategic supply networks

744

A Reference Model for Strategic Supply Network Development

described until the demand has reached the last tier. The requested information is then split-lot transferred to the OEM, aggregated and finally visualized as a supply network, in which each participant of the supply network constitutes a network node. This process may result in the identification of several possible supply networks as shown in the right part of Figure 7, where, for exmple, product 1 can be provided by two supply networks, supply network 1 (root node S1-1) and supply network 2 (root node S1-2), whereas product 2 can only be provided by supply network 3. It is now up to the OEM to decide which of the potential strategic supply networks (in the example above for product 1) will be selected to fulfill its original demand. The basic information needed for the selection results from the evaluation of potential networks.

evaluate strategic supply networks Based on defined evaluation criteria, potential networks are evaluated. Evaluation criteria may span from simple facts to highly complex considerations. One of the simplest criterion is the minimum number of nodes in the supply network, which can be used to minimize overall complexity of supply networks. Criteria with more complex calculations, for example, are the shortest total delivery time, the minimum total cost or the regional only sourcing (indicating, that only those suppliers are selected which are located within a certain region). Complex criteria are maximization of product quality or delivery time liability, since these criteria implicate the evaluation of past experience. While considering critical areas in the supply network, it is also of main importance to

Figure 7. Example for result of identification process

745

A Reference Model for Strategic Supply Network Development

know which nodes have absolute monopoly with their supply value or which are involved in more than one potential supply network (see S2-2 and S3-1 in the example in Figure 7). After having specified the evaluation criteria, the next step is to define the evaluation method. In most cases, a method is represented by an algorithm which itself is related to the selected evaluation criterion. For example, the criterion minimum number of nodes involves a simple algorithm counting the nodes in potential tree graphs, comparing the results and selecting the tree (supply network) with the least number of nodes. Assuming that the identification process will provide several possible supply networks for different products, the function select supply network(s) will select the supply networks related to a specific product in order to evaluate them using the evaluation criteria and methods as just introduced above. The result of the evaluation process is a rated list of all supply networks related to a specific product. This list can therefore be visualized and used for the selection of strategic supply networks in order to produce the specific product.

select strategic supply networks Based on the evaluation results of potential supply networks, target suppliers are identified for negotiation. In order to close a contract with those suppliers, contract negotiations are conducted first in order to specify the contract terms relevant for ordering the required goods. Those elementary functions highlighted in white in Figure 6 express that the steps cannot be automated and therefore need face-to-face communication in order to be executed.

746

strategic supply network Modeling: business Process and data Models The semantic data model, introduced in Figure 5 has been extended with data objects used for the identification of supply networks. The extension of the model can be found in Figure 8. The objects, which are shadowed, connect the different semantic data models to each other (see Figure 5 and Figure 10). Starting from the demand of a customer, it is relevant to collect data not only from the suppliers in tier-1, but also from all suppliers in tier-n. A whole supply network specified by a demand is a network of suppliers, providing information to the customer, which is used for the development of the supply network. This network of suppliers is represented in the data model as a complex monitoring object, whereas a single supplier is represented as an elementary monitoring object. With the affiliation of elementary monitoring objects to a complex monitoring object, and with the identification of predecessors and successors of such elementary monitoring objects, the whole supply network is defined. Each complex monitoring object is related to a contract which has been offered to the customer for delivering a requested product. At a particular time, each elementary object provides information about the product range, bill of material, financial data or more. This information is known as supplier generated data. In addition, the customer generates their own data, called customer generated data, specifying the performance of the respective supplier of the elementary monitoring object. Examples for data generated by the customer are target performance data and actual performance data. Target performance data are guidelines for the supplier, and

A Reference Model for Strategic Supply Network Development

Figure 8. Semantic data model for the function strategic supply network modeling

747

A Reference Model for Strategic Supply Network Development

Figure 9. Business process for the identification of strategic supply networks

the actual performed data are the work performed by the customer. With the acquisition of supplier generated data and with the definition and the measurements of performance data, the customer holds all the needed to evaluate different complex monitoring objects of the supply network. Different evaluation methods are defined by different evaluation criteria.

748

The whole process of modeling the supply network for a specific demand sent by a customer is shown in Figure. 9. The process modelled holds for each company in the network. Requests from a customer may arrive (contract offer requested) for a specific product, or different contract offers from one or more suppliers (contract offer stated) may be sent to the company examined. If the com-

A Reference Model for Strategic Supply Network Development

Figure 10. Semantic data model for the identification of strategic supply networks

pany has received a request for a specific product, a bill-of-material-explosion is produced in order to identify the products, which need to be ordered from suppliers. Contract offers need therefore to be requested from the respective suppliers. A request for one and the same product may be sent to different suppliers. The company examined waits for the different contract offers of the suppliers in order to evaluate them and conclude their own contract, containing the contract aspects of all suppliers involved. The contract is then offered to the requesting customer. Since each node in the network performs the process just described, the contract offered to the customer includes all contract aspects of the supply network. The semantic data model introduced in Figure 5 and Figure 8 has been extended with the contract information objects shown in Figure 10.

Each node in the network is a company. A company can either be a customer or a supplier. One and the same company can be a supplier for a specific product, and at the same time a customer ordering goods necessary for production of the requested product. A company concludes contracts with their customers and suppliers for a specific product. An assembly defines a product, which may contain additional products. A contract has different states. Each contract, which has been received from a supplier, is an offered contract. Such a contract is then evaluated with evaluation methods, reaching the state of an evaluated contract. Evaluated contracts with good evaluation results may become potential contracts, which are then concluded and accumulated to a concluded contract, which again is offered to the requesting customer.

749

A Reference Model for Strategic Supply Network Development

Figure 11. SSND supply network for an electronic motor

PrototyPe IMPleMentAtIon oF ssnd For proof of concept, the prototype tool SSND has been implemented providing the functionality for the identification and dynamic modeling of strategic supply networks. A sample view of a supply network with detailed information about every supplier contributing to an example demand for the production of an electronic motor is shown in Figure 11. Only a selected area of the whole supply network is shown. The rectangles represent the different companies of the supply network visualized with important information about the node contributing to the supply network of the electronic motor. Relevant information for the requestor about the suppliers is, for example, name of the company, material group the supplier

750

is producing, minimum volume necessary to be ordered and capacity per day. The companies are visualized in the SSND prototype in different colors, differentiating between (a) suppliers who are able to deliver the product and amount requested, (b) suppliers who are not answering to the demand sent, (c) suppliers who are not online or where a communication problem exists and therefore can not be reached and (d) suppliers who do not have enough capacity for producing the required product, or where the volume required by the client is too low. The tool provides different modes of visualizing the network—adding more detailed information to the nodes, showing just parts of the network, and so forth—in order to support the client with all necessary information for developing the strategic supply networks.

A Reference Model for Strategic Supply Network Development

conclusIon

reFerences

Challenges in today’s economy are more and more transforming formerly closely-linked value chains into flexible networks, thus significantly changing the buyer/producer-supplier relationship. As laid out in this chapter, this is especially true for the field of strategic purchasing, where an extension from a supplier-centric to a supply network perspective is required. In order to accomplish this extension, complexity issues connected with the modeling of supplier networks have to be overcome. Having identified the need for managing the complexity of supplier network modeling, a reference model for the domain of strategic supply network development has been developed. It contributes to the class of theoretical constructs of potential business challenges and describes functional, data and process aspects in strategic sourcing in order to optimize the purchasing function in a network perspective. In this chapter, an overview of the reference model has been given detailing the functions of demand planning and identification of supply networks. Additionally, a prototype of the model has been implemented in order to evaluate the described concepts. Since the reference model is classified as a theoretical construct, and the prototype implementation has until now only been evaluated in small examples, additional work needs to be investigated in validating the concept in practice. Additionally, the prototype needs to be extended in order to allow additional product classifications next to eClass. Such an enhanced version of the existing prototype, based on a consistent and validated reference model, would constitute a basic component in an IT-infrastructure that enables companies to efficiently develop and maintain their strategic supply networks.

Albani, A., Bazijanec, B., Turowski, K., & Winnewisser, C. (2004a). Component framework for strategic supply network development. Paper presented at the 8th East-European Conference on Advances in Databases and Information Systems (ADBIS-04), Budapest, Hungary (LNCS 3255). Albani, A., Keiblinger, A., Turowski, K., & Winnewisser, C. (2003a). Domain based identification and modelling of business component applications. Paper presented at the 7th EastEuropean Conference on Advances in Databases and Information Systems (ADBIS-03), Dresden, Deutschland (LNCS 2798). Albani, A., Keiblinger, A., Turowski, K., & Winnewisser, C. (2003b). Dynamic modelling of strategic supply chains. Paper presented at the E-Commerce and Web Technologies: 4th International Conference, EC-Web 2003 Prague, Czech Republic (LNCS 2738). Albani, A., & Müssigmann, N. (2005). Evaluation of supply networks. Paper presented at the International Workshop on Modelling InterOrganisational Systems (MIOS), in conjunction with the OTM 2005 Federated Conferences, Larnaca, Cyprus (LNCS). Albani, A., Winnewisser, C., & Turowski, K. (2004b, 25.09. - 29.09.). Dynamic modelling of demand driven value networks. Paper presented at the On The Move to Meaningful Internet Systems and Ubiquitous Computing 2004: CoopIS, DOA and ODBASE, Larnaca, Cyprus (LNCS). Ammer, D. (1968). Materials management (2nd ed.). Irwin, Homewood, IL.

751

A Reference Model for Strategic Supply Network Development

Angeli, R. (2002). Development and coordination of dynamic enterprise networks. Paper presented at the Wissenschaftssymposium Logistik der BVL. [in German] Burtler, P., Hall, T. W., Hanna, A. M., Mendonca, L., Auguste, B., Manyika, J., et al. (1997). A revolution in interaction. The McKinsey Quarterly, 1/97, 4-23. Carr, A. S., & Pearson, J. N. (1999). Strategically managed buyer-supplier relationships and performance outcomes. Journal of Operations Management, 17, 497-519. Carr, A. S., & Smeltzer, L. R. (1999). The relationship of strategic purchasing to supply chain management. European Journal of Purchasing & Supply Management, 5(1), 43-51. Das, T. K., & Teng, B. S. (1998). Resource and risk management in the strategic alliance making process. Journal of Management, 24(1), S. 21-24. Dodel, J. H. (2004). Supply chain integration: Reduction of the logistic criticality in the automotive industry. Unviersity of St. Gallen, Switzerland. [in German] Fettke, P., & Loos, P. (2004). Reference modeling research. Wirtschaftsinformatik, 46(5), 331-340. [in German] Fuhry, G., Valdes, L., & Reinecke, N. (2002). Digital sourcing-purchasing in the next generation. Retrieved 5.7. 2004 from, www.digitaltransformation.de [in German] Gulati, R. (1998). Alliances and networks. Strategic Management Journal, 19, 293-317. Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal, 21, 203-215. Hagel III, J. (1996). Spider versus spider. The McKinsey Quarterly, 1, pp. 5-18.

752

Herman, J. (2002, July/August). Global value webs. Supply Chain Management Review, pp. 30-37. Hirschsteiner, G. (2000). Purchasing in the company. In S. Schötz (Ed.), Einkauf, methoden, werkzeug und arbeitshilfen für den industriellen einkauf (Chap. 3.2.1). Kissing: WEKA PraxisHandbuch. [in German] Houlihan, J. B. (1985). International supply chain management. International Journal of Physical Distribution and Logistics Management, 15(1), 22-38. Jahns, C., Middendorff, A., & Schober, H. (2001). Repositioning of the purchasing function . In K. Kohlhammer (Ed.), Beschaffung aktuell, materialwirtschaft, einkauf, logistik (Vol. 2/2001, pp. 38-43). Organ des Bundesverbandes Materialwirtschaft, Einkauf und Logistik e.V. [in German] Jarillo, C. J. (1988). On strategic networks. Strategic Management Journal, 9, 31-41. Jones, T., & Riley, D. (1985). Using inventory for competitive advantage through supply chain management. International Journal of Physical Distribution and Logistics Management, 5, 16-22. Kaufmann, L. (2002). Purchasing and supply management-a conceptual framework. In Handbuch industrielles beschaffungsmanagement (2. Auflage ed., pp. 3-33). Wiesbaden: Hahn, D, Kaufmann, L. (Hrsg.). Kopanaki, E., Smithson, S., Kanellis, P., & Martakos, D. (2000). The impact of inter-organizational information systems on the flexibility of organizations. Paper presented at the Proceedings of the Sixth Americas Conference on Information Systems (AMCIS), Long Beach, CA. Lambert, D. M., & Cooper, M. C. (2000). Issues in supply chain management. Industrial Marketing Management, 29(1), 65-83.

A Reference Model for Strategic Supply Network Development

Large, R. (1999). Management of strategic purchasing. Wiesbaden: Gabler. [in German] Malone, T. W., & Lautbacher, R. J. (1998, September-October). The dawn of the e-lance economy. Harvard Business Review, 145-152. Malone, T. W., Yares, J., & Benjamin, R. I. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), 484-497. McIvor, R., Humphreys, P., & McAleer, E. (1997). The evolution of the purchasing function. Journal of Strategic Change, 6(3), 165-179. Miles, R. E., & Snow, C. C. (1984). Fit, failure and the hall of frame. California Management Review, 26(3), 10-28.

Prahalad, C. K., & Gary, H. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-91. Scheer, A.-W. (1999). Aris-business process modeling (2nd ed.). Berlin: Springer. Schifferer, S. (2001). Process oriented management of the purchasing organisation. Unpublished Dissertation, Technische Universität, München. [in German] Strache, H. (1983). How to purchase in monopolistic environments? Accurate purchasing behaviour for purchasing agents. Praxis für Materialwirtschaft und Einkauf, Volume 3, Nürnberg. [in German]

Osterloh, M., & Frost, J. (2003). Process management as core competence (Vol. 4). Wiesbaden: Gabler Verlag. [in German]

Tapscott, D., Ticoll, D., & Lowy, A. (2000). Digital capital: Harnessing the power of business webs. Cambridge, MA: Harvard Business School Press.

Picot, A., Reichwald, R., & Wigand, R. T. (2003). The boundless enterprise: Information, organization and management (5th ed.). Wiesbaden: Gabler Verlag. [in German]

Thorelli, H. B. (1986). Networks: Between markets and hierarchies. Strategic Management Journal, 7, 37-51.

Pine, B. J., Victor, B., & Boynton, A. C. (1993). Making mass customization work. Havard Business Review, 36(5), 108-119.

vom Brocke, J. (2004). Reference modeling research. Wirtschaftsinformatik, 46(5), 390-404. [in German]

This work was previously published in Reference Modeling for Business Systems Analysis, edited by P. Fettke and P. Loos, pp. 217-240, copyright 2007 by IGI Publishing (an imprint of IGI Global).

753

754

Chapter 2.21

Virtual Logistics from Outsourcing Logistics Vladimír Modrák Technical University of Košice, Slovakia

IntroductIon The wide utilisation of information communication technology has significantly affected also a development of logistics services concepts. Consequently, research in the area of virtual companies including logistics services is developing. Presented visions are commandingly optimistic, even though sceptics are already gathering counter-arguments against those visions. As an important factor of strengthening, the abovementioned optimistic vision can be accounted for by a tendency of wider applications of outsourcing. Activities carried out by specialised external providers for a larger number of customers are usually cheaper, particularly because of fixed costs. Moreover, organisations that provide outsourcing bring into partnership their own know-how from optimisation of logistical activities. Cooperation in this field helps to eliminate or reduce unexpected idle periods in transport, such as long transport routes, reloading, customs clearing, and other. A higher form of outsourcing is the inclusion of lo-

gistical centers (LC) into a supply chain (SC). With the progressing globalization, the significance of integrated logistical centers is increasing. The aim of the article is to describe the concept of an integrated architecture of a logistic center reflecting progressive trends in logistic management. It also includes a model of features for a designing of a virtual logistical center and description of typical signs of virtual corporations.

bAcKground It is the paradox that information and communication technology (ICT) is from one side a precondition for modern business concepts and, on the other hand, is a significant barrier for their building. Especially, the problem of information incompatibility between companies prevents an effective deployment of ICT systems within the integrated supply chain (Hertz, 2001). The reason for the creation of integrated SC is in the establishment of close relationships and in the

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Virtual Logistics from Outsourcing Logistics

creation of unified procedures aimed at increasing the effectiveness of the whole logistical chain. In these terms, SC can be characterized as a worldwide network of suppliers, factories, warehouses, distribution centers and retailers through which raw materials are acquired, transformed, and delivered to customers (Fox et al., 2000). Interest in the implementation of ICT in SCM has grown recently along with the change in the orientation of logistical management from internal attention to the overall company strategy focus, which was oriented to an integration of relations with suppliers and distributors (Meade, 1988). It led to gradual integration of logistical companies. Currently, increasing development in e-commerce and ICT is supporting this tendency. Important applications include, for example, Electronic Data Interchange (EDI) and Extranet. These information systems act as platforms for the integration of several of the phases (plan, source, make and deliver) of the supply chain with the objective of promoting open communication among partners (Gunasekaran & Ngai, 2004). Especially a phase of planning is critical in order to gain supply chain advantages, as companies need to exchange large amounts of planning and operational data (Edvards et al., 2001). Due to the onset of advanced ICT in SCM, development of virtual companies is relatively expanding. According to Davidov and Malone (1992), the virtual company of the future will look in the eyes of an observer as being almost limitless, with ever changing contact surfaces between the company, the supplier and the customers. Birchall and Lyons (1995) claim that, from the nineteennineties onwards, only intelligent organisations, which will not try to avoid new organisation forms, will survive. Kalakota and Robinson (2000) state that, “The design of a new model of business should be able to create alliances that emerge whenever a new type of response is necessary and most, or preferably all of a demanding, fickle customer’s rising needs can be satisfied.” In this sense can be seen also the perspective of virtual

manufacturing and logistics. Franke and Jockel (2000) define a term—“virtual logistics” —as a management process that consistently obtains and co-ordinates critical logistical resources provided primarily by virtual corporation members, but also by externals. Understandably, there are more views on virtual logistic centers, which are in this article one of the objects of interest. In concordance with the aim of this article, a virtual logistic center can be defined as an organization that consists of several logistics service providers and their facilities in a region (Meidute, 2004).

FroM logIstIc centers to vIrtuAl logIstIcs Infiltration of information and communication technology into manufacturing technologies and logistic tools is formulating new challenges for the creation and implementation of modern manufacturing and logistics concepts. In connection with that, in logistic management a positive shift in organisation of material flows from less effective—discrete material flows—to economically effectual—continual material flows—is registered. Discrete material flows in supply chain basically are caused by applying push system. By this strategy manufacturers push products to the customers in response to demand estimates but in quantities that minimise production costs. In general it results in excess inventory and the longer the lead-time. Continual flows in SC are resulted from the conditions of pull system, in which the goods are delivered to the customer with an agreed batch of material at a time and in a quantity that suits the supplier’s needs. There is no need of a stock between the supplier of materials and the production, and the stock of finished products can be reduced to an essential capacity, which buffers the flow from the production to the customer. The frequency of the flow increases, chains pass on smaller batches, the flow is smooth. To avoid transport problems

755

Virtual Logistics from Outsourcing Logistics

due to an increased flow frequency, a segment for completion of goods and an aggregation of deliveries for customers is inserted into SC (see Figure 1a). Customers’ regular requests are directed right into the production, which should be capable to react promptly and individually to a change in orders that occurs in the course of the framework contracts fulfilment. A supply chain with a synchronous material flow is an ideal type of supply chain, where production and transport processes are completely adapted to flexible reactions to any change in a requirement. The material flow is balanced, smooth, without a stock (with the exception of a minimal backup stock). Inside of any element and on the way between chains there is only minimal quantity of raw materials or finished products that is precisely defined at a specific moment. That is possible through a parallel information flow, by which an information system operator of the whole logistical chain secures the processing of customers’ orders and simultaneously dovetails,

synchronises and optimises all processes in the supply chain. For that it has available real-time information from all partners and objects of partial supply chains. As another development factor in logistic approaches a wider application of outsourcing can be considered. Activities carried out by specialised external providers for a larger number of customers are usually cheaper, particularly due to fixed costs. Moreover, organisations that provide outsourcing bring into partnership their own know-how from optimisation of logistical activities. Unexpected idle periods in transport (reloading, customs clearing, and other) is possible to soften or eliminate by the inclusion of a logistical center into a supply chain (see Figure 1b), which will secure the reception of required supplies from specific customers, and carry out stock operations and stock records, including other logistics services (completion, packaging, marking, etc.). Sequentially, customers in the JIT mode take individual deliveries from the stock.

Figure 1. a) Insertion of completion and aggregation into SC; b) Inclusion of LC into SC

756

Virtual Logistics from Outsourcing Logistics

Logistical activities for distribution of products have to contain all distribution, wholesale and retail elements of the supply chain, which means they should finish at the end customer—consumer. Logistical activities of LCs in a distribution and sale of products and purchasing and sales activities of wholesale and retail companies are usually not harmonised. Each of those organisations creates a partial supply chain according to their market interests and the relations between them are decided by their economic strength, not a common goal. The expanding logistics pushes on the concentration of branched stock networks by creating a minimal number of technically well-equipped so-called integrated logistical center (ILC) with regional and territorial coverage, which effectively resolves the conflicts between economical interests of producers and the retail market. Conflicts are resolved as follows (Modrák & Kiss, 2005): •

•

Product range conflict results from retail’s requirement of the supply of a wide product range, while the production supplies a more narrow range. This conflict is resolved by purchasing and completion in warehouses. Quantity conflict and time conflict is given by the request of frequent supplies in small

•

quantities against producers’ supplies in big quantities with a lower frequency. The conflict is resolved by keeping a stock of goods. Spatial conflict occurs as a result of misallocation of production and the center of consumption, and it is resolved by placing the warehouse into the place that is identical with an intermodal transport terminal. Parenthetically, ICL are accounted as key factor for transport intermodality improvement.

A model of the transition of logistics centers to integrated logistics centers is depicted in Figure 2. ILCs fulfill the primary function – to supply customers with goods in the required way and in the required range. Therefore they play the role of completion and expedition. The secondary function is given by keeping the necessary stock of goods. Another tendency of logistical approaches is the speeding up of international trade through e-commerce, which significantly influences the strengthening of the international character of logistic distribution chains. The trend in introducing e-commerce shifts from part ordering, materials scheduling and delivery into sales,

Figure 2. Transition from decentralized logistics centers to integrated logistics centers

757

Virtual Logistics from Outsourcing Logistics

invoicing and receipts (Pawar & Driba, 2000). It means substantial re-evaluation of the logistical wholesale practice, from ensuring stock operations and the subsequent distribution towards complex logistical processes orientated on the satisfaction of needs of individual retail units and towards the increase of efficiency of the flow of goods in the interest of securing their competitiveness. Technical progress in the past years has allowed creating and using so-called intelligent logistical systems, which provide sophisticated services for customers, including the colorization, economization and safety of transport systems. Utilization of progressive ICT in the management of logistical systems results in intensive development of complex transport services, which are represented by virtual integrated service systems—named as virtual logistics centers (VLC). A wider concept of virtual integrated services constructed from further members like producers and retailers is characterized as a virtual corporation. According to Scott (2000), members of a virtual corporation will benefit from the assets that each of them contributes related to reputations, organizational structure and specialized dynamic capabilities. Another advantage of the a virtual corporation can be seen in electronic connectivity of members that will enable supply chain integration to execute

cross-enterprise activities and to coordinate the operations of collaborating firms. As a result, electronic connectivity will move firms from using enterprise-centric supply chains to synchronized electronically connected supply chains (Serve et al., 2002). The conceptual position and the role of virtual corporation in relation to ILCs is schematically demonstrated in Figure 3.

FeAtures oF vIrtuAl corPorAtIon And logIstIcs Technical solution of a virtual corporation is based on utilization of ICT, which is enabling virtualization of product manufacturing and ebusiness practice. A sense of business idea of a virtual corporation is prompt satisfying customer needs that are uncovered by marketing activities. Functioning of a virtual corporation in simplified manner is basically executed by the way described as the following. On the basis of a customer’s specific requirement, the virtual corporation initiates from the set of real manufacturing companies the supply network of cooperating partners, which in the sequence of the planned logistical chain meets the ordered requirement in the most effective way. It is supposed to also establish of network

Figure 3. The conceptual position of virtual corporation in relation to ILCs

758

Virtual Logistics from Outsourcing Logistics

of ILCs, by interlinking, by which practically a multi-integrated architecture of logistics center is constructed. The advantage of a virtual corporation is that the offered logistics services do not depend on the building of new logistical capacities, demanding in terms of capital investment, but they depend on effectively managed cooperation of available capacities of members. It is important to point out that virtual corporations require a different management approach (Franke, 1999). For example, psychological preparedness for virtual work should be taken into account to competency, for both managers and employees (Jackson & Klobas, 2005). The sense of virtual logistics centers can be seen mainly in mutual sharing of resources, information, knowledge and best practice, which leads to cost reduction for everybody. When implementing the model of virtual logistics center, it is necessary to take into account the following obstacles: •

•

•

The current competitors, providing services of the same character, may have natural fears that they could lose their independence when contemplating an idea that they should cooperate in the interest of providing complex logistics services Mistrust of possible synergic effects that would be capable to support effectively the development of logistical activities of the participating partners Incompatibility of logistical information systems

The provision of integrated logistics services requires the use of capacities of diverse resources, which include buildings, machinery and equipment, as well as the workforce. Individual or group use of available capacities depends on the customer’s specific requirement and on the most effective way of meeting it.

The concept of VLC is usually based on a modular architecture. In this intent, the architecture of VLC may comprise more sorts of resource, such as: • • •

Stable resources (land, buildings and machines placed in individual locations) Organisational and management resources Mobile resources

Information systems of logistical companies and the whole communication infrastructure of individual locations, including the management and servicing potential, can be considered to be organisational and management resources, which are coordinated by an information system. Mobile resources are all machines and equipment, human resources and financial capital of companies that can be considered realistically in the structure of a VLC being created. It looks that stable resources even so further significantly influence the structure and architecture of the VLC model. With their technical and economic parameters, stable resources limit the extent and territorial coverage of the provided basic and supplementary logistics services. The designed spectrum of logistics services should include the possibilities of the creation of integrated services by allocating supplementary services to the basic ones. By an analysis of links between locations and characteristics of provided logistics services through stable resources, it leads to knowing that the concentration of services in various decentralised locations may result in the growth of transport volumes. On the other hand, the decentralisation of locations of a virtual logistics center will decrease of the load of transport routes by the dissipation of transport routes between individual locations and by the optimisation of transport chains.

759

Virtual Logistics from Outsourcing Logistics

Future trends

conclusIon

To anticipate new trends in logistics management it seams to be pertinent to state a positive shift in the organisation of less effective discontinuous material flows into the area of economically effective continual and synchronised material flows. Another current tendency is the speeding up of international trade, which significantly influences the strengthening of the international character of logistical distribution chain and the prolonging of the distances they overcome. It means a substantial re-evaluation of the logistical practice of the wholesale, from securing storage operations and the subsequent distribution to complex logistical processes focused on the satisfaction of needs of individual retail units. The competitive advantage is manifested by the integration of logistics services and by the increase in the efficiency of material flows through virtual LCs. In relation with the term “virtual corporation,” it is possible to meet optimistic as well as pessimistic characteristics of that concept. If we start from visions of companies of the future, they are described as dynamically stable (Boynton, 1993). “Dynamically” in the sense that they are able to serve the widest range of customers and meet variable requirements for products. “Stable” in terms of the use of their long-term process capabilities and collective knowledge. The practice and theory of management offers a number of possibilities for the fulfilment of those attributes. They include cross-board organisational structures of companies and structures based on partnership in business with the related character of activities. According to the optimistic view, exactly those smaller forms will correspond with organisational structures that will be the most frequent ones in the future. From that point of view virtual corporations meet the requirement of a dynamic capability to meet variable requirements of the market.

Virtual reality signs in logistics bring with itself also some limitations, which are related with the key area of each company—the human resources. Conditions and factors that impact the crossdisciplinary learning in virtual teams have been addressed, for instance by Schaffer and Schmidt (2005). The disadvantage of the computer communication is that it does not allow the use of elements of non-verbal communication. Virtual teams are not allowed such a creative discussion as in the case of immediate communication, when inspiration for new ideas occurs on the principles of brainstorming. On the other hand, we can count with widening the number of contacts, but also with the decrease in the quality of the communication level. As a potential risk factor for the architectures of network organisations it is also necessary to consider computer terrorism. This problem is seriously being dealt with by software engineering, but it is not possible to eliminate it with an absolute certainty. It also outlines certain limitations of a virtual logistics centers. In a realistic view it is clear that the basis of virtual corporations are becoming intellectual capabilities, where traditional activities can be performed by an external supplier.

760

reFerences Birchall, D., & Lyons, L. (1995). Creating tomorrow’s organization—Unlocking the benefits of future work. London: Pitman Publishing. Boynton, A.C. (1993). Achieving dynamic stability through information technology. California Management Review, 35(2), 58-77. Hertz, S. (2001), Dynamics of alliances in highly integrated supply chain networks. International Journal of Logistics; Research and Applications, 4(2), 237-256.

Virtual Logistics from Outsourcing Logistics

Davidov, W.H., & Malone, M.S. (1992). The virtual corporation. New York: HarperBusiness. Edwards, P., Peters, M., & Sharman, G. (2001), The effectiveness of information systems in supporting the extended supply chain. Journal of Business Logistics, 22(1), 1-27. Fox, M.S., Barbuceanu, M., & Teigen, R. (2000). Agent-oriented supply-chain management. International Journal of Flexible Manufacturing Systems, 12(2/3), 165-188.

Meade, L. (1988). Strategic analysis of logistics and supply chain management systems using the analytical network process. Transportation Research Part E – Logistic and Transportation Review, 34(3), 201- 215. Meidute, I. (2004), The development and perspectives of logistics centers in Lithuania. In Proceedings of International Conference ReIStar ’04, Transport and Telecommunication Institute (pp. 323-327). Riga.

Franke, U. (1999). The virtual web as a new entrepreneurial approach to network organizations. Entrepreneurship & Regional Development, 11(3), 203-229.

Modrák, V., & Kiss, I. (2005). Information and communication technology in supply chain management. In M. Khosrow-Pour (Ed.), Advanced topics in information resource management (pp. 251-284). Hershey, PA: Idea Group Publishing,.

Franke, U.J., & Jockel, O. (2000). Virtual logistics: An exploratory case study (Working Paper SWP 3/00). Cranfield University, School of Management.

Moberg, C.R., Speh, T.W., &. Freese, T.L. (2003). SCM: Making the vision a reality. Supply Chain Management Review, 7(5), 34-39.

Fitzpatrick, W.M., & Burke, D.R. (2000). Form, functions, and financial performance realities for the virtual organization. SAM Advanced Management Journal, 65(3), 13-22. Gunasekaran, A., & Ngai, E.W.T. (2004). Virtual supply-chain management. Production Planning & Control, 15(6), 584-595. Jackson, P., & Klobas, J.E. (2005). Envisioning the virtual workplace: conceptualising virtualisation. In Proceedings of 13th European Conference on Information Systems: Information Systems in a Rapidly Changing Economy, Institute for Management of Information Systems, Regensburg, Germany. Retrieved from http://132.199.131.65/ ecis2005/chairs/PDF/261 Kalakota, R., & Robinson, M. (2001). eBusiness 2.0, Roadmap for Success. Reading, MA: Addison-Wesley.

Pawar, K.S., & Driva, H. (2000). Electronic training in the supply chain: A holistic implementation framework. Logistics Information Management, 13(1). Schaffer, S.P., & Schmidt, T.M. (2005). Crossdisciplinary learning in virtual teams. In S. Dasgupta (Ed.), Encyclopedia of Virtual Communities and Technologies (pp. 78-81). Hershey, PA: Idea Group Reference. Scott, J. (2000). Emerging patterns from the dynamic capabilities of Internet. Intermediaries Journal of Computer-Mediated Communication, 5(3). Serve, M., Yen, D.C., & Wang, J.C. (2002). B2B enhanced supply chain process: Toward building virtual enterprises. Business Process Management Journal, 8(3), 245-253.

761

Virtual Logistics from Outsourcing Logistics

Key terMs Electronic Data Interchange: The electronic communication of business transactions, such as orders, confirmations and invoices, between organizations. Logistics Center: An area that is administrated by one company and allows other companies to lease warehouse space to carry out warehousing and logistics services. Logistics Management: A part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.

Supply Chain: A worldwide network of supplier, factories, warehouses, distribution centers and retailers through which raw material are acquired, transformed, and delivered to customers (Fox et al., 2000) Supply Chain Management: The integration of business process from end users through original suppliers that provides products, services, and information that add value for customers (Moberg et al., 2003). Virtual Corporation: An organization that is created from a network of suppliers, manufacturers and administrative services to accomplish specific objectives, such as flexibility and responsiveness (Fitzpatrick & Burke, 2000). Virtual Logistics: A management process that consistently obtains and co-ordinates critical logistical resources provided primarily by virtual corporation members, but also by externals.

This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik & M. Cunha, pp. 1805-1811, copyright 2008 by Information Science Reference (an imprint of IGI Global).

762

763

Chapter 2.22

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider Kwok Hung Lau Royal Melbourne Institute of Technology University, Australia Wun Leong Ma Royal Melbourne Institute of Technology University, Australia

AbstrAct As a result of globalization, supply chains of many large business organizations nowadays tend to cover wider geographic areas spanning across different countries and continents. The growth in length and complexity gradually replaces the traditional linear supply chains with extended supply networks comprising not only suppliers, manufacturers, distributors, and end customers, but also service providers. With the increasing use of third-party logistics (3PL) providers by international firms seeking integrated logistics services, many global 3PL providers are forming partnerships with large corporations to take care of the latter’s logistics operations in different regions. The selection of the right 3PL provider for alliance is therefore paramount to the success of global supply chain management. This article

investigates the significance of this subject and proposes a supplementary framework for evaluation of 3PL providers as global logistics partners for international firms. The framework focuses on the core competencies of 3PL providers and their abilities to attain economies of scale helping users achieve their outsourcing objectives.

IntroductIon Rapid advancements in information and communication technology (ICT) in recent years, coupled with the collapse of entry-to-market and other trading barriers, have changed significantly the way organizations operate in terms of business model and operating scale (Ritchie & Brindley, 2002). Globalization, lead-time reduction, customer orientation, and outsourcing are

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

some major changes contributing to an increasing interest in advanced logistics services and global supply chain management (Hertz & Alfredsson, 2003). Successful global logistics depends heavily on communication and transportation. Improved communication between different business partners through the use and sharing of real-time information facilitates the logistics of production and inventory over wider geographic areas. Efficient transport arrangement, such as volume consolidation and cross docking, makes possible the actual transactions between nodes (Bookbinder, 2005). Owing to the increased levels of resource requirement, complexity, and risk in running global logistics, many firms tend to outsource their logistics operations to third-party logistics (3PL) providers and focus on their core businesses. Successful management of global supply chains therefore requires radical changes in supply chain structure, business processes, and relationships with business partners particularly logistics service providers. Traditionally, supply chain is relatively linear in structure (Figure 1). A typical manufacturing supply chain involves a few tiers of suppliers, the manufacturer (the focal company), a few tiers of distributors (including wholesalers and retailers), and finally the end customers. Materials mainly flow from upstream to downstream (i.e., from suppliers to end customers) with a small reverse flow of returns while information tends to flow in both directions. Transportation is provided either in-house by the different parties

separately or outsourced to different 3PL providers (see for example Ballou, 2004; Bowersox, Closs, & Cooper, 2002; Chopra & Meindl, 2007; Coyle, Bardi, & Langley Jr., 2003; Wisner, Leong, & Tan, 2005). With globalization and disintermediation as a result of advancement in ICT, the linear supply chain model and the associated uncoordinated logistics operations can no longer meet the demand of customers for higher efficiency, shorter lead time, and wider geographic coverage. The supply chain tends to become networked (Figure 2) with the focal company as the hub and a major 3PL provider looking after the logistics operations of the whole supply chain for the focal company in different regions (Ritchie et al., 2002; Simchi-Levi, Kaminsky, & Simchi-Levi, 2003; Waters, 2003). The importance of logistics and supply chain management and the increasing use of 3PL providers are clearly indicated in the latest global third-party logistics survey conducted by Georgia Institute of Technology, Cap Gemini LLC, SAP, and DHL (Langley Jr., Allen, & Colombo, 2006). The 2006 survey findings show that 85% of the North American respondents, 89% of Western Europe, 88% of Asia-Pacific, and 95% of Latin America agree that “logistics represents a strategic, competitive advantage for our company” (p. 6). Across all the four regions surveyed, the most frequently outsourced services include transportation (90%), warehousing (74%), customer clearance and brokerage (70%), and forwarding (54%). The survey also reveals

Figure 1. A traditional linear supply chain model Information flow Material flow Suppliers' suppliers Suppliers' suppliers Suppliers' suppliers

764

End customers Suppliers

Manufacturer

Distributors

End customers End customers

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Figure 2. A networked supply chain model Information flow Material flow 1st-tier suppliers 2nd-tier suppliers

Wholesalers

Manufacturer 1st-tier suppliers

End customers Retailers

3PL provider Logistics service

a growing trend of outsourcing. The spending in 3PL services (2006 against 2009-2011) is projected to increase by an average of 8% from 48 to 56% in North America, 7% from 64 to 71% in Western Europe, 6% from 63 to 69% in AsiaPacific, and 8% from 39 to 47% in Latin America. Furthermore, there is a continuing trend of 3PL users to rationalize or reduce the number of 3PL providers they used suggesting that 3PL users are seeking integrated logistics services, i.e., services incorporating multiple logistics functions such as warehousing, transportation, and channel assembly offered as a package. This finding ties in with the frequent mergers, acquisitions, and consolidations in the 3PL sector in recent years leading to the emergence of “global 3PL providers.” Prominent examples include DHL and Exel; Kuehne & Nagel and USCO, UPS and Fritz and Menlo Forwarding, Deutsche Bahn and Bax Global, Uti Worldwide and Standard Corporation, and PWC Logistics and Geo-Logistics (Langley et al., 2006). There are many advantages in logistics outsourcing, which refers to the carrying out of a company’s logistics activities by a third-party operator. The most common benefits are saving in cost, reduction in risk, increase in capacity, and improvement in service quality. Others include time savings, cash infusion, freeing up in-house staff, focusing on core activities,

talent availability, access to specialists, business process re-engineering, greater flexibility, greater productivity, and bigger geographical coverage (Burdon & Bhalla, 2005; Embleton & Wright, 1998; Kakabadse & Kakabadse, 2002; Lau & Zhang, 2006). In theory, logistics outsourcing should enable firms to access their 3PL providers’ expertise and specialist skills. It should also bring cost savings to firms through economies of scale achieved by their 3PL providers via transaction bundling and volume consolidation (Beaumont & Sohal, 2004; Bhatnagar, Sohal, & Millen, 1999; Rabinovich, Windle, Dresner, & Corsi, 1999). In other words, firms are making use of their 3PL providers’ core competencies-generally refer to what a company is specialized in or good at (Javidan, 1998; Prahalad & Hamel, 1990)–and cost efficiencies through economies of scale–commonly refer to efficiency gained from increasing scale of operation (Campbell, 1990; Fleischmann, 1993; Jara-Díaz & Basso, 2003)--to achieve logistics outsourcing goals and objectives. This belief is supported by the study of five big European companies by Brandes, Lilliecreutz, and Brege (1997) on the reasons and process of outsourcing. Following this argument, core competencies of 3PL providers and their abilities to achieve economies of scale can therefore be regarded as two of the major critical determinants of logistics outsourcing success.

765

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Table 1 lists some of the major objectives of logistics outsourcing and the outcomes expected from the activity. It can be seen that the success of the first objective depends on the 3PL provider’s ability to achieve economies of scale for its user while the remaining ones rely on the expertise and capabilities of the 3PL provider. In short, the underlying assumption for successful logistics outsourcing is that the service provider is competent in its business. Providing logistics services should be the core competencies of the 3PL provider that supplement its user’s deficiency in this area. This is particularly significant for international firms in managing their global supply chains. Competent 3PL providers are able to pool skilled professionals and other useful resources at low costs and execute the same services repeatedly for their uses over the globe. The generation of cumulative experience through scale and scope economies resulting in better, varied, and faster services at lower costs is essential to efficient global supply chain management. Such accrual of advantages would not have been possible had the clients executed the activities in their own premises (Kedia & Lahiri, 2007).

In the light of the growing demand for integrated logistics services from international firms, this article aims to correlate the different logistics outsourcing relationships with the two major factors of success, namely core competencies and ability to achieve economies of scale. The importance of finding a compatible 3PL provider in the management of a global supply chain is also discussed and a supplementary framework for the selection of integrated logistics service provider is proposed. A longitudinal case study is used to examine the impacts of core competencies and economies of scale (or the absence of them) on logistics outsourcing. The findings provide generic parameters to help develop the supplementary integrated logistics service provider evaluation framework. Section 2 of the article reviews the literature in a few areas including vertical and horizontal logistics alliances, international outsourcing partnerships, and strategic development of 3PL providers, as well as the latest studies in the evaluation of 3PL providers. Section 3 describes the methodology employed for the research. A summary of the findings from the case study, a thorough analysis of the observations, and a discussion of the implications are provided in Sections 4 to 6. Section

Table 1. Major objectives of logistics outsourcing Objective of logistics outsourcing

766

Expected outcome

To reduce costs of logistics operation

Reduction in capital investment in infrastructure, assets, human resources, and other related costs

To lower risk

Reduction in risk of inefficient capital investment

To reduce management time and resources for logistics operation

Release of management to focus on core business, reduction of human resources, and related administrative costs

To enhance reliability of delivery

Provision of on-time delivery and accurate order fulfillment to customers

To improve quality of customer service

Provision of better and higher quality of customer service than what was provided prior to outsourcing

To access best practices in logistics operation

Use of best practices and latest technologies in carrying out the outsourced activities

To enhance flexibility to changes initiated by changing customer demand and market condition

Provision of flexible service for varying scale of operation and change management capability to meet the need of customers

To achieve innovation and continuous improvement in logistics operation

Availability of IT technologies to enable coordination, synchronization and optimization of logistics operations

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

7 proposes a supplementary evaluation framework that builds upon the works of previous research and the current case study. It is hoped that the proposed framework can assist international firms in making better logistics outsourcing decisions through proper assessment of the core competencies of the potential 3PL providers and their abilities to achieve economies of scale. The article concludes in Section 8 with a discussion on the limitation of the study and the direction for further research.

lIterAture revIew As the 2006 global third-party logistics survey reveals, the use of 3PL providers by international firms will continue because of the ever-increasing globalization of their businesses. As a result, most 3PL providers desire to move their customers from a conventional customer-supplier relationship to a true “partnership” (Langley, et al., p. 5). Taking the definition by the European Commission, thirdparty logistics is defined as “activities carried out by an external company on behalf of a shipper [or client] and [they] consist of at least the provision of management of multiple logistics services. These activities are offered in an integrated way, not on a stand-alone basis. The co-operation between shipper and the external company is an intended continuous relationship [lasting for at least one year]” (as cited in Carbone & Stone, 2005, p. 496). For a global supply chain, the major 3PL provider can take over the entire logistics management as well as operations from its user. These include management, analysis, and design of activities associated with transport and warehousing (e.g., inventory management), information related activities (e.g., tracking and tracing), as well as value-added activities (e.g., secondary assembly of products and supply chain management) (Laarhoven, van Berglund, & Peters, 2000). As a result of globalization, the international market for logistics and transport services be-

comes larger and complex. International firms rely more and more on 3PL providers for logistics solutions. According to the 2006 global third-party logistics survey, 3PL users are sometimes frustrated with apparent differences in doing business with specific 3PL providers from one region to another. The use of a “global 3PL provider” not only rids the user of the management headache but also enables the user to capture local benefits such as low labour costs so as to help reduce the net landed cost of its products (Langley, et al., 2006, p. 16). Therefore, there is a growing trend of vertical logistics alliances in which the 3PL provider and the user maintain a long-term formal or informal relationship to render all or a considerable number of logistics activities. The 3PL provider sees itself as a long-term partner in this arrangement to provide a comprehensive range of services to the user (Bagchi & Virum, 1998). A vertical alliance includes planning and overseeing the inbound and outbound freight flows in the nodes of the logistics network. In the alliance, the 3PL provider looks for improvements to the service levels, inventories management, and order processing for the user company (Peters, Cooper, Lieb, & Randall, 1998). To acquire the necessary capabilities and a global presence required for vertical alliances, many 3PL providers pursue horizontal alliances through horizontal cooperation, merges and acquisitions. Horizontal alliance can be a means to spread costs and risks and to increase the scope of services. This practice is attractive when costs of developing new services and solutions for complex problems facing customers in dynamic markets are too high for a single 3PL provider (Carbone et al., 2005). Horizontal cooperation is defined by the European Commission (2001) as concerted practices between companies operating at the same levels in the market. Short-term horizontal alliances can be formed between 3PLs, IT consultants, and software vendors. The search for higher capability of offering “global consulting”

767

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

in supply chain management is seen by some as evidence of evolution from 3PL to 4PL--a term coined by Accenture to refer to “a supply chain integrator that assembles and manages the multiple resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution” (as cited in Carbone et al., 2005, p. 506). Permanent horizontal alliances through merges and acquisitions enable the 3PL provider to have wider geographic coverage and control of major traffic flows through the creation of efficient transport chains. The alliances also provide sufficient size to cope with high investment cost in physical infrastructure and ITC for efficient operation. Economies of scale are also permitted through business process re-engineering and entry into new market segments. Through the acquisition of specialist capabilities, especially higher valueadded services, strategic and operational synergies can also be achieved (Plehwe & Bohle, 1998). With closer cooperation between 3PL provider and the user, the role of 3PL provider also changes from provision of standard logistics services to development of customer solutions. Based on the balance between general problem solving capability (GPSC) and the degree of customer adaptation (DOCA), Hertz et al. (2003, p. 141) propose four different development strategies for 3PL providers as follows: •

•

768

Standard 3PL provider (relatively high GPSC and relatively high DOCA): The 3PL provider offers a highly standardized modular system to customers with relatively simple combination of standardized services such as warehousing, distribution, pick and pack, etc. Service developer (high GPSC and relatively high DOCA): The 3PL provider offers an advanced modular system of a large variety of services such as specific packaging, crossdocking, track and trace, and special security system, etc., and a common IT-system used for all customers.

•

•

Customer adapter (relatively high GPSC and high DOCA): The 3PL provider offers totally dedicated solutions involving the basic services for each customer. For example, the service provider might take over the customer’s total warehouses and the logistics activities. The 3PL provider is seen as a part of the customer organization. Customer developer (high GPSC and high DOCA): The 3PL provider develops advanced customer solutions for each customer by handling the entire logistics operations. Value-adding services and enhancement of knowledge are common and the role of the 3PL provider is more like a consultant.

In vertical alliances, the 3PL provider acts as a customer developer involving a high integration with the user often in the form of taking over its whole logistics operations. Its role is a logistics integrator to offer integrated logistics solutions to the user and share the risks and rewards of the logistics management with the user. Similarly, Kedia et al. (2007) also look at international outsourcing of service (IOS) as a form of partnership that can be classified into three different types: tactical, strategic, and transformational. With the increase of value proposition from low to high to highest and the involvement of provider from arm’s length to deep to intense, the IOS partnership moves from tactical to strategic to transformational. Tactical IOS partnership is basically transaction oriented aiming at cost reduction. Involvement of the service provider is rule-based and contract-oriented. Strategic IOS partnership emphasizes on value enhancement required to enable a company to remain locally responsive as well as globally integrative. It is usually achieved through building long-term relationships with a few best-in-class integrated service providers that possess cumulative experiences and scope of organizational learning for their users. In vertical alliances, a transformational IOS

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

partnership is the ultimate goal. From the user’s point of view, the partnership helps the user share its risk with the provider because of the reduced need for capital expenditure on infrastructure and manpower development. It also enhances the user’s flexibility as the logistical competencies of the provider assist in providing faster response in a globalized business environment. Finally, transformational IOS partnership provides opportunities for the user to redefine its businesses through transformation (i.e., changes of business model) or business process re-engineering (i.e., changes of practice). Transformational IOS partnership provides opportunities to enhance the user’s overall competitiveness through paradigm shift and is therefore wider in scope than mere business process reengineering, which is mainly to improve efficiency of certain logistic activity. The success of the relationship depends on the trustworthiness of partners and the culture distance between the two parties. As vertical alliance impacts significantly on successful global supply chain management, the selection of the right 3PL provider is of utmost importance. Studies in this regard are quite abundant (see for example Beaumont et al., 2004; Bhatnagar et al., 1999; Boyson, Corsi, Dresner, & Rabinovich, 1999; Langley, et al., 2006; Lynch, 2000; Razzaque & Sheng, 1998; Stock, Greis, & Kasarda, 1998). Jharkharia and Shankar (2007) reviewed the literature and summarized some of the most commonly used criteria for the selection of 3PL provider as follows: compatibility with the users, cost of service, quality of service, reputation of the company, long-term relationship, performance measurement, quality of management, information sharing and mutual trust, operational performance, IT capability, size and quality of fixed assets, delivery performance, financial performance, market share, geographical spread and range of services provided, and flexibility in operations and delivery. Among these criteria, many are related to the core competencies of the 3PL provider as well as its ability to achieve economies of scale and pass the cost savings back to the user.

In the light of the previous review, this research aims to investigate how core competencies of 3PL providers and their abilities to achieve economies of scale determine the type of partnerships they can enter with their users and how the two factors contribute to the success of logistics outsourcing.

Methodology This research is founded on a longitudinal case study of the outsourcing experiences of a global company focusing on the service providers’ core competencies and abilities to achieve economies of scale. In general, case studies are less vigorous than empirical studies. Furthermore, because of the use of small sample, the case study approach also faces a limitation in generalizing the findings to reflect the situation of the whole industry. Nevertheless, the approach is suitable for exploratory and explanatory research like the one described in this article to provide a preliminary in-depth investigation of a problem (Benbasat, Goldstein, & Mead, 1987; Walsham, 1995; Yin, 1994). The intention is not to generalize the findings but to use them to better understand the crux of a problem and to propose recommendations for solution as well as directions for further research. The global company in the case study provides information services to its clients all over the world. As its core activity is information gathering and dissemination, it relies on outsourcing to handle its non-core activities such as logistics operations. Between 1989 and 1999, the company changed three 3PL providers. The purpose of the case study is to unearth the reasons for the repeated outsourcing failures and investigate how they can be attributed to lack of core competencies and inabilities to achieve economies of scale. Through the logistics manager of the company who oversaw the entire outsourcing process and managed the three 3PL providers during the period, detailed first-hand information about the case was collected for analysis which helps determine if

769

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

core competencies of the 3PL providers and any achievement of economies of scale existed. Table 2 shows the source and the usage of information in the case study. For reason of commercial confidentiality, pseudonymous names have been used. The parties involved in this case include the user company X and its three logistics service providers (A, B, and C). All the three freight forwarders used by X are international companies with global presence and local offices in Singapore (Table 3). As leading international information service provider supplying news and financial information to its clients worldwide, X installs computers and terminals

at its clients’ premises to provide the subscribed data and information. With regional headquarters set up in Singapore, X has outsourced its logistics operations to freight forwarders since 1989. In the 1980s, outsourcing practice in Singapore was still at its infancy. Many 3PL providers were actually freight forwarding companies. The services that X outsourced include warehousing, inbound and outbound logistics, inventory management, local transportation, international freight delivery, and regional distribution of subscriber equipment. X awarded the logistics service contracts to the 3PL providers on a “2+1”-year basis (i.e., two years initially with a scope for extension of one

Table 2. Source and usage of information in the case study Source of information

Usage of information in the case study

Use company’s logistics outsourcing analysis reports

To identify the logistics activities outsourced, the expectations of the user company from the 3PL providers, and the performance metrics employed in monitoring the logistics services provided.

Proposals submitted by the 3PL providers for the logistics outsourcing contracts

To understand the capabilities of the 3PL providers in providing the required logistics services, the cost figures, and other statistics provided by the 3PL providers for evaluation, the track records and the reputations of the 3PL providers in the industry.

User company’s evaluation reports for the selected 3PL providers

To understand why the 3PL providers were selected and determine if the user company had performed the standard evaluation procedure properly.

Performance records of the 3PL providers during their respective contract periods

To examine the performances of the 3PL providers against the expected targets and identify the problem areas and their causes.

Performance evaluation reports at the end of the contract periods

To review the user company’s overall comments on the performance of the 3PL providers during their respective contract periods and understand the reasons for the termination of contracts.

Table 3. Profiles of the 3PL providers in the case study 3PL name

770

Country based

Contract period

Specialization

Service provided to X

A

UK public-listed company

1989 – 1995

International airfreight forwarding and local transportation

• Day-to-day management of X’s logistics activities including warehousing, inbound and outbound logistics, local transportation, international airfreight forwarding, and inventory management • Order processing and customer service

B

US public-listed company

1995 – 1997

International freight forwarding and heavy weight movement

Same as above

C

Singapore-based private company

1997 – 1999

International air and sea freight forwarding

Same as above

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

year). The contract required the 3PL provider to manage all the logistics operations of X including the provision of warehouse space, facilities, manpower, equipment and tools necessary for the activities. The service was charged at a fixed price (i.e., a lump sum) and a variable price scheme according to the type of service and activity performed. X hoped that it could reduce its investment in resources and achieve flexibility through logistics outsourcing. It expected the 3PL provider to deliver the subscriber equipment from the point of receipt to its clients in the most efficient and economic manner. In other words, X expected the 3PL provider to achieve economies of scale for its logistics operations and reduce its logistics expenditure. To facilitate analysis, an ideal situation of integrated logistics outsourcing (i.e., the 3PL provider) being a customer developer (Hertz et al., 2003) and the outsourcing relationship being transformational (Kedia et al., 2007), is used as a basis for comparison to gauge the performance of the three 3PL providers in the case. It is assumed that logistics functions such as transportation, inventory management, capacity planning, etc. should be coordinated and managed by the 3PL provider with logistical competency. Information and material flows should be streamlined and integrated by the 3PL provider to achieve economies of scale through consolidation of transactional and physical movement activities. Furthermore, the 3PL providers should be able to develop unique customer solutions and redefine business processes for its user through transformation or business process re-engineering thereby help its user gain efficiency and cost effectiveness. Through the comparison, it can be established whether core competencies of the 3PL providers and their abilities to achieve economies of scale for user existed.

FIndIngs Analysis of the case reveals that the three 3PL providers failed to bring efficiency gains to X as expected despite of a full outsourcing of logistics operations. Problems with the 3PL providers as listed in Table 4 show that they did not operate, coordinate, or manage X’s logistics activities as customer developers. Their IOS relationships with X were mainly tactical. Apart from C, the other two 3PL providers did not provide complete centralized coordination and management of logistics activities for X leading to duplicated effort and wasteful operation on some occasions. The lack of logistics information systems and other IT support from the 3PL providers also prohibited them from integrating and streamlining the material and information flows of X to achieve higher efficiency. These outcomes can be attributed to a few common practices. First, all the three 3PL providers did not invest adequately in resources to develop their capabilities and competencies. They did not possess their own warehouses to achieve economies of scale or logistics information systems to enable better planning, coordination, and management of logistics activities for X. Second, the quality of their staff was less than satisfactory (e.g., untrained staff) and their management of X’s logistics operations was ineffective (e.g., no quality or ISO9000 compliant process). Finally, they provided little or no IT support to manage X’s supply chain to maintain efficient information flow or to coordinate material flow. The lack of own warehouses and the reliance on leased facilities have limited the capabilities of the three 3PL providers to offer cost benefits to X through economies of scale. Since X spent a significant portion of its logistics cost in warehousing and related activities, its objective to reduce cost and to gain considerable savings through

771

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Table 4. Problems with the 3PL providers in the case study Area

Problems with A

Problems with B

Problems with C

Warehousing

• Did not possess own warehouse. Used leased private warehouse for X with no sharing of warehouse transaction cost to achieve economies of scale. • Cost of usage all charged to X and not shared among other customers. Did not achieve economies of scale. • Did not possess own WMS to optimize warehouse operation.

• Did not possess own warehouse. Used private warehouse especially leased for X (i.e., subcontracting). • X solely funded the leased warehousing and the related services. No consolidation of cargo with other customers of B or sharing of fixed cost to achieve economies of usage.

• Did not possess own warehouse. Used private warehouse especially leased for X (i.e., subcontracting). • Cost of usage all charged to X and not shared among other customers. Did not achieve economies of scale.

Staffing

• No pooling of staff from other business units to share the fixed staff cost of providing service to X. Temporary staff members were recruited to provide the manpower resources at the leased warehouse for X. • Inexperienced warehouse operation staff. X had to provide training to the staff of A to use its MRP II system. • Staff lacked basic logistics knowledge. X had to provide onthe-job training to the staff of A which had no in-house training program of its own. • High staff turnover rate (>40%).

• B’s logistics team for X comprised full-time and part-time staff with a 40% turnover that seriously affected service continuity and performance (e.g., 20% variance was found in annual stock take). • X had to provide training to the staff of B to use its MRP II system. • Much time was spent in re-training new comers and handing over job duties as a result of frequent staff changes.

• Staff either pooled from internal units or through external recruitment. However, there was no sharing of staff cost. • X had to provide on-the-job trainings on inventory management and order processing to the logistics team members of C. • High staff turnover of 50% occurred mainly at the supervisor level. Poor staff stability seriously affected day-to-day operation. Unsatisfactory performance and low customer service level were reported throughout the contract period (e.g., 10% variance was found in annual stock take).

Transportation

• Did not possess own vehicle fleet. Used subcontractors for delivery service. Little control and no economies of scale were achieved. • Did not possess own TMS for efficient scheduling and route planning. • Poor tracking system (used telephone only). Failed to provide a high level of on-time delivery service to customers as required by X.

• Used a combination of own and leased vehicle fleets. Economies of scale were achieved through consolidation of cargos for X and other customers of B. However, the benefit gained was not passed back to X as cost savings. • Did not posses own TMS for efficient scheduling and route planning. • No monitoring of performance of subcontractors to ensure they worked up to the service level required by X.

• Possessed own transport fleet and full-time staff to handle all transport activities with a dedicated team to serve X. However, capacity was not fully utilized and economies of scale were not achieved. • Possessed own TMS with GPS technology to track and trace its transport fleet resulting in faster turnaround time.

Management

•

• No major problems identified.

• No major problems identified.

• •

Not able to provide one-point solution to client’s problem. Vertical control in each department created unnecessary delays in communication and action. Lack of unity of control. Fragmented management of inventory and distribution resulted in duplicated effort and wasteful operation.

continued on following page

772

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Table 4. continued Area IT support

Problems with A • Service not provided.

Problems with B

Problems with C

• B possessed own team of IT professionals but failed to develop a logistics information system to integrate with X’s legacy system for end-to-end supply chain management as stated in its proposal submitted to X. • Technical complexity, prohibitive cost, and inadequate numbers of participating customers for cost sharing were the main causes of the failure.

• Did not possess own IT staff but hired external consultants for any IT system project. • In the outsourcing contract, C proposed to provide a low cost IT solution to replace X’s own MRP II system but the project had never taken off.

outsourcing was not realized basically. Apart from some bulk freight rate savings obtained through volume consolidation, the major benefit X enjoyed in the logistics outsourcing was a reduction in staff cost. However, the savings were offset by the poor and unsatisfactory service performance of the 3PL providers manifested by their high staff turnovers, incompetent management, and inefficient services.

•

AnAlysIs • X’s case unfolds the following common issues with the three 3PL providers which suggest that they did not actually possess core competencies in all the services they provided and they were not able to achieve economies of scale as expected: •

Performance of the 3PL providers was good in international freight forwarding but only average or even poor in other logistics activities. Apart from freight forwarding, the three 3PL providers acted more like a resource provider than an integrated logistics service provider with little capability to add value to their user’s supply chain. They were more like generalists providing little specialist skills or specialized equipment or systems for the outsourced services.

•

Workers of the three 3PL providers were incompetent due to poor training and high turnover rate. Many of them lacked the basic knowledge or skills to perform their jobs well. The main role of the three 3PL providers in most activities was to supply manpower resources. As a result, the three 3PL providers failed to reduce the management responsibility and time of their user because of ineffective communication and lack of problem-solving and decisionmaking skills. Owing to the lump sum payment arrangement for warehousing service, there was no cost benefit arising from economies of scale through the sharing of use of facilities. In general, the services were not provided across the whole customer bases of the 3PL providers and were charged at fixed price instead of a cost-sharing basis. The three 3PL providers were generally weak in IT capability to provide support to X. Their scale of operation and financial strength did not permit the provision and sharing of such service across all their users.

The above issues are all related to the amount of resources invested by the 3PL providers, the capabilities of utilizing their resources, the competencies in providing efficient logistics services,

773

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

and the abilities to bring cost savings to their users through increasing scale of operation and size of customer base. They boil down to the 3PL providers’ core competencies and abilities to achieve economies of scale. The findings of the case study suggest that although the 3PL providers might have the resources and capabilities to offer different logistics services, they were not necessarily competent in all the logistics activities they performed. Core competencies developed in one area as a result of long establishment, large investment, accumulated skills, and cumulative experience did not automatically translate into core competencies in other areas of logistics operation. To the 3PL providers, core activities might be the businesses they could do best or make the greatest profit. To their users, however, the 3PL providers’ core competencies should be their unique expertise and experiences that could assist their users in conducting the outsourced logistics activities in the most efficient and cost effective manner. This mismatch became the root of the disappointment and the cause of the repeated outsourcing failures in the case of X. The issues previously identified are not necessarily specific to the case of X or a particular industry. In fact, the lack of resources, capabilities, or core competencies are common weaknesses of many companies to various extents. From a 3PL user’s perspective, however, the success of logistics outsourcing hinges on the condition that the 3PL provider will not be plagued by these problems. A logical conclusion is that these generic issues have to be thoroughly addressed in the selection of integrated logistics providers.

dIscussIon X’s case reveals the significance of examining the core competencies of the potential 3PL providers and their abilities in achieving economies of scale

774

before making the final outsourcing decision. To a large extent, X should be responsible for its logistics outsourcing failures. The company has an obligation to understand what core competencies of the 3PL providers are required in order to achieve its outsourcing objectives. It should also establish that the selected 3PL providers actually possess the required competencies prior to signing the contracts. X might understand well its own logistics costs and level of customer service required. However, evidence suggests that it has not fully examined the 3PL providers’ capabilities and core competencies before requesting proposals. X selected its 3PL providers on the basis of price, range of services offered, and technical competency to provide facilities, equipment, and tools necessary for the running of its logistics operations. Using the Request for Proposal (RFP) approach, X aimed to shop for the best 3PL providers among its freight forwarders hoping that the 3PL providers could take over a wide range of its logistics functions at lower costs. However, most of the outsourcing benefits that X hoped for did not materialize because of a sharp disparity between X’s expectation and the actual performance of each of the three 3PL providers. In outsourcing its logistics functions, X did follow closely the standard procedures of outsourcing as outlined in Figure 3. The company conducted its competence analysis and mapping of activities properly (Stages 1 to 3) before requesting proposals from the 3PL providers (Stage 4). It also developed its own set of performance measures and cost parameters to evaluate the performance of the 3PL providers (Stages 5 to 7). The repeated termination of logistics outsourcing contracts (Stage 8) therefore suggests that simply following the standard procedures might not be adequate. More detailed guidelines would be required for the most critical stage (Stage 4) in which the eligible 3PL providers are evaluated and the most compatible one is selected.

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Figure 3. Standard procedures of the logistics outsourcing process stage 1: competence Analysis Separate core and non-core competencies of the firm.

stage 2: outsourcing Analysis

stage 3: contract Preparation

Identify non-core activities to be outsourced.

Establish outsourcing goals and objectives for preparation of agreement.

stage 6: transfer and control

stage 5: contract negotiation

stage 4: request For Proposal (rFP)

Transfer, monitor and control the outsourcing activities.

Negotiate contract and measures of outsourcing performance.

Identify qualified 3PL providers and select the most compatible candidate.

stage 7: Performance evaluation

stage 8: contract renewal/termination

Evaluate performance of the 3PL provider and provide feedback.

Continue with existing outsourcing relationship or replace the 3PL provider.

Despite the fact that core competencies and ability to achieve economies of scale are critical to the success of logistics outsourcing, there are few studies in the literature on the selection of 3PL providers focusing on what the core competencies of 3PL providers are and how they can achieve economies of scale in practice for the benefit of their users. For example, Arnold (2000) proposes an outsourcing model with design alternatives for manufacturing firms combining transaction cost economics with a core competency approach. His main objective, however, is to develop a “de-materialized company” (p. 28) for optimizing outsourcing design and management. Similarly, Hafeez, Zhang, and Malak (2002) provide a structured framework for determining the key capabilities of a firm using the analytic hierarchy process. Nevertheless, the framework is used mainly for identifying competency gaps within the firm with a view that the result might facilitate the making of outsourcing decisions. Momme (2002) proposes a framework for outsourcing manufacturing in which competence analysis is the first of the six phases outlined. However, the analysis focuses more on identifying the client’s own core activities than that of the supplier’s. It appears that there is little attempt to explore the core competencies of the supplier, which are supposed to complement the client’s non-core business skills. Also, the issue

of economies of scale has not been addressed in the proposed framework. It has yet to be proven that economies of scale achieved by the supplier, if any, would bring cost savings to its client. Similarly, Vaidyanathan (2005) recommends a framework to establish a set of criteria for the selection of 3PL provider using IT as the focus to peruse the core functionalities of 3PL provider such as inventory management, transportation, and warehousing. Nonetheless, core competencies and economies of scale are again not at the centre of discussion. In view of the above inadequacy, this article attempts to fulfil the existing gap by proposing a supplementary evaluation framework for the selection of 3PL provider focusing on the two foregoing critical factors.

ProPosed FrAMeworK X’s case reveals that resources and capabilities of the 3PL providers are essential elements of their core competencies in providing logistics services to their users. This finding is in line with the competencies hierarchy proposed by Javidan (1998) in which he contends that core competencies of a firm build upon its competencies which, in turn, depend on its capabilities to utilize its resources. Javidan (1998) defines the four levels of his competencies hierarchy as follows (p. 62):

775

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

• • • •

Resources are the inputs into the firm’s value chain; Capabilities refer to the firm’s ability to exploit resources; Competency is a cross-functional integration and coordination of capabilities; and Core competencies are skills and areas of knowledge that are shared across business units and resulted from the integration and harmonization of strategic business unit competencies.

The difficulty in rising from one hierarchy level to another (i.e., resources to capabilities to competencies to core competencies) increases with the ascent but the value to the firm also inflates in increasing magnitude. Javidan’s (1998) competencies hierarchy is a relatively simple and generic framework used mainly to relate a firm’s core competencies to building blocks like resources, capabilities, and competencies. The framework is not especially designed for identification of core competencies by itself. Instead, it is used to show the linkages between the building blocks and the firm’s strategic hierarchy comprising functional strategy, business strategy, corporate strategy, and mission statement. Nevertheless, the concept of competencies hierarchy, which is built upon resource-based view and theory (Barney, 1991; Grant, 1991; Peteraf, 1993; Wernerfelt, 1984), does provide a useful reference for an evaluation framework to access the core competencies of 3PL providers. The issues identified in X’s case presented in this article help define the dimensions of the array and supply the individual cell of the framework with ingredients. As X’s case reveals, quantity and quality of resources committed by the 3PL providers, capabilities to exploit the resources and directly control the outsourcing operations, and competencies in integrating and coordinating the logistics functions for users are critical determinants of success in maintaining the logistics outsourcing

776

relationship. As such, some of the issues identified in the case study, such as the use of owned or leased assets, full-time to temporary employee ratio, staff turnover and stability, and the use of subcontractor and consultant, etc., can in fact be translated into generic criteria to evaluate and assess the core competencies of 3PL providers in general. Basically, a successful 3PL provider should process certain amount of resources and capabilities in order to attain core competencies in providing logistics services and to transfer cost benefits derived from economies of scale to users. These resources and capabilities include fully controlled assets such as warehouse and transport vehicle fleet, qualified personnel and well-trained staff, specialized handling equipment for service such as warehouse automated storage system, track-and-trace system, etc., and a large customer base with sufficient volume of transactions to enable cost sharing. Based on the previous discussion, this article proposes a supplementary 3PL provider core competencies evaluation framework as shown in Figure 4. The framework makes use of the findings of the case study to develop a list of generic evaluation items grouped under “resources,” “capabilities,” and “competencies”--the building blocks of core competencies--and use them to examine if the 3PL provider’s core competencies are present. The “competencies” building block in the proposed evaluation framework is akin to the “competency” building block in Javidan’s (1998) competencies hierarchy. While “competency” in Javidan’s (1998) hierarchy refers to a cross-functional integration and coordination of capabilities (p. 62), the “competencies” building block in the proposed evaluation framework refers to the availability of integrated processes that reflect the ability of the 3PL provider to make use of its resources and capabilities to develop best-of-class practices. The proposed framework is not meant to replace any existing 3PL provider evaluation models such as the ones proposed by Momme and Hvolby (2002) and Vaidyanathan (2005). In making logistics outsourcing decisions, there are many factors

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Figure 4. A proposed supplementary framework for 3PL provider evaluation

777

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

other than core competencies and ability to achieve economies of scale to consider. They include cost, quality, service, performance, strategic fit, compatibility of organization culture, and financial stability, among others (Beaumont et al., 2004; Vaidyanathan, 2005). Therefore, the proposed framework only attempts to supplement the evaluation process upon the completion of the normal assessment procedure at the RFP stage. In using the proposed supplementary framework to evaluate the available resources of a 3PL provider, it is recommended that staff qualification and training, staff turnover and stability, ratio of full-time to temporary staff, percentage of assets owned or leased, etc. should be examined. Similarly, to evaluate the service provider’s capabilities, it is necessary to consider whether the 3PL provider has IT capabilities developed in-house or by consultants, whether logistics is truly its core business or just the main source of revenue, and whether the 3PL provider is a recognized leader in the industry, etc. To evaluate the 3PL provider’s competencies, its ability to achieve economies of scale and to pass the benefits back to its users, the presence of quality assurance procedures, benchmarking, dedicated management team for client to coordinate activities, the capability to manage its subcontractors and use their competences as leverage, and the availability of flexible price model, etc. are some of the criteria. Presence of quality processes and dedicated management team enable the 3PL provider to deliver high level of service to the user’s customers. The use of subcontractors can provide the 3PL provider with greater flexibility in transport management and capacity planning. Nevertheless, effective use of subcontractors’ core competencies as a leverage to build up the 3PL’s own core competencies hinges on a good management of these subcontractors. Scale of operation and size of customer base usually affect a 3PL provider’s ability to help its user to cut cost through economies of scale. Although cost savings can be achieved through multiple offering of services to different users, order consolidation hence volume

778

discount, and sharing of usage of resources and assets, users will not be benefited if the costs of usage of facilities are not shared across the 3PL provider’s customer base. Therefore, the availability of variable price model allowing the spreading of fixed costs across multiple users forms another evaluation criterion under the proposed framework. It is believed that a categorical item-by-item evaluation (i.e., checking against pre-determined parameters) using the proposed framework should help identify the 3PL provider as a resource owner or a resource provider, a specialist or a generalist, and a problem solver or only a process provider. This will enable the 3PL user firm to better understand what outsourcing relationship (i.e., tactical, strategic, or transformational) should be developed and what role the 3PL provider could play in the outsourced logistics activities (i.e., a standard 3PL provider, a service developer, a customer adaptor, or a customer developer). The categorization also helps determine the strengths and weaknesses of the 3PL provider in terms of its investment in resources and innovation, proven skills and knowledge, and ability to coordinate and integrate logistics processes. This will facilitate the 3PL user firm in checking whether the 3PL provider has the capabilities and competencies to actually meet its user’s logistics outsourcing needs, as well as the cumulative experience and scope for organizational learning that are necessary for forming vertical logistics alliance. Despite the fact that logistics is usually not the core business of 3PL user firms, the step-by-step approach proposed in the supplementary framework permits the recognition of the 3PL provider’s core competencies in a more systematic and objective manner. By applying the proposed evaluation framework at the RFP stage together with other evaluation processes to all the eligible 3PL providers, the outsourcing firm would be able to determine which provider could help the company achieve its logistics outsourcing goals and objectives and provide the best scope for long-term transformational IOS partnership through vertical logistics alliance.

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

conclusIon This article argues that “core competencies” and “economies of scale” are two critical factors, among others, that contribute to the success or failure of logistics outsourcing, which is paramount to modern-day global supply chain management. Core competencies of a 3PL provider build on the amount of resources it possesses, its capabilities to fully exploit these resources, and its competencies in utilizing the capabilities to provide efficient and cost effective integrated logistics services to users. The proposed supplementary evaluation framework presented in this article can assist logistics outsourcing firms to assess the core competencies of eligible 3PL providers at the RFP stage. The framework is meant to supplement the standard evaluation process instead of replacing any procedure. It provides a systematic method to determine if core competencies of a 3PL provider are present and whether they match with the firm’s logistics outsourcing needs. Through a categorical item-by-item evaluation process, the framework could assist outsourcing firms in determining what logistics outsourcing relationship should be formed and what role the 3PL provider could play in the partnership. The evaluation would not only help determine whether the 3PL provider could achieve the logistics outsourcing goals and objectives of its user but also reveal if there is scope for vertical logistics alliance that is critical to successful global supply chain management. As this study involves only one case with three 3PL providers to identify generic issues in logistics outsourcing, the findings might not be totally comprehensive although they have helped establish essential parameters for the proposed evaluation framework. To fully investigate the impact of core competencies and economies of scale on outsourcing success, more studies are needed to explore the current practices of 3PL providers in different industries and regions for comparison. This might be incorporated into annual global outsourcing surveys like the one

currently conducted by Georgia Institute of Technology, Cap Gemini LLC, SAP, and DHL (Langley, et al., 2006). The findings should be useful in improving or refining the proposed evaluation framework to extend its applicability to the practitioner community.

AcKnowledMent The authors of this article sincerely acknowledge the valuable comments and suggestions of the three anonymous reviewers, which have helped enhance the quality of the article over its earlier version.

reFerences Arnold, U. (2000). New dimensions of outsourcing: a combination of transaction cost economics and the core competencies concept. European Journal of Purchasing & Supply Management, 6(1), 23-29. Bagchi, P. K., & Virum, H. (1998). Logistical alliances: Trends and prospects in integrated Europe. Journal of Business Logistics, 19(1), 191-213. Ballou, R. H. (2004). Business logistics/supply chain management: A balanced approach. (5th ed.). NJ: Pearson, Prentice Hall. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120. Beaumont, N., & Sohal, A. (2004). Outsourcing in Australia. International Journal of Operations & Production Management, 24(7), 688-700. Benbasat, I., Goldstein, D. K., & Mead, M. (1987). The case study research strategy in studies of information systems. MIS Quarterly, 11(4), 369-386. Bhatnagar, R., Sohal, A. S., & Millen, R. (1999). Third party logistics services: A Singapore perspective.

779

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

International Journal of Physical Distribution & Logistics Management, 29(9), 569-587. Bookbinder, J. H. (2005). Global logistics. Editorial. Transportation Research Part E: Logistics & Transportation Review, 41(6), 461-466. Burdon, S., & Bhalla, A. (2005). Lessons from the untold success story: Outsourcing engineering and facilities management. European Management, 23(5), 576-582. Bowersox, D. J., Closs, D. J., & Cooper, M. B. (2002). Supply chain logistics management. Boston: McGraw Hill. Boyson, S., Corsi, T., Dresner, M., & Rabinovich, E. (1999). Managing third party logistics relationships: What does it take. Journal of Business Logistics, 20(1), 73-100. Brandes, H., Lilliecreutz, J., & Brege, S. (1997). Outsourcing--success or failure?: Findings from five case studies. European Journal of Purchasing & Supply Management, 3(2), 63-75. Campbell, J. F. (1990). Freight consolidation and routing with transport economies of scale. Transportation Research Part B: Methodological, 24(5), 345-361. Carbone, V., & Stone, M. A. (2005). Growth and relational strategies used by the European logistics service providers: Rationale and outcomes. Transportation Research Part E: Logistics & Transportation Review, 41(6), 495-510. Coyle, J. J., Bardi, E. J., & Langley Jr., C. J. (2003). The management of business logistics: A supply chain perspective. (7th ed.). Ohio: South-Western, Thomson. Chopra, S., & Meindl, P. (2007). Supply chain management: Strategy, planning, & operation. (3rd ed.). NJ: Pearson, Prentice Hall. Embleton, P. R., & Wright, P. C. (1998). A practical guide to successful outsourcing. Empowerment in Organizations, 6(3), 94-106.

780

European Commission. (2001). Protrans: Analysis of European logistics regions. Deliverable No. 2, November, Competitive and Sustainable Growth Programme of the 5th Framework programme. Fleischmann, B. (1993). Designing distribution systems with transport economies of scale. European Journal of Operational Research, 70(1), 31-42. Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33(3), 114-135. Hafeez, K., Zhang, Y., & Malak, N. (2002). Determining key capabilities of a firm using analytic hierarchy process. International Journal of Production Economics, 76(1), 39-51. Hertz, S., & Alfredsson, M. (2003). Strategic development of third party logistics providers. Industrial Marketing Management, 32(2), 139-149. Kedia, B. L., & Lahiri, S. (2007). International outsourcing of services: A partnership model. Journal of International Management, 13, 22-37. Jara-Díaz, S. R., & Basso, L. J. (2003). Transport cost functions, network expansion, and economies of scope. Transportation Research Part E: Logistics and Transportation Review, 39(4), 271-288. Javidan, M. (1998). Core competence: What does it mean in practice? Long Range Planning, 31(1), 60-71. Jharkharia, S., & Shankar, R. (2007). Selection of logistics service provider: An analytic network process (ANP) approach. Omega, 35(3), 274-289. Kakabadse, A., & Kakabadse, N. (2002). Trends in outsourcing: Contrasting USA and Europe. European Management Journal, 20(2), 189-198. Laarhoven, P., van Berglund, M., & Peters, M. (2000). Third-party logistics in Europe--five years later. International Journal of Physical Distribution and Logistics Management, 30(5), 425-442.

A Supplementary Framework for Evaluation of Integrated Logistics Service Provider

Langley Jr., C. J., Allen, G. R., & Colombo, M. J. (2006). 2006 third-party logistics: Results and findings of the 11th Annual Study. Georgia Institute of Technology, Cap Gemini LLC, SAP, and DHL. Lau, K. H., & Zhang, J. (2006). Drivers and obstacles of outsourcing practices in China. International Journal of Physical Distribution & Logistics Management, 36(10), 776-792. Lynch, C. F. (2000). Logistics outsourcing: A management guide. Illinois: Council of Logistics Management Publications.

An examination of industry practices. International Journal of Physical Distribution & Logistics Management, 29(6), 353-373. Razzaque, M. A., & Sheng, C. C. (1998). Outsourcing of logistics functions: A literature survey. International Journal of Physical Distribution & Logistics Management, 28(2), 89-107. Ritchie, B., & Brindley, C. (2002). Reassessing the management of the global supply chain. Integrated Manufacturing Systems, 13(2), 110-116.

Momme, J. (2002). Framework for outsourcing manufacturing: Strategic and operational implications. Computers in Industry, 49(1), 59-75.

Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2003). Designing & managing the supply chain: Concepts, strategies & case studies. (2nd ed.). Boston: McGraw Hill, Irwin.

Momme, J., & Hvolby, H. H. (2002). An outsourcing framework: Action research in the heavy industry sector. European Journal of Purchasing and Supply Management, 8(4), 185-196.

Stock, G. N., Greis, N. P., & Kasarda, J. D. (1998). Logistics, strategy, and structure: A conceptual framework. International Journal of Production Management, 18(1), 37-52.

Peteraf, M. (1993). The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14, 179-192.

Vaidyanathan, G. (2005). A framework for evaluating third-party logistics. Communications of the ACM, 48(1), 89-94.

Peters, M., Cooper, J., Lieb, R. C., & Randall, H. L. (1998). The third-party logistics industry in Europe: Provider perspectives on the industry’s current status and future prospects. International Journal of Logistics: Research and Application, 1(1), 9-25.

Walsham, G. (1995). Interpretive case studies in IS research: nature and method. European Journal of Information Systems, 4(1), 74-81.

Plehwe, D., & Bohle, D. (1998). Uberlegungen zum forschungsfeld transnationale organisation in Europa. B-Social Science Research Center, Berlin. Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-91. Rabinovich, E., Windle, R., Dresner, M., & Corsi, T. (1999). Outsourcing of integrated logistics functions:

Waters, D. (2003). Logistics: An introduction to supply chain management. New York: Palgrave Macmillan. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5, 171-180. Wisner, J. D., Leong, G. K., & Tan, K. C. (2005). Principles of supply chain management: A balanced approach. Ohio: South-Western, Thomson. Yin, R. K. (1994). Case study research: Design and methods. (2nd ed.). London: Sage Publications.

This work was previously published in International Journal of Information Systems and Supply Chain Management, Vol. 1, Issue 3, edited by J. Wang, pp. 49-69, copyright 2008 by IGI Publishing (an imprint of IGI Global).

781

782

Chapter 2.23

Web Services and Service-Oriented Architectures Bruce J. Neubauer University of South Florida, USA

IntroductIon A review of the development of information systems can help in understanding the potential significance of Web services and service-oriented architecture (SOA) in the public sector. SOA involves the convergent design of information systems and organizational workflows at the level of services. The purpose of this chapter is to suggest a strategy for mapping the design of service-oriented architectures onto the complex patterns of governance including combinations of federalism, regionalism, and the outsourcing of functions from government agencies to nonprofit organizations. This involves the modeling of workflows and the identification of opportunities for the sharing of services among agencies and nonprofits. The structures of government agencies reflect political jurisdictions, legislative committee structures, areas of public policy, and geographical locations. Federalism creates situations in which multiple agencies (often at different levels of government) have similar responsibilities in

the same geographic areas. Metropolitan areas are complex mosaics of local governments and special districts. In addition, nonprofit organizations are also involved in strategic alliances with government agencies to provide services to citizens. The coordination of efforts among multiple organizations has been one of the major functions of public administrators acting through formal or informal networks of relationships within and across organizational boundaries. Web services and SOA can be used to help integrate the often costly and fragmented delivery of government services.

bAcKground Information systems were historically centralized. It is still common for departments within an organization to each have their own computer applications used to support accounting, payroll, or other specific responsibilities. Such applications and systems are sometimes referred to as “stovepipe” applications, suggesting the fact that

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Web Services and Service-Oriented Architectures

they stand alone. While such applications may well optimize specific functions, they may not be designed to support business process workflows that cut across departments. As a consequence, common business processes often require manually entering data multiple times and making adjustments for the different ways the same data are stored in multiple databases. Modern systems of applications are sometimes called enterprise systems or ERPs. The acronym ERP stands for enterprise resource planning. Examples of ERP solutions include SAP and Oracle applications. Such systems are designed at the scale of an entire organization. ERPs are modular in nature. An organization can purchase the modules it needs from the same vender and be assured that they are compatible with one another. The benefit of systems of computer applications designed at the enterprise level is an improved ability of the applications to support entire business processes. Many enterprise systems share one enterprise database. It should not be necessary to enter data into multiple stovepipe applications. The underlying database should provide top managers with one version of the truth rather than a collection of summaries gleaned from multiple databases within the organization. Electronic data interchange (EDI) is a similar technology for creating data communications between organizations. EDI solutions tend to be point-to-point connections between specific organizations for specific purposes. Government agencies can more easily coordinate their efforts and outsource responsibilities when they have modern information systems. ERP and EDI technologies are valuable and widely used. However, ERP solutions tend to be inflexible and EDI solutions may not support agile relationships among multiple organizations in networks of strategic alliances. Web services is a modern aspect of computer programming that facilitates the linking together of disparate legacy computer resources. SOA is an application

of design principles to both computer resources and organizational units that can facilitate the creation of agile relationships between departments within large organizations and among organizations working together. Early computer programmers worked in procedural programming languages such as FORTRAN and COBOL. The entire program usually ran on one machine and data were often managed by the software application itself rather than by the use of a separate database management system. Later, when programmers wrote procedural applications to run on networked computers, they sometimes used remote procedure calls to make use of subprocedures of code physically residing on another machine. The application would send a request across the network and wait for the subprocedure to run on the other machine and send data back to the application. This way of thinking evolved into object-oriented programming. A major benefit of this approach is reuse of the work required to create the subprocedure. Another benefit relates to loose coupling, meaning that the task of building a very large and complex application can be assigned to many individuals who can each build his or her own part of it without a detailed knowledge of what other programmers are doing (Kaye, 2003). As long as the interface between the part of the system and the rest of the system is agreed upon, how the part does what it does is not especially important to other programmers. To an object-oriented programmer, a use of a Web service is the invocation (calling) of structured code residing across a network on a Web server. To a business analyst, a Web service is an opportunity to reuse not just code but entire services provided by organizations. Service-oriented architecture involves the orchestration or choreography of multiple services. An orchestration involves one focal application calling one or more services as needed within the same organization. A choreography is a coordination of services between or among organizations. Having been

783

Web Services and Service-Oriented Architectures

asked to make the transition from procedural programming to object-oriented programming, computer programmers are now facing the challenge of working at the level of the design of services. The design of Web-based information systems can be very challenging (Andrew et al., 2006; Terrasse, Becker, & Savonnet, 2003). Modeling such systems in terms of services can help address that complexity while helping to bridge the traditional divide between organization design and the design of business processes. Some books on Web services and SOA are intended primarily for managers and executives (Barry, 2003; Bloomfield, Coombs, Knights, & Littler, 2000; Linthicum, 2004; Manes, 2003). Other sources not specifically written for managers are certainly approachable by people without technical backgrounds (Erl, 2004, 2005). Ties between workflow design and service-oriented architecture are addressed by Marks and Bell (2006) and Allen (2006). O’Toole (1997) has written that governments often seek to execute their efforts via structures of interagency collaboration, that the role of not-forprofit organizations is large and growing, and that the frequency and variety of links with for-profit

firms is impressive. There are many situations that present possibilities for managers to add or remove actors from the array of their activities involving networks with others (Brudney, O’Toole, & Rainey, 2000). With human oversight, Web services can be used to facilitate the assembly and reassembly of agile strategic alliances. Strategic alliances are held together by networks of human trust rather than by the compatibility of computer network protocols.

IMPleMentIng governMent web servIces And servIce-orIented ArchItectures Some Web services are relatively small units of functionality that can be accessed by software applications of various kinds. For example, currency exchange rates change frequently. It is inefficient to expect employees to find current rates of exchange each time the need for this information arises. This kind of activity can be automated and then either consumed or made available to others via a Web service (see Figure 1, where Activity B can

Figure 1. Simple Business Process Invoking a Web service

Activity A

Activity B

Activity C

784

Service

Web Services and Service-Oriented Architectures

be to apply a currency conversion to an amount of money). By using Web services, it is entirely feasible for one organization (almost anywhere in the world) to continually update a database with currency exchange rates and expose that information as a service to the computer applications of other organizations using the Internet. The organization maintaining the data can expose a Web service by providing the necessary WSDL (Web Service Description Language) file at a Web address, and by publishing the availability of the service using UDDI (Universal Description, Discovery and Integration). In computer jargon, such a relationship between two entities is called client-server, meaning that the client entity always asks for something, and the server entity always acts in the role of a provider (please see “Key Terms” below for brief explanations of WSDL, UDDI, and other technical acronyms). What makes a service a Web service is its implementation across the Internet using XML (extensible markup language) and SOAP (Simple Object Access Protocol) standards. Humans may or may not be directly involved in the maintenance of the database containing exchange rates in the example above. When the request from a computer application comes in, the service hits the database and returns the needed information to the application across the Internet. The arrival of the request is not synchronized with the work required to keep the database updated. The work required to be done is not a factor of the number of requests received. Although it may be costly to continually update the database, there is little or no cost associated with making the information available to additional organizations. The major constraints on scaling up to serve large numbers of requests are bandwidth to and from the server providing the Web service, and the speed of the processor(s) on the server. Of course, if the Web server or the database fails or is taken off line for maintenance, the business processes of many organizations may be affected. One idea behind

UDDI is that the failure of a Web service could trigger an automated substitution of another Web service to assure the continuity-dependent processes. As a slightly more complex example, consider the business process of a city government responding to a request to renew a business license. Several activities may be required to make the decision regarding whether or not to renew the license. It may be necessary to verify the physical integrity of the building in which the business is housed. It may also be necessary to verify that property taxes have been paid and that there is no evidence that the business is being used for criminal purposes. In the past, each of these three activities may have been performed manually and in sequential order. As a result, it might have taken a month or more to issue each renewal. There is often no reason why multiple related activities cannot be initiated in parallel. For example, checking for taxes and crime reports can probably be automated and performed almost instantly. Within the organization, automated activities can be implemented using Web services or other means. If the city government has an intranet, it uses the same technologies as the Internet and it makes sense to automate selected services using Web services. As previously indicated, the design of Web services exposed only within one organization is called orchestration. The orchestration of Web services is a step toward the choreography of Web services involved in the business processes of multiple organizations. Figure 2 is a model of a business process that includes the parallel performance of activities and the outsourcing of two activities via Web services. Web services can be simple or very complex. An entire business process involving many activities and business rules can be nested inside a Web service and made available to others as a subprocess in a larger context. If real-time human intervention is required for the process triggered by the call to the Web service to be

785

Web Services and Service-Oriented Architectures

Figure 2. More complex business process invoking multiple Web services Activtiy A

Activtiy B

Activtiy C

Service

Activtiy D

Service

Activtiy E

completed, the calling process may have to wait until the secondary process is completed before going forward. Leymann, Roller, and Schmidt (2002) make a distinction between hierarchical patterns and peer-to-peer structures, noting that in many cases a mixture of hierarchical and peer-to-peer structures is used to realize complex multipartner business processes. In a hierarchical structure, the ultimate process transcends any of the organizations supporting its activities. The supporting organizations are each likely to have internal workflows independent of one another and choreographed at the level of the transcendent process. This arrangement can allow each organization to keep its secrets regarding how it performs its work internally and to protect contents of databases from unintended uses by others. In a peer-to-peer relationship between organizations (or between departments in one organization), each partner is both providing services and consuming services provided by others (see Figure 3). Each partner outsources what it is less well equipped to do and provides to its partners services it performs well.

786

In a hierarchical architecture, each Web service supports a transcendent process, represented in Figure 4. A hierarchical architecture begs the question regarding who or what is responsible for the transcendent process. In the private sector, a transcendent process may be a supply chain that includes multiple companies such as a manufacturer, warehouse, shipper, and retailer. No one company owns the entire supply chain and yet all participate in it. Examples of transcendent processes in the public sector are not as obvious. Federalism tends to ensure that large processes are managed by state or national governments. Regional governance (as in a metropolitan area with many overlapping jurisdictions) provides opportunities for peer-to-peer service architectures and for hybrid architectures. State agencies can manage large processes, and city and county agencies (and special districts) may provide Web services to each other and in support of the larger processes managed by state governments. The same pattern exists at the next larger scale, meaning that there may be opportunities for state governments to share services as peers while also supporting larger processes managed at the na-

Web Services and Service-Oriented Architectures

Figure 3. Peer-to-peer relationship between organizations or departments exposing and consuming each other’s Web services

Figure 4. Hierarchal relationship between a transcendant process and Web services provided by organizations

tional level. The notion of transcendent processes may suggest an interpretation of the virtual state (Fountain, 2001). Relationships among organizations via Web services are negotiated by humans and should include service-level agreements that spell out the responsibilities of partners to one another. Agility does not suggest that working relationships among agencies and nonprofits should be brief encounters. Technical agility helps assume that technology will not impede substitution of

strategic partners or make changes in alliances difficult and costly. In a time of crisis, such as a natural disaster or terrorist event, the ability to quickly reassemble sets of strategic relationships among agencies may be very important (Harrald, 2006). In such circumstances, the possible automated substitution of Web services supported by UDDI may become valuable. The following is a list of suggestions and guidelines intended to help generalist managers steer their organizations toward acceptance and

787

Web Services and Service-Oriented Architectures

adoption of information technologies that include Web services and SOA. •

•

•

•

•

•

•

788

Encourage employees to think about the organization in terms of sequences of activities that cut across functional areas (departments). Identify major business processes that the organization performs frequently, either to create value for citizens or for the organization’s own internal needs. Encourage IT professionals and other employees to begin thinking of activities and the computer software that support them as services. Encourage programmers and other IT employees to better understand what the organization does and the business processes that it performs, including business rules that affect the flow of work through activities within business processes. Help them realize that this is similar to ways they manage the flow of execution within computer applications. Try to create an organizational culture in which nontechnical employees do not blame IT professionals for their technical problems and in which IT professionals recognize and appreciate the knowledge and skills of end users. Create incentive systems that encourage employees to optimize processes rather than to maximize the interests of their own departments. Encourage programmers and other IT professionals to continue their educations by attending training in object-oriented analysis and design, modern programming languages, and emerging Web-based technologies. Accept the fact that there are limits to the ability of programmers to jump paradigms. Most large organizations need some programmers with legacy skills and others with more cutting-edge skills. Legacy special-

ists can help “wrap” older applications for inclusion in modern systems. Programmers who are experts in object-oriented programming are likely to be unable and unwilling to maintain legacy applications written in COBOL, for example. The most difficult aspects of implementing government Web services and service-oriented architectures are likely to be political and administrative issues. There are close relationships between the possession of information, political power, and administrative discretion. Employees are likely to resist change even if change does not threaten their employment. For budgetary reasons, political and administrative resistance to the introduction of Web services is likely to become greater at the level of the extension of workflows across organizational boundaries. Agencies may become smaller and more specialized as redundant activities are identified in multiple agencies. Government agencies have legal and ethical responsibilities for the protection of data about citizens. Administrators may rightly feel that their ability to assure proper handling of confidential data is compromised when data become accessible to other organizations via Web services. Other major issues involve relationships among agencies regarding federalism, relationships among agencies regarding regional governance, and relationships between sectors involving privatization and outsourcing. Almost any major e-government initiative today is likely to be implemented using Web services. Citizens and employees as users are not likely to see or realize that the resources of multiple departments and/or organizations are involved in making the system functional. The following are brief descriptions of several government projects in Europe and the United States, involving BEA and its partners, available on the Web in the fall of 2006. What is common to each of the following examples is the need to tap into multiple disparate IT systems in order to support either a busi-

Web Services and Service-Oriented Architectures

ness process or a complex visualization needed for monitoring or decision-making purposes. The National Institute for Agricultural Research (INRA) is a French public research body responsible for producing and distributing innovations relevant to agriculture, food, and the environment. INRA needed to transform its purchasing management system, rationalize its global ordering process, and analyze its expenses. INRA deployed an intranet purchasing program. As a result, INRA is able to more effectively manage its €100 million of annual purchases. Process automation has streamlined and enhanced many of INRA’s day-to-day processes. INRA has also benefited from a significant increase in productivity, largely due to the automation of complex tasks. Its managers now have a unified view of expenditures and purchasing decisions. Oslo is the capital of Norway and has a parliamentary model of government. Each city district has its own district administration, which administers multiple social and health services. In addition, there are approximately 40 departments and agencies with specific areas of responsibilities. In total, up to 55 operations offer more than 250 different services to the citizens of Oslo. The local government’s vision and strategic plan is to provide all relevant services online. More than 200 services were made available interactively in less than 1 year. Citizens can now apply online for a wide range of public-sector services, including building-construction permits, child care, and the payment of parking tickets. A United States Department of Agriculture (USDA) mainframe-based system known as STARS (Store Tracking and Redemption System) was the primary tool used by the agency to manage the Food Stamp Program. Technicians were unable to automate many key processes and the legacy system had become difficult to maintain. Systems integrator Ventera Corporation designed a new system named STARS II involving Web services and SOA. As indicated by the USDA’s

Privacy Impact Assessment Form available on the Web at the USDA site, the new system draws upon data from the treasury department and the Social Security Administration, and also from state agencies and third-party providers. The City of Chicago Public Housing Commission needed to link multiple legacy systems and provide a consistent view into project information for city executives, project managers, contractors, architects, and other personnel. The goal was to improve planning, expedite problem resolution, and reduce expenditures triggered by contract provisions regarding project deadlines missed. A company named Enterpulse designed and implemented a project management portal using a BEA portal. The resulting application enables improved project tracking and substantial cost savings by visually displaying data that enable administrators to prioritize project work efforts and avoid contract penalties.

Future trends Interest in the use of Web services in the public sector will increase as they become more widely used in corporations. The focus of governmental budgetary deliberations may shift toward business processes in continuing efforts to constrain costs and increase performance. Because Web services do not expose actual databases and other resources on legacy systems, it is possible to share services while also addressing concerns of agency administrators regarding the responsibilities of agencies for information security and the privacy of citizens and others. Over time, service orientation may gradually change our primary way of perceiving organizations. Information systems then become the mediator of what employees do, and Web services become a means by which activities and entire processes can be shared among organizations. Because different kinds of organizations have similar

789

Web Services and Service-Oriented Architectures

processes, distinctions between organizational sectors (government, nonprofit, and for profit) may become less apparent. Organizations may tend to become smaller and more specialized.

conclusIon The essential questions in designing processes based upon services are the following. How should activities be defined? When should an activity be made available to others and when should an activity be outsourced to others? Organizations (and departments within organizations) that are closest to the data should be responsible for capturing and managing that data. Organizations (and departments within organizations) whose employees have a specialized expertise should make that expertise available to others. These guidelines still leave a number of high-level design decisions open for discussion. The essential assertion of this chapter is that hierarchical SOA patterns can be used to support relationships among agencies at different levels of government (federalism) and that peerto-peer SOA patterns can be used to support relationships based upon regional governance and the outsourcing of functions from agencies to nonprofit organizations. In terms of hierarchical relationships, parent entities (i.e., states vis-à-vis local governments) may be more likely to share business processes with child entities, and child entities may be more likely to share access to data with parent entities using Web services. In other words, the states might share business processes with their political subdivisions as Web services. The federal government might share business services with state governments as Web services. Local governments might make data available to both state agencies and federal agencies using Web services. Also, the states might make data available to the federal government using the same technology. The sharing of Web services among local governments and special districts

790

could become very complex given the variety of relationships involving overlapping jurisdictions and different policies. This chapter has proposed the application of modeling and design principles to the challenge of using service orientation to help government agencies and nonprofit organizations become more cost effective. Reports of implementation experiences with actual details of patterns of design including administrative, political, and technological implications are needed. In the design sciences, an evidence of maturity within a domain is the emergence of commonly observed patterns that become the building blocks for complex systems. SOA is a young and promising design science with the potential to significantly reshape the delivery of real services by government agencies and nonprofit organizations.

Future reseArch dIrectIons Opportunities for future research regarding SOA can be categorized into technical questions, political questions, and administrative questions. Regarding technical questions, because they depend upon Internet protocols, calls to Web services are relatively slow when compared to dedicated connectivity such as EDI. Attempts to address other technical challenges tend to lead to solutions that add additional overhead to making calls to Web services. Application performance may become an issue because the communications are based on SOAP, XML, and other Internet standards. Assuring that calls to Web services are chunky helps minimize the number of calls across networks. Nevertheless, Web applications may not scale well (i.e., serve increasing numbers of simultaneous users) because Web protocols and standards tend to be slow. Security, of course, is always important and a direction for future research. The encryption required to secure XML-based communications adds to the technical overhead that degrades the performance of Web services.

Web Services and Service-Oriented Architectures

Web services are usually stateless, meaning that the computer providing the service to other applications does not remember previous communications that may be part of the same transaction. That being the case, additional information regarding past events must often be included in subsequent calls to the same Web service. The management of transactions involving multiple Web services is especially problematic. Twophase and three-phase commit protocols that can be implemented when one organization owns or controls all parts of a distributed application cannot easily be implemented using Web services that are usually stateless. Web services are not likely to be widely reused unless they can easily be found. Automated discovery of available Web services may not satisfy the concerns of managers regarding security, privacy, and service-level agreements. The technical vision of distributed applications that can swap out Web services on the fly (perhaps to achieve load balancing) will not actually be fully implemented until managers of organizations can feel confident that they can safely delegate to software agents a variety of human concerns regarding who their partners are. Although these are essentially political and/or administrative concerns, any actual implementation of solutions will become technical concerns that may well call for technical research. Regarding political implications and the need for future research, Web services have the potential to substantially change the ways that organizations perform their work. The long-term implications involve the very design of organizations, including government agencies and nonprofits. While Web services are usually cast at the grain of activities rather than at the grain of the tasks of entire departments or missions of entire agencies, it is possible that Web services could lead to major changes in the ways agencies and nonprofits perform their work. The budgetary processes of governments often involve incremental adjustments from the previous fiscal year without regard for the possibility that technology may facilitate major changes

in workflows that might dramatically reduce costs. Even administrators who have positive attitudes toward the adoption of new information technologies may have political reasons to resist the adoption of distributed information systems that may make possible substantial reductions in necessary funding. SOA may also tend to compromise the ability of agency administrators to control information available to others. Research to better understand how agency and nonprofit administrators perceive Web services and SOA (as both threats and opportunities) might help assure that their organizations will not be unnecessarily penalized by the adoption of these technologies in budgetary and other political processes. It follows that a future research direction regarding administration is to better understand how Web services and SOA tend to affect existing business processes and relationships among organizations. There are opportunities to model and simulate knowledge-based workflows involving combinations of computer networks and human operators. Software like Arena and TechSmith’s Morae could be used to study not only the usability of computer-facilitated workflows, but also the identification of bottlenecks in selected workflow designs. As activities become broken out of the context of specific workflows and reused in multiple workflows, humans may lose their sense of understanding the meaning of their efforts in a larger context. This may tend to make work less satisfying. It may also lead to errors in judgment because the programmers who design distributed applications (including services provided by humans using technology) may not anticipate humans’ need to exercise judgment within meaningful contexts. A Web service involving human participation that one moment is used to select a good location for a new gas station and 10 minutes later is used to target a warhead may fail to provide human participants with necessary contexts required for the true exercise of judgment. Web services and SOA might be the next big step toward alienation

791

Web Services and Service-Oriented Architectures

of employees (life in the cubicles) and at worse a cruel exploitation of human minds harnessed to exercise judgments in the absence of knowing the consequences of related decisions. In light of globalization, Web services and SOA could be for knowledge work what outsourcing of production has been to industrial employment. The prospect that the mind might be reduced to a commodity is not attractive. Research regarding how employees regard their work experiences and their need for the context that provides meaning to their employment could inform the humanistic implementation of systems involving SOA. Research into the administrative implications of SOA can help assure that organizations and societies reap the benefits of this new technology while avoiding its use in ways that alienate employees and make inappropriate delegations of discretion to software systems.

reFerences Allen, P. (2006). Service orientation: Winning strategies and best practices. Cambridge: Cambridge University Press. Andrew, P., Conard, J., Woodgate, S., Flanders, J., Hatoun, G., Hilerio, I., et al. (2006). Presenting Windows Workflow Foundation, beta edition. Indianapolis, IN: SAMS. Barry, D. K. (2003). Web services and serviceoriented architectures. San Francisco: Morgan Kaufmann Publishers. Bloomfield, B. P., Coombs, R., Knights, D., & Littler, D. (Eds.). (2000). Information technology and organizations: Strategies, networks, and integration. New York: Oxford University Press. Brudney, J. L., O’Toole, L. J., Jr., & Rainey, H. G. (2000). Advancing public management: New developments in theory, methods, and practice. Washington, DC: Georgetown University Press.

792

Erl, E. (2004). Service-oriented architecture: A field guide to integrating XML and Web services. Upper Saddle River, NJ: Prentice Hall. Erl, E. (2005). Service-oriented architecture (SOA): Concepts, technology, and design. Upper Saddle River, NJ: Prentice Hall. Fountain, J. E. (2001). Building the virtual state: Information technology and institutional change. Washington, DC: Brookings Institution Press. Harrald, J. R. (2006). Agility and discipline: Critical success factors for disaster response. The Annals of the American Academy of Political and Social Science, 614(1), 256-272. Kaye, D. (2003). Loosely coupled: The missing pieces of Web services. Marin County, CA: RDS Press. Leymann, F., Roller, D., & Schmidt, M.-T. (2002). Web services and business process management. IBM Systems Journal, 41(2), 198-211. Linthicum, D. S. (2004). Next generation application integration: From simple information to Web services. Boston: Addison-Wesley. Manes, A. T. (2003). Web services: A manager’s guide. Boston: Addison-Wesley. Marks, E. A., & Bell, M. (2006). Service-oriented architecture (SOA): A planning and implementation guide for business and technology. Hoboken, NJ: Wiley Press. O’Toole, L. J., Jr. (1997). Treating networks seriously: Practical and research-based agendas in public administration. Public Administration Review, 57(1), 45-52. Terrasse, M.-N., Becker, G., & Savonnet, M. (2003). Metamodeling architectures and interoperability of Web-enabled information systems. In A. Dahanayake & W. Gerhardt (Eds.), Web-enabled systems integration: Practices and challenges (pp. 1-18). Hershey, PA: Idea Group Publishing.

Web Services and Service-Oriented Architectures

Further reAdIng Agrawal, R., Bayardo, R., Jr., Gruhl, D., & Papadimitiour, S. (2002). Vinci: A service-oriented architecture for rapid development of Web applications. Computer Networks, 39(5), 523-539. Bieberstein, N., Sanjay, B., Fiammante, M., Jones, K., & Shah, R. (2006). Service-oriented architecture compass: Business value, planning and enterprise roadmap. Upper Saddle River, NJ: Pearson. Buschman, F., Meunier, R., Rohnert, H., & Sommerlad, M. (1996). Pattern-oriented software architecture: A system of patterns. New York: John Wiley & Sons. Cox, D. E., & Kreger, H. (2005). Management of the service-oriented-architecture life cycle. IBM Systems Journal, 44(4), 709-726. Datz, T. (2004, January 15). What you need to know about service-oriented architecture. CIO Magazine. Retrieved February 23, 2007, from http://www.cio.com/archive/011504/soa.html Debevoise, T. (2005). Business process management with a business rules approach: Implementing the service oriented architecture. New York: Business Knowledge Architects. Ferguson, D. F., & Stockton, M. L. (2005). Service-oriented architecture: Programming model and product architecture. IBM Systems Journal, 44(4), 753-780.

ibm.com/services/us/gbs/bus/pdf/g510-5060ibm-service-oriented-modeling-arch.pdf IBM Redbooks. (2004). Patterns: Serviceoriented architectures and Web services. White Plains, New York: IBM Corporation. Kragzig, D., Banke, K., & Slama, D. (2004). Enterprise SOA: Service-oriented architecture best practices. Upper Saddle River, NJ: Prentice Hall. Marks, E. A., & Bell, M. (2006). Service-oriented architecture (SOA): A planning and implementation guide for business and technology. Hoboken, NJ: Wiley Press. Marks, E. A., & Werrell, M. J. (2003). Executive’s guide to Web services (SOA, service-oriented architecture). Hoboken, NJ: Wiley Press. McGovern, J., Sims, O., & Jain, A. (2006). Enterprise service oriented architectures: Concepts, challenges, recommendations. New York: Springer. McKendrick, J. (2006, January 3). Ten examples of SOA at work, right now. ZD Net. Retrieved February 23, 2007, from http://blogs.zdnet.com/ service-oriented/?p=508 Nagaratnam, N., Nadalin, A., Hondo, M., McIntosh, M., & Austel, P. (2005). Business-driven application security: From modeling to managing secure applications. IBM Systems Journal, 44(4), 847-868.

Foster, I. (2005). Service-oriented science. Science, 308(6723), 814-817.

Newcomer, E., & Lomow, G. (2004). Understanding SOA with Web services. Reading, MA: Addison-Wesley Professional.

He, H. (2003, September 30). What is service-oriented architecture? O’Reilly XML.COM. Retrieved February 23, 2007, from http://webservices.xml. com/pub/a/ws/2003/09/30/soa.html

Papazoglou, M. P., & Georgakopoulos, D. (2003). Service-oriented computing. Communications of the ACM, 46(10), 25-28.

IBM Business Consulting Services. (2004). IBM service-oriented architecture and modeling. Retrieved February 23, 2007, from http://www-935.

Pulier, E., & Hugh, T. (2005). Understanding enterprise SOA. Greenwich: Manning Publications.

793

Web Services and Service-Oriented Architectures

Schmidt, M. T., Hutchison, B., Lambros, P., & Phippen, R. (2005). The enterprise service bus: Making service-oriented architecture real. IBM Systems Journal, 44(4), 781-798. Walend, D. (2006, April 4). Understanding service oriented architecture. Retrieved February 23, 2007, from http://today.java.net/pub/a/today/2006/04/04/understanding-service-orientedarchitecture.html Woods, D., & Mattern, T. (2006). Enterprise SOA: Designing IT for business innovation. Cambridge, MA: O’Reilly Media. Zimmermann, O., Krogdahl, P., & Gee, C. (2004). Elements of service-oriented analysis and design: An interdisciplinary modeling approach for SOA projects. Retrieved February 23, 2007, from http://www-128.ibm.com/developerworks/ webservices/library/ws-soad1/

Key terMs And deFInItIons Business Process: A business process is a sequence of purposeful activities frequently performed within an organization or by multiple organizations in a coordinated way. It creates value for citizens or customers, or fulfills an internal need of an organization. Workflow designs are models of business processes. Electronic Data Interchange (EDI): EDI is a commercial way to create and use an electronic connection between two computers or networks geographically distant from one another and often owned by different organizations. These connections can be secure and may be relatively costly and inflexible as compared to solutions based upon Web services. Extensible Markup Language (XML): XML is a way to mark up text-based content into a structure that can be interpreted by a computer application that has the schema necessary for interpretation.

794

Object-Oriented Programming: Most modern computer programming languages are object oriented, meaning that conceptually the programming code consists of units (objects) that include both a data structure and an ability to do things. Some kinds of objects correspond to things that exist in the real world, such as citizens. Web services are an extension of this modular way of structuring programming code and designing programs that are distributed across computer networks. Service-Oriented Architecture (SOA): An SOA is a design by which multiple services are called in sequence or in parallel so as to implement the activities that compose a business process. Simple Object Access Protocol (SOAP): SOAP refers to an XML protocol used to provide a container in code for communications with Web services. The expression “SOAP envelope” is often used to describe the function of this technology. Strategic Alliance: A strategic alliance is a working association between two or more organizations, such as between a government agency and a nonprofit organization. Universal Description, Discovery and Integration (UDDI): A UDDI is a Web-based directory that lets organizations publish the availability of Web services they provide that are available to be used by software applications used by other organizations. UDDI is often compared to a telephone book or yellow pages. Web Service: A Web service is a service made available within an organization or between organizations at the level of computers connected by in intranet or across the Internet using specialized standards including WSDL, SOAP, and UDDI. Web Service Description Language (WSDL): A WSDL is a file on a Web server that is associated with a Web service that contains information about how a software application can

Web Services and Service-Oriented Architectures

talk to the Web service and what services the Web service is prepared to provide. WSDL files are intended to be read by computers. Because they are text files, they can be opened and read with Microsoft Notepad and other ASCII editors.

This work was previously published in Handbook of Research on Public Information Technology, edited by G. Garson and M. Khosrow-Pour, pp. 531-543, copyright 2008 by Information Science Reference (an imprint of IGI Global).

795

796

Chapter 2.24

Is the Business Model Broken?

A Model of the Difference Between Pay-Now and Pay-Later Contracts in IT Outsourcing Eric Walden Texas Tech University, USA Param Vir Singh University of Washington, USA

AbstrAct This chapter seeks to evaluate the dominant IT outsourcing contracts model (pay-later) as compared to an alternative model (pay-now) in light of changing economic conditions. We integrate practitioner observations in the spirit of mathematical transaction cost problems to develop a conceptual economic model to compare these two types of contracts. We uncover three very important facts which suggest that pay-now contracts are always at least as good as pay-later contracts, and paynow contracts are better than pay-later contracts when economy is volatile. These findings provide a rich insight into the problem of failing IT outsourcing contracts since the prevailing poor state of economy. We further discuss the implications

of our findings and suggest that simply shifting the contract from a pay-later to a pay-now will fix the IT outsourcing business model.

IntroductIon In a recent Fortune magazine article, one of the interviewees, William Nygen of Oakmark funds, comments on outsourcer EDS’s business model. He brings up the possibility that “the business model is worse than we thought it was” (Loomis, 2003, p. 74). This chapter is an investigation of the business model not just of EDS, but of information technology (IT) outsourcers across the board. For a decade or more outsourcing has been hailed as the panacea for IT problems (Lacity

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Is the Business Model Broken?

& Hirschheim, 1993). Some industry observers go so far as to claim that outsourcing is the payoff from IT (Kirkpatrick, 2002). However, the analysis provided in this work shows that there are fundamental problems with the traditional IT outsourcing arrangement. In short, the business model is broken. Fortuitously, the analysis also suggests an easy way to fix the problem. This work shows that the back-end loading of IT contracts results in misalignment between clients and vendors. This misalignment results in transactions, which should take place, failing to transpire, resulting in losses to both client and vendor. The findings presented here help explain why more than half of IT outsourcing contracts must be renegotiated (Caldwell, 1997; Lacity & Willcocks, 2001). The model also suggests that simply moving from a back loaded to a front loaded contract will fix the business model. The rest of the chapter is organized as follows. In the next section we briefly review the relevant literature on IT outsourcing. Following that, we present two models of how to structure an IT outsourcing contract and show how they result in different levels of value. We then derive three propositions for IT outsourcing based on these two models. Finally, we conclude with a discussion of the implications of this work and directions for future research.

lIterAture revIew Our background literature is a combination of practitioner observations and economic modeling. From the practitioner side we find three stylized facts. First, IT outsourcing contracts are typically back-loaded, with the vendor offering discounts early in the contract and receiving profits in the later periods of the contract. Second, a majority of IT outsourcing contracts have to be renegotiated before conclusion. Lastly, the cost for the baseline services is very close to the vendor’s

cost, but additional services command considerable margins. IT outsourcing contracts, and here we are speaking of the total outsourcing deals, usually begin with the vendor purchasing the assets of the client and hiring all of the client’s employees. Frequently, the vendor will overpay for the assets and in some cases offer loans to the client (Lacity, Willcocks, & Feeny, 1995). In fact, in a study of the top reasons for outsourcing, The Outsourcing Institute (1998) found that number ten was the cash infusion offered from vendor to client. However, like any pay-later deal, the bill eventually comes due and the vendor recaps the initial capital outlay by charging more in later periods. Interestingly, practitioner research indicates that more than half — 53% to be exact — of outsourcing contracts are renegotiated before running their full term (James, 2000). For example, less than two years after signing an IT outsourcing agreement with Computer Sciences Corp., health maintenance organization Oxford Health Plans Inc. canceled the deal (Rosencrance, 2002). Halifax bank of Scotland abruptly ended a 10-year contract with IBM after only two years (Arminas, 2002). Mony Insurance of New York canceled a $210 million contract with Computer Sciences Corp. less than half way through it (Caldwell, 1997). Chase Manhattan Bank paid $15 million to terminate its contract with Fiserv, and Zale Corporation terminated a 10-year contract with ISSC after only 5 years (Lacity & Willcocks, 2001). Why must so many contracts be renegotiated? One standard complaint is that the contract performs well for some time and then the costs of add-ons and additional services begin to overwhelm the client (Barthelemy, 2001). Even academic research shows that lack of flexibility, as defined by the cost of reacting to changes, is the prime source of contract failure in IT outsourcing (Lacity et al., 1995).

797

Is the Business Model Broken?

The vendor essentially covers all of the transition costs up front, then to make up profit in later periods, charges a great deal for additional services. This frequently leads to contract failure. For example, in August of 2002, EDS reassured investors that earnings guidance was correct. Then in September, they revised guidance down by 80% (Loomis, 2003). The claimed reason for this miscalculation was that the bulk of profits were made from discretionary spending on additional services, which have much higher margins than baseline spending, and that discretionary spending failed to appear at the end of the quarter. Essentially, EDS’s (and most other vendors’) profit comes not from the contracted services, but from additional add-on services, which are overpriced in order to allow the vendor to recoup the transition costs. This discussion of practitioner observations suggests that problems in the original contract lead to outsourcing failures later in the relationship. Specifically, there are significant transition costs involved in moving control of IT services from the client to the vendor. The parties are faced with a decision on how to pay for these costs and usually decide to have the vendor pay for them. However, the vendor must recoup these costs in order to make a profit. This is accomplished by charging high margins for optional add-on services. Early in the relationship, when the client’s needs are very close to the baseline, the costs are well below what it costs the client to achieve internally and the bulk of the value from the relationship goes to the client. However, as the relationship develops and the client’s needs expand beyond the baseline services, more and more high margin add-ons are needed and the majority of the value then goes to the vendor. While the timing of payments is not a problem, it does create an imbalance in the relationship that results in loss to both client and vendor. To these stylized facts we add economic modeling. There is a class of economic problems

798

including incomplete contract theory (Bakos & Brynjolfsson, 1993; Grossman & Hart, 1986; Hart & Moore, 1988), agency theory (Arrow, 1985; Eisenhardt, 1989) and double marginalization (Spengler, 1950; Tirole, 1990) that deals with failures of dyads. The goal of a dyad should be to maximize joint surplus first, then decide how to divide that surplus. However, problems arise because each economic agent maximizes, not the joint surplus, but the individual surplus. These can be classed as transaction cost problems. We model these practitioner observations in the spirit of mathematical transaction cost problems. We show that the traditional back-loaded outsourcing model results in significant transaction cost problems, when the demand for IT services is elastic. This elasticity issue is very important, because it explains why this problem has not been detected earlier. For the past decade or more, the demand for IT services has been very inelastic. IT has been a must-have and has been perceived as the driver of innovation. However, since the dotcom crash in 2000 and the slow economy of 2001 and beyond, IT expenditures have been more closely scrutinized. Thus, the expected discretionary spending does not occur and the model shows its weakness.

Model Practitioner observations suggests that IT outsourcing contracts can be broadly classified as pay-now or pay-later contracts based on the way transactions are conducted through the life of the contract. A pay-now contract is defined as an arrangement between the client and the vendor in which the client pays the vendor a lump-sum amount at contract inception and then all the IT needs of the client are provided at vendor’s marginal cost. A pay-later contract is defined as an arrangement between the client and the vendor in which the vendor pays the client a lump-sum

Is the Business Model Broken?

amount at contract inception (usually to cover transition costs) and then all the IT needs of the client are provided at client’s marginal cost. Practitioner research suggests that most of the contracts in practice today are pay-later contracts where the vendor initially buys the assets of the client and later charges him a higher price for service demanded. We develop a two period model to analyze the value of pay-now contract over pay-later contract and the effect of changes in economy over these contracts. We analyze this by deriving the lost joint surplus which could have occurred if a pay-now contract were signed over a pay-later contract. This lost surplus is called dead weight loss. Dead weight loss is the value of the transactions that are worth more to the client than they cost to the vendor, but that do not get executed because the contract price is too high.

AssuMPtIons We describe a two period game with two risk neutral firms — a client and a vendor. The firms wish to formalize an agreement in which the vendor supplies IT services to the client. In order to keep the model simple, we characterize IT outsourcing services as being described only by a single service. Clearly, in a real outsourcing arrangement, quantity would be a vector of various services, but the model is not significantly enhanced by considering multiple services. The client has a random demand curve depending upon a variety of exogenous factors. In the interest of parsimony we characterize this demand curve as D(q) = bd + mdq, where bd is distributed uniformly over the interval [bds,bdf]. Thus, the demand curve is linear and demand shocks shift the curve, without changing the slope. The vendor’s cost curve is given by Cv(q) = bv + mvq and the client’s by Cc(q) = bc + mcq. We assume bv < bc and mv < mc. Thus, the vendor

has lower cost and greater economies of scale at all positive values of quantity. Note that we have assumed the marginal cost curves to be linear functions of quantity q but in reality they may be better depicted by quadratic curves. However, using quadratic curves makes the calculations cumbersome without significantly enhancing our model.

Period one In period one, client and vendor negotiate for signing a pay-now or pay-later contract. If they sign the pay-later contract then vendor makes a lump-sum payment to the client in period 1, and the services demanded by client are provided at client’s marginal cost. If, instead, they sign a paynow contract the client makes a lump-sum to the vendor in period 1, and the services demanded are provided at vendor’s marginal cost. We further assume no discount rate as it does not enhance the meaning of the model or change its outcomes. The exact size of the lump-sum distribution depends upon the model of bargaining used. In a one-to-one bargaining situation, the Nash solution would be for firms to set a lump-sum that splits the joint surplus equally (Grossman & Hart, 1986). A competitive bargaining model would suggest that the share of the lump-sum given to the vendor would be infinitesimally less than the minimum size of a side payment the second best competitor could accept and still make a profit (Snir & Hitt, 2001). A variety of other bargaining mechanisms are possible. However, the nature of the bargaining and the size of the lump-sum distribution are not important to our outcomes and hence we do not delve into the question of how the bargaining proceeds. While the bargaining method is important to how the joint surplus is divided, it does not play a role in our model, which examines the size of the joint surplus. Thus, we leave bargaining considerations for future research and other scholars.

799

Is the Business Model Broken?

Note that this scenario is a simplified explacAlculAtIng the exPected nation of pay-now and pay-later contracts but deAd loss Is the weIght Business Model Broken? 349 captures their essence. In actuality, in pay-later contracts, the services are provided at a higher Ideally, any contractual The exact size of the lump-sum distribution depends upon the modelarrangement of bargainingshould aim price than used. the price in a pay-now contract. This thewould joint be surplus (Williamson, In a one-to-one bargaining situation, at themaximizing Nash solution for firms higher price can be anything, but for keeping 1985). Joint surplus is the combined to set a lump-sum that splits the joint surplus equally (Grossman & Hart, 1986).profit made calculations we define these prices as would clifrom the arrangement bythe thelump-sum client and the vendor. A simple competitive bargaining model suggest that the share of ent’s marginal cost and vendor’s marginal cost, Though the client receives a given to the vendor would be infinitesimally less than the minimum size number of a sideof benefits respectively. like economic in IT, payment the second best competitor could accept and stillgains, make expertise a profit (Snir & and more To summarize, in period one of theother parties to Hitt, 2001). A variety bargaining mechanisms are possible. However, concentration on core-capabilities, research sugthe contract type — pay-now thedecide natureonofcontract the bargaining and the size of thethat lump-sum aremost not important gests economicdistribution benefits are the important our outcomes and hence we do not delve into thefirm question of how or pay-later — and to negotiated the appropriate reason for any client to consider outsourcing the bargaining proceeds. While the bargaining method is important to how the side payment. IT (Loh & Venkatraman, 1992; McFarlan & Nolan, joint surplus is divided, it does not play a role in Smith, our model, which examines1998). the Benefits 1995; Mitra, & Narsimhan, size of the joint surplus. Thus, we leave bargaining considerations for future Period two for the vendor are mainly economic (Chaudhary, research and other scholars. Nam, & Rao, 1995). Since our model discusses the scenario is a simplified of pay-now pay-later In period Note two, bthat is this realized, determining the explanation pay-later contract and theand pay-now contract from d contracts but The captures essence. in pay-later the client’s demand curve. clienttheir chooses the In actuality, an economic viewpoint,contracts, we will consider joint services are provided at a higher price than the price in a pay-now contract. This quantity of IT services to purchase based on the surplus in terms of economic benefits obtained higher canvendor be anything, but for keeping simple define these contract price andprice pays the the appropriate bycalculations the vendor and the we client. prices as client’s marginal cost and vendor’s marginal cost, respectively. price. The model can be illustrated graphically To compare a pay-now contract with a payTo1.summarize, in period one the parties tolater the contract on contract typesurplus in as in Figure contractdecide we compare the joint — pay-now or pay-later — and negotiated the appropriate side payment. Quantity demanded by the client depends upon two cases. As shown in the figure, the difference the type of contract signed as well as the demand between the joint surplus in pay-now and pay-later curve. As is shown in the figure the client pays contracts is the dead weight loss. Dead weight Period Two price C(later) for quantity Q(later) in the case of a loss incurred by signing a pay-later contract over pay-later contract whereas the client pays price a pay-now contract for a given demand curve is In period two,inbthe is case realized, determining the client’s demand curve. The client d Q(now) of a pay-now C(now) for quantity the area given by the shaded triangle in Figure 1. chooses the quantity of IT services to purchase based on the contract price and contract. Note that C(later) is more than C(now) and Because the intercept bd of the demand curve is pays the vendor the appropriate price. The model can be illustrated graphically Q(later) is less than Q(now). That is, in the case of the distributed uniformly, there are infinite numbers as in Figure 1. pay-later contract, client pays more per unit for of demand curves possible. For every demand fewer units as compared to a pay-now contract. curve there will be a different triangle. So the Figure 1. Comparison of pay-later pay-now contracts and pay-later contracts Figure 1. Comparison of pay-now and client's Mc => Pay-later

cost

client's demand

C(later)=P2

dead weight loss: Transactions worth more to the client than they cost to the vendor, but that do not get executed. vendor's Mc => Pay-now

C(now ) P1

Q(later)=Q1 Quantity

800

Q(now)=Q2

Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited.

Is the Business Model Broken?

Box 1. E ( DWn −l ) = E (Joint Surplus now − Joint Surpluslater )

∫

=

prob(Demand Realization) × (Joint Surplus now − Joint Surpluslater ) dDemand

Demand bdf

=

1



∫ pdf (b ) ×  2 base × height db d

d

bds

  ∆bd (bdf + bds )   ∆bd (bdf + bds ) 1  − bc bv ∆bd − bv + bv 2 ∆bd    bc  2 2  mv − md      ∆bd (bdf + bds )    ∆bd (bdf + bds ) 1 − − bc 2 ∆bd − bv + bv bc ∆bd    bc  2 2  mc − md    2 2  ∆bd (bdf + bds )    ∆bd (bdf + bds + bdf bds ) ∆bd (bdf + bds ) mc − mv bv − bc +  − + bc bv ∆bd     3 2 2  (mc − md )(mv − md )    2 2  m − m   ∆bd (bdf + bds + bdf bds ) 2 ∆bd (bdf + bds )  c v  − b c ∆bd − bc  −  (m − m )2    3 2 d   c 

=

1 1 2 ∆bd

(1)

where Δbd = bdf – bds expected dead weight loss is calculated over the entire possible set of demand curves. Expected dead weight loss incurred by signing a pay-later contract over a pay-now contract can be calculated as shown in Box 1.

mc > mv > 0

We now evaluate (2) based on the assumptions of the model. We find that: E(DWn-l) > 0.

evAluAtIng the exPected deAd weIght loss Incurred by sIgnIng A PAy-lAter contrAct over A PAy-now contrAct

(4)

(5)

This means that the expected dead weight loss of signing a pay-now contract over a paylater contract is positive. That is, the difference between the expected joint surplus of a pay-now contract and a pay-later contract is positive. This is expressed in Proposition 1.

The first question we address is to determine if the assumptions given above allow us to unambiguously determine which type of contract performs better. To evaluate (1) for finding the sign of E(DWn-l) we need to reiterate the underlying assumptions of the model. bd > bc > bv > 0,

(2)

md < 0, and

(3)

Proposition 1: The expected joint surplus achieved in a pay-now contract is greater than the expected joint surplus achieved in a pay-later contract. The pay-now contract enables additional transactions to occurs, which would not have occurred if it were a pay-later contract. In the real world, this would mean that in the case of a pay-now contract, the client would be able to obtain more

801

Is the Business Model Broken?

services at a lower per-unit cost compared to what it receives in a pay-later contract. Thus, we see that the fundamental problem with the pay-later contract is not the timing of the payment, but rather the way the pricing must be structured to allow the vendor to recoup the upfront costs of transition.

evAluAtIng the IMPAct oF chAnges In deMAnd elAstIcIty Services demanded by the client depend upon the IT demand curve of the client. During the long running, technology driven bull market of the 1990’s, firms tended to have very inelastic demand curves. That is to say, that the quantity of IT demanded was not very sensitive to the price of IT. However, after the dotcom crash and subsequent cool economy, firms became more sensitive to the price of IT. Again, citing the Fortune article on EDS, we find that EDS is currently suffering because clients are curbing discretionary spending more than they had in the past. Thus, it is interesting to examine the effect of changes in demand elasticity on the difference

in joint surplus between the traditional pay-later contract and the pay-now contract. The elasticity of demand can be measured by dq/dp × p/q. For a given price and quantity, dq/ dp is measured by the slope, md, of the demand curve. If demand becomes more elastic in response to environmental conditions, the effect of the change in elasticity is proportional to the effect of a change in md. To determine the effect of changes in demand elasticity we differentiate (1) with respect to md which yields the results shown in Box 2. This is an important implication of the model. It explains the fact that dead weight loss incurred by signing a pay-later contract over a pay-now contract increases as the client’s demand for IT services becomes more elastic. IT demand over the last decade has been very inelastic and hence the dead weight loss was negligible. Thus, it did not matter if the client and vendor signed a pay-now contract or a pay-later contract. On the contrary, since the dotcom crash and the poor state of the economy, the demand for IT has become more elastic, and, hence the dead weight loss problem has surfaced. This logic yields our Proposition 2.

Box 2. ∂E ( DWl − n ) 1  (bdf + bds ) 2 (mc − mv )   2 (mc − mv )  2  +  bc = bc 3 3     ∂md 2 2  (mc − md )   (mc − md )   2 2 bdf2 + bds2 + bdf bds ) (mc − mv ) 2 (mc − md )(mv − md ) + (mc − md ) ( + 4 2  3 (mc − md ) (mv − md ) 

(

)  

 (bv − bc )2 ((mv − md ) + (mc − md ))  (mc − mv )((mc − md ) + (mv − md ))  +  bc b  . + 2 2 2 2      (mv − md ) (mc − md ) (mc − md ) (mv − md )     

(6)

From this, it can be shown that: ∂E ( DWl − n ) >0. ∂md

802

(7)

Is the Business Model Broken?

Proposition 2: As the client’s demand for IT services becomes more elastic, the pay-later contract becomes worse as compared to a paynow contract.

evAluAtIng the IMPAct oF deMAnd shIFts IT has a fluid environment where changes occur each day. IT is considered essential for strategic advantage and receives a major share of financial resources when the economy is strong but is first to face budget cuts when economy is poor. The demand for IT tends to vary over time. Firms in different industries and firms outsourcing different facets of their IT services are likely to face very different demand variability. Therefore, it is interesting to ask how the variability of demand influences the value of contractual choice. We measure the realized level of demand as a function of the intercept, bdf, of the demand curve. The greater the intercept the greater the increase in demand for IT services at all prices. To determine the effects of changes in the variability of demand we note that the variance of the uniform distribution is 1/12*(bdf – bds)2. By increasing the distance between the endpoints, we increase the possible range of demand realizations and the variance of demand. Thus, to examine the impact of demand variability on the value of contractual

choice we differentiate (1) with respect to bdf. This yields the results shown in Box 3. This gives us our third proposition. Proposition 3: As the variance of demand for IT services increases, the pay-later contract becomes worse as compared to a pay-now contract. This shows us that the greater the variance in demand the larger the difference between the pay-now and pay-later contracts. In other words, as the potential change in IT demand increases, the dead weight loss associated with the pay-later contract increases. This occurs because the relative difference between vendor and client capabilities increases as quantity increases. The vendor is more flexible and more able to respond to changing IT needs. Thus, if IT needs change dramatically, the loss associated with failing to take advantage of the vendor’s advantage increases. This is particularly problematic for rapidly growing, or rapidly technologizing firms.

dIscussIon The work presented here compared pay-now and pay-later contracts with an aim to figure out if one has any advantage over the other. The model compares the two types of contracts by evaluating (1) dead weight loss incurred by choosing

Box 3. 2  mc − mv ) ( ∂E ( DWn −l ) 1  bc  mc − mv  (2bdf + bds )   +   = 2 2  (m − m ) (m − m )  . ∂bdf 2  2  (mc − md )  3 d v d   c 

(8)

Given the assumptions it can be shown that: ∂E ( DWl − n ) >0. ∂bdf

(9)

803

Is the Business Model Broken?

Table 1. Implications of contractual choice Summary

Logic

Proposition 1

A pay-now contract generates greater surplus than a paylater contract.

In order to recoup the upfront payment to the client, the vendor must charge a higher per unit price for IT services. This higher per unit charge means that some transactions in which the vendor’s cost to perform the duties is less than the client’s value of having the duties performed will NOT take place.

Proposition 2

The greater the client’s elasticity of demand, the more pronounced the difference between the pay-now and pay-later contracts

If a client is not sensitive to the cost of IT then the client will demand transactions even when the price is higher.

Proposition 3

The greater the variability of demand the more pronounced the difference between the pay-now and pay-later contract

Because the vendor has economies of scale over the client, the larger the quantity of IT services the more cost advantage the vendor has. Thus, more transactions meet the criteria of being between the vendor’s cost and the client’s valuation.

one contract over other, (2) impact of changes in demand elasticity, and (3) impact of demand shifts. The general propositions are summarized in Table 1. Our first proposition is that if a pay-later contract is selected over a pay-now contract, dead weight loss is incurred. If a pay-later contract is selected over a pay-now contract, fewer transactions take place, which leads to less joint surplus. This point is extremely important here because the aim of any outsourcing arrangement is to increase the joint surplus. This implies that signing a pay-now contract is beneficial for both the client and the vendor. However, very few large-scale outsourcing projects will actually save money in the first year because of significant transitions costs. The employees of the client must be shifted to the vendor, and these employees need to be retrained in the procedures of the vendor. Similarly, the vendor’s employees must be trained in the systems and processes of the client. Leases for both software and hardware must be transferred, and perhaps renegotiated. Significant legal and managerial fees in structuring the contract must be paid. Finally, some learning curve and adjustment to the new procedures must be overcome. All of this creates great expense that overshadows the benefits to outsourcing for the first year.

804

Convincing clients to adopt a pay-now contract may be very difficult. In general, clients outsource to reduce costs and they expect clear cost savings immediately. Rather than offer a contract that increases IT costs, for instance, 10% in the first year and then saves 20% per year, vendors offer a contract that saves 30% the first year, then 20% the second year, then breaks even in the third year and actually costs in the forth year. This sort of contract is certainly appealing for a variety of psychological reasons, particularly if the people responsible for the outsourcing arrangement expect to be in different positions in a few years. Sadly, it comes at significant economic cost. Our second and third propositions are driven by the fluid nature of the IT environment, the changes in the state of economy over the past few years, and their effect on the attitude of firms towards spending on IT. To understand the difference between pay-now and pay-later contracts in regard to a changing economy, it is important to first understand how changes in the economy affect the attitude of a firm towards IT. Changes in economy combined with the fluid environment of IT affect the attitude of firms towards spending on IT in two ways: (1) overall spending on IT and (2) sensitivity towards spending on IT. Throughout the 1990s, the economy was growing and firms were spending on resources of strategic advantage. IT

Is the Business Model Broken?

was considered extremely important for strategic advantage, so IT gained a tremendous share of capital budgets during the past decade. During that phase, demand of IT was very inelastic. That is, firms wanted to gain all the IT resources available and at the same time remained insensitive to price. For example, to gain strategic advantage brick and mortar firms wanted to become click and mortar firms and spent millions of dollars to do so. Nonetheless, since the dotcom burst in 2000 and the prevailing poor state of the economy since 2001, firms’ overall attitude has changed from growth to survival. This shift in attitude has hit IT expenditures particularly hard. IT expenditures have been more closely scrutinized, and hence, the overall spending on IT has declined and the sensitivity towards spending on IT has increased. Now firms want to get only those IT resources or services that are essential. Consequently, spending on IT has declined considerably and now firms are less willing to devote large amounts of capital to IT than they were in the 1990s. Proposition two states that as the demand curve shifts from inelastic to elastic behavior, the paylater contract becomes worse as compared to a pay-now contract. This point is of consequence, because during the last couple of years the demand of IT has shifted from inelastic to elastic, but a shift in contracts has not yet been observed. As long as the client is insensitive to price, pay-later contracts work as good as pay-now, but as soon as the sensitivity towards price changes, the joint surplus in pay-later contract lags the joint surplus in pay-now contract. Earlier, clients considered IT as a must have and were not very considerate about the price, but now they are very considerate about the price. Slowing down of the economy has dried up the funds for IT spending. Therefore,

fewer and fewer transactions are taking place and hence, less and less joint surplus is being achieved. This means lesser individual surplus for both client and vendor. As a result, arrangements that follow pay-later contracts for IT outsourcing do not seem to be a profitable strategy anymore to both the parties. This is possibly one of the explanations as to why outsourcing contracts are failing with alarming regularity. This is depicted in Table 2. Proposition three states that as the variance of demand for IT increases, the pay-later contract becomes worse as compared to a pay-now contract. It should be noted that this phenomenon does not occur if the demand of IT is perfectly inelastic. If the demand of IT is perfectly inelastic then increase in demand has the same effect on a pay-later contract as on a pay-now contract. One of the chief forces that would tend to increase the variance of IT demand is the rate of technology innovation. This finding is particularly interesting for IS scholars, because it suggests that IT outsourcing contractual choice is sensitive to the rate of technological change. This is also an important finding for practitioners for two reasons. First, as the rate of technological advancement seems to increase over time, it suggests that the value of making the correct contractual choice will increase over time. Second, one of the often cited reasons for outsourcing is to be able to make changes quickly (Lacity et al., 1995). This implies that those firms that are outsourcing are specifically the firms with greater demand variability. Hence, the firms that are exploring outsourcing options are those that suffer the most from improper contractual choice. Therefore, special effort should be made in contract selection.

Table 2. How changes in elasticity interact with contractual choice Inelastic Demand

Elastic Demand

Pay-later

No Problem

BIG Problem

Pay-now

No Problem

Small Problem

805

Is the Business Model Broken?

Changes in the IT environment and the state of the overall economy suggest the necessity of shifting IT outsourcing contracts from a paylater to pay-now. As shown by the model, under the prevailing state of the economy, a pay-now contract is better than a pay-later contract for both the vendor and the client. We showed that by just changing the type of contract from a front loaded one to a back loaded one, additional joint surplus can be generated. Such a shift in the type of contracts requires a shift in the thinking of the management, but the benefits are worth it.

reFerences Arminas, D. (2002). Bringing it all back home. Supply Management, 7(12), 16. Arrow, K. J. (1985). The economics of agency. In J. W. Pratt & R. J. Zeckhause (Eds.), Principals and agents: The structure of business (pp. 37-55). Boston: Harvard Business School Press. Bakos, J. Y., & Brynjolfsson, E. (1993). Information technology, incentives, and the optimal number of suppliers. Journal of Management Information Systems, 10(2), 37-53. Barthelemy, J. (2001). The hidden costs of IT outsourcing. MIT Sloan Management Review, 27(3), 60-69. Caldwell, B. (1997, September 29). Outsourcing backlash. InformationWeek, 650, 14-16. Chaudhary, A., Nam, K., & Rao, R. (1995). Management of information systems outsourcing: A bidding perspective. Journal of Management Information Systems, 12(2), 131-159. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.

806

Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. The Journal of Political Economy, 94(4), 691-719. Hart, O., & Moore, J. (1988). Incomplete contracts and renegotiation. Econometrica, 56(4), 755-785. James, G. (2000, October 30). How companies court disaster in outsourcing deals. Computerworld, 34(44), 41. Kirkpatrick, D. (2002, December 27). Finally a productivity payoff from IT? Fortune.com. Retrieved May 30, 2006, from http://archives. cnn.com/2002/TECH/ptech/12/18/fortune.ff.it. productivity/index.html Lacity, M. C., & Hirschheim, R. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86. Lacity, M., & Willcocks, L. (2001). Global information technology outsourcing. New York: John Wiley & Sons. Lacity, M., Willcocks, L., & Feeny, D. (1995). IT outsourcing: Maximizing flexibility and control. Harvard Business Review, 73(3), 84-93. Loh, L., & Venkatraman, N. (1992). Determinants of information technology outsourcing: A cross-sectional analysis. Journal of Management Information Systems, 9(1), 7-24. Loomis, C. J. (2003, February 17). I own this problem. Fortune, 147(3), 72-76. McFarlan, F. W., & Nolan, R. L. (1995). How to manage an IT outsourcing alliance. Sloan Management Review, 36(2), 9-23. Outsourcing Institute, The. (2003, April 30). Executive survey: The Outsourcing Institute’s annual survey of outsourcing end users. Jericho, NY. Retrieved May 30, 2006, from http://www. outsourcing.com/content.asp?page=01b/articles/ intelligence/oi_top_ten_survey.html

Is the Business Model Broken?

Rosencrance, L. (2002, May 13). Oxford health pulls plug on pact, will move IT in-house. Computer World, 36(20), 14.

Spengler, J. J. (1950). Vertical integrations and anti-trust policy. Journal of Political Economy, 58(2), 347-352.

Smith, M., Mitra, S., & Narsimhan, S. (1998). Information technology outsourcing: A study of pre-event firm characteristics. Journal of Management Information Systems, 15(2), 61-93.

Tirole, J. (1990). The theory of industrial organization. Cambridge, MA: MIT Press. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press.

Snir, E. M., & Hitt, L. M. (2001). Vendor screening in information technology contracting with a pilot project. Journal of Organizational Computing and Electronic Commerce, 14(1), 61-88.

807

To summarize, in period one the parties to the contract decide on contract type — pay-now or pay-later — and negotiated the appropriate side payment.

Period Two

Is the Business Model Broken?

In period two, bd is realized, determining the client’s demand curve. The client chooses the quantity of IT services to purchase based on the contract price and pays the vendor the appropriate price. The model can be illustrated graphically APPendIx as in Figure 1.

Calculations for the Expected Surplus Benefits of Signing a Pay-Now Contract over a Pay-later contract Figure 1. Comparison of pay-now and pay-later contracts client's Mc => Pay-later dead weight loss: Transactions worth more to the client than they cost to the vendor, but that do not get executed.

cost

client's demand

C(later)=P2

vendor's Mc => Pay-now C(now ) P1

Q(later)=Q1 Quantity

Q(now)=Q2

Client marginal curve: Copyrightcost © 2007, Idea

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

Cc = b c + m c q

(1)

Vendor marginal cost curve: Cv = bv + mvq

(2)

Demand curve: D= bd + mdq

(3)

The expected surplus of signing a pay now contract over a pay later contract for a given demand curve is the area given by the shaded triangle above. There are infinite numbers of demand curves. For every demand curve there will be a different triangle. So the expected surplus benefit (difference in surplus of signing a pay now contract over a pay later contract) over the entire possible set of demand curves will be the sum of areas of all such triangles multiplied by their probabilities. In the Appendix figure, Area of triangle = (1/2) Base * Height = (1/2)(P2 – P1)(Q2 – Q1)

(4)

Q1 is quantity where demand curve and client cost curve intersect. Q1 =

bd − bc mc − md

Similarly, Q2 is the quantity where the demand curve and the vendor curve intersect.

808

(5)

Is the Business Model Broken?

Q2 =

bd − bv mv − md

(6)

P1 is the price given by the vendor curve corresponding to quantity Q1 P1 = bv + mv Q1 = bv + mv

bd − bc mc − md

(7)

P2 is the price given by the client curve corresponding to quantity Q1 P2 = bc + mc Q1 = bc + mc Area of triangle =

Area = Area =

(8)

1 (P2 − P1 )(Q2 − Q1 ) 2

(9)

bd − bc b − bc  bd − bv b − bc  1 − bv − mv d − d  bc + mc   mc − md mc − md  mv − md mc − md  2

 bd − bv 1  (bc − bv ) 2   mv − md

Area =

bd − bc mc − md

  bd − bc  − (bc − bv )   mc − md

  bd − bc  bd − bv  + (mc − mv )    mc − md  mv − md

  bd − bc  bd − bc    − (mc − mv )      mc − md  mc − md  

1 (A − B + C − D ) 2

 b − bv A = (bc − bv ) d  mv − md

(10) (11) (12)

   1 2 =  (bc bd − bc bv − bv bd + bv ) m m − d    v

(13)

 b − bc    1 2 B = (bc − bv ) d =  (bc bd − bc − bv bd + bv bc )  mc − md   mc − md 

(14)

 2   mc − mv  (bd − bd bv − bc bd + bc bv )  =    (mc − md )(mv − md )   b − bc  bd − bc   mc − mv  2  b − bc ) D = (mc − mv ) d   =  2 ( d  mc − md  mc − md   (mc − md )  Expected surplus benefit over the entire range of possible is given by:  b − bc  bd − bv C = (mc − mv ) d   mc − md  mv − md

bdf

E ( DWl − n ) =

1 bdf − bds

∫

bds

1 ( A − B + C − D )dbd = 2

1 2( bdf − bds )

bdf bdf bdf  bdf   ∫ Adbd − ∫ Bdbd + ∫ Cdbd − ∫ Ddbd   bds  bds bds bds

(15)

(16)

(17)

Solving the previous equation. bdf

∫ Adb

d

bds

bdf

=



∫  m

bds

v

 1 2  (bc bd − bc bv − bv bd + bv )dbd − md 

(18)

809

Is the Business Model Broken?

bdf

∫

bds

bdf

   bd2  bd2 1 Adbd =  b b b b b − − + bv 2bd   c c v d v 2  bds  mv − md   2

bdf

∫ Bdb

d

bdf

=

bds



 1 2  (bc bd − bc − bv bd + bv bc )dbd − md 

∫  m

c

bds

(19)

(20)

   bd2  df bd2 1 2 ∫ Bdbd =  mc − md   bc 2 − bc bd − bv 2 + bvbcbd  bds bds

bdf

b

bdf

∫ Cdb

d

=

bds

bdf



bds



∫  (m

c

(21)

 2 mc − mv  (bd − bd bv − bc bd + bc bv )dbd − md )(mv − md ) 

(22) bdf

   bd 3 bd2  mc − mv bd2 Cdb = − b − b   ∫b d  (mc − md )(mv − md )   3 2 v c 2 + bcbvbd    ds bds

bdf

bdf

∫

(23)

 m −m  2 c v ∫b  (m − m )2  (bd − bc ) dbd c d ds  

bdf

Ddbd =

bds

(24) bdf

   b3d  mc − mv 2 2 Ddb = ∫b d  (mc − md )(mc − md )   3 − b cbd − bd bc    ds bds

bdf

1 E ( DWl − n ) = bdf − bds

bdf

(25)

1

∫ 2 ( A − B + C − D )db

d

bds

bdf    bd2  bd2 1 1 1 2  = − bc bv bd − bv + bv bd    bc 2 bdf − bds  mv − md   2 2  bds 

   bd2  df bd2 1 2 b b b b b b b − − − +  c c d v v c d  2  bds  mc − md   2 b

bdf

   bd 3 bd2  mc − mv bd2 b b +  − − + bc bv bd    v c 2 2  bds  (mc − md )(mv − md )   3 bdf    b3d   mc − mv 2 2 −  − b c bd − bd bc      bds   (mc − md )(mc − md )   3

Let us denote bdf – bds = Δbd

810

(26) (27)

Is the Business Model Broken?

  ∆bd (bdf + bds )   ∆bd (bdf + bds ) 1  − bc bv ∆bd − bv + bv 2 ∆bd    bc  2 2  mv − md       ∆bd (bdf + bds ) ∆bd (bdf + bds )   1 − − bc 2 ∆bd − bv + bv bc ∆bd    bc  m m 2 2 − d   c  2 2   b b b b b ∆ + + b b b ∆bd (bdf + bds ) ∆ d ( df + ds )   mc − mv d ( df ds df ds ) bv − bc + bc bv ∆bd  +  −    2 3 2  (mc − md )(mv − md )      m − m   ∆bd (bdf2 + bds2 + bdf bds ) 2 b b b ∆ + d ( df ds ) c v  − − b c ∆bd − bc   (m − m )2    3 2 d  c  

E ( DWl − n ) =

1 1 2 ∆bd

(28)

Finding the sign of the expected surplus Taking out Δbd from the entire factor and dividing by denominator we get

(bdf + bds ) + b 2    (bdf + bds ) 1  1  − bc bv − bv   bc v  2  mv − md  2 2    (bdf + bds ) + b b     (bdf + bds ) 1 − − bc 2 − bv   bc v c  2 2  mc − md    2 2    (bdf + bds + bdf bds ) (bdf + bds ) (bdf + bds ) + b b  mc − mv bv − bc +  −   c v  3 2 2  (mc − md )(mv − md )     m − m   (bdf2 + bds2 + bdf bds ) 2 (bdf + bds )   c v  −b c − bc   −  (m − m )2    3 2 d  c   

E ( DWl − n ) =

(29)

 (bdf + bds )    mc − mv       mc − mv 1 1   2 E ( DWl − n ) = bc − − +        mv − md   mc − md   (mc − md )(mv − md )   (mc − md )2   2       + bds )       mc − mv 1 1 − −        mv − md   mc − md  (mc − md )(mv − md )   2    bdf2 + bds2 + bdf bds )    mc − mv   ( bv mc − mv   + + (b − b )  −  2      (mc − md )(mv − md )  (mc − md )  mv − md v c 3   

−bv

−

(b

df

 m −m  2   bc mc − mv c v b  b b + (bv − bc ) +   c v  2   c mc − md m m m m − − m m − ( ) d )( v d ) ( c c d   

2 E (DWl-n)=S1 + S2 + S3 + S4 + S5 + S6

(30) (31)

811

Is the Business Model Broken?

(b

+ bds )    1 1  −  m − md   mc − md 2  v (bdf + bds ) mc − mv  = bc  (m − m )2  2 d  c  df

S1 = bc

S2 = − bv

(b S3 =

2 df

(b =

(b

df

+ bds )  1   2   mv − md

  mc − mv     mc − mv   +   +  2   (mc − md )(mv − md )   (mc − md )  

  1 −   mc − md

(32)    mc − mv   = 0  −    (mc − md )(mv − md )  

(33)

+ bds2 + bdf bds )    mc − mv   mc − mv   −    (mc − md )(mv − md )   (mc − md )2   3   

2  + bds2 + bdf bds ) mc − mv ) (    (m − m )2 (m − m )  3 d v d   c 2   bv − bc ) ( bv bc  S4 = (bv − bc ) − (bv − bc ) =   − − mv − md mc − md m m m m ( )( ) v d c d   2 df

  mc − mv S5 =   bc bv  (mc − md )(mv − md )   m −m  2 c v b S6 =   (m − m )2  c d  c 

(34)

(35)

(36)

(37)

To find out the sign of E(DWn-l) we have to follow these underlying assumptions of the model: b d > b c > bv > 0

(38)

md < 0

(39)

mc > mv > 0

(40)

Following the assumptions: S1 > 0

(41)

S2 = 0

(42)

S3 > 0

(43)

S4 > 0

(44)

S5 > 0

(45)

812

Is the Business Model Broken?

S6 > 0

(46)

Putting these values in Equation 31 we get, E(DWl-n) > 0

(47)

Following Equations 31-37, we have: 2 2 2  (mc − mv ) 1  (bdf + bds ) mc − mv  (bdf + bds + bdf bds ) bc     + 2 2  (m − m )   (m − m ) (m − m )  2 2 3 d d v d   c   c  2     m −m  2  (bv − bc ) mc − mv c v +  b  + + b b   (mv − md )(mc − md )   (mc − md )(mv − md )  c v  (m − m )2  c  d    c   Differentiating Equation 8 wt md

E ( DWl − n ) =

(

2 2 2 2  ∂E ( DWl − n ) 1  (bdf + bds ) 2 (mc − mv )  (bdf + bds + bdf bds ) (mc − mv ) 2 (mc − md )(mv − md ) + (mc − md )   = bc + 4 2   (m − m )3  2 2 3 ∂md (mc − md ) (mv − md ) d  c   

 (bv − bc )2 ((mv − md ) + (mc − md ))  (mc − mv )((mc − md ) + (mv − md )) +  bc bv + 2 2 2 2     (mv − md ) (mc − md ) (mc − md ) (mv − md )       2 (mc − mv )  2 b  +  (m − m )3  c  d  c  

(48)

)  

(49)

Following the underlying assumptions of the model (Equations 38, 39, 40) we fid that: ∂E ( DWl − n ) >0 ∂md

(50)

Differentiating Equation 48wrtbdf 2  mc − mv ) ( ∂E ( DWl − n ) 1  bc  mc − mv  (2bdf + bds )     =   +  (m − m )2 (m − m )   ∂bdf 2  2  (mc − md )2  3 c d v d     Following the underlying assumptions of the model (Equations 38, 39, 40) we fid that:

∂E ( DWl − n ) >0 ∂bdf

(51)

(52)

This work was previously published in Outsourcing Management Information Systems, edited byA. Schniederjans, D. Schniederjans, & M. Schniederjans, pp. 339-362, copyright 2007 by IGI Publishing (an imprint of IGI Global).

813

Section III

Tools and Technologies

This section presents extensive coverage of the tools and technologies that both derive from and inform IT outsourcing. These chapters provide an in-depth analysis of the use and development of innumerable devices and tools, while also providing insight into new and upcoming technologies, theories, and instruments that will soon be commonplace. Within these rigorously researched chapters, readers are presented with examples of the tools that facilitate and support continued developments and advancements in outsourcing research. In addition, the successful implementation and resulting impact of these various tools and technologies are discussed within this collection of chapters.

815

Chapter 3.1

Innovative Technological Paradigms for Corporate Offshoring Tapasya Patki GGSIP University, India A. B. Patki Department of Information Technology, India

AbstrAct Internet technology has impelled us to develop faith in the modern practices of business, commerce, and trade. Offshoring has been viewed as a global phenomenon on the economic frontier. While new technologies need to be framed, stopgap arrangements in the form of transient solutions to upgrade the current systems are also desired. Newer regulations and multi-jurisdictional compliance have profound impacts on the growth of outsourcing projects. The development of new technological solutions must challenge the myth that legislation and statutory practices are the only possible mechanisms to counter the unscrupulous activities in the context of outsourcing. A change in the outlook toward such methodologies is essential to shed away the technological inertia and latency. This article opens up discussion issues in the perspective of hardware and software requirements for efficient offshoring. The aim is to achieve

higher precision, protection, and throughput by applying core-computing techniques to the existing practices of outsourcing.

IntroductIon The information and communications technology (ICT) revolution has triggered the economic development at collaborative and cooperative levels. Internet-based infrastructure provided impetus for outsourcing projects to hubs such as India, China, and the Philippines. Bednarzik (2005) indicates that due to its emerging nature, there is no universally accepted definition of offshoring. While the industry professionals use outsourcing and offshoring terms interchangeably, IEEE and ACM believe that when a U.S. company gives work to companies in other nations like India, it is outsourcing (and not offshoring). A general business expansion trend, including an outreach

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Innovative Technological Paradigms for Corporate Offshoring

program, is to explore potentials of other nations for widening an organization’s horizons (Friedman, 2005). Considering this general view, offshoring, outsourcing, and subcontracting need to be distinguished. A report of the ACM Job Migration Taskforce (Aspray, Mayadas, & Vardim, 2005) looked at the issue from a global perspective, as compared to a country-centric one in the context of rapid globalization of IT and the migration of jobs resulting from outsourcing and offshoring. The report clearly defines the following two terms: • •

Outsourcing refers to having work for a company done by another organization. Offshoring refers to having this work done in another country, whether or not it is done by part of the same company.

This leads to a partially overlapping definition of outsourcing and offshoring. Transferring a part of the workload from a host location to another adjunct destination can broadly represent the meaning of these two terms. Predominantly, the host and the destination locations are in different countries. The authors explore the possibility of such situations from the previous perspective, that is, not adhering to a fixed definition. Such an approach is necessary for a global outlook, wherein the participation of developed and developing nations is at equal stake levels (Farrell, Kaka, & Sturze, 2005). Both subcontracting and

offshoring/outsourcing have impact on work force realignment. The fears, however, are disjoint. Subcontracting may result in a partial relocation of the workforce with ensured job security. Such a possibility is absent in offshoring/outsourcing. In this context, the theory of comparative advantage, propagated by the economics of offshoring cannot be applied to subcontracting. With the introduction of business models in the developing nations for managing the available workforce and the infrastructure, the ICT industry paved the way for the foundation of first generation outsourcing oriented corporate

816

models (FG-OOCM) for expanding commerce. The FG-OOCM has opened up various issues for outsourcing-based research, and a need for deploying technological solutions to offshoring activities is being felt. For example, consider a situation where Mexican, Indian, Chinese, and American people work together in an outsourcingbased system. In such cases, knowledge management is a challenge and a need for introducing technological solutions is felt. Although distinct units, rules, and documents of each participating organization can be considered as explicit knowledge, these do not make knowledge for the entire outsourcing system. Information and knowledge are interdependent, but information per-se contains no knowledge. Some of the issues of knowledge management in software engineering (Desouza, 2003) are applicable to outsourcing. In general, outsourcing system operations are performed by outside contractors, and the terms of understanding between the client and the contractor for outsourced services are defined based on distribution of responsibility, liability sharing, and performance monitoring. These issues require managing of electronic records and evidence, impose legal compliance requirements, and need to be viewed from the perspective of technology as opposed to that of mere administration.

Internet Technology Framework Outsourcing is a multistage phenomenon involving individual (usually management/technical positions), functional (knowledge and responsibility orientated), and process (flow of product or services) level activities (Greaver, 1998). Depending on the process requirements, outsourcing can be classified as tactical, strategic, and transformational (Brown & Wilson, 2005). The mindset of considering tactical outsourcing for reducing financial costs is assuming new dimensions to make business capabilities portable on a global basis. Detailed analysis of case studies in a research-based manner establishes the suc-

Innovative Technological Paradigms for Corporate Offshoring

cess pattern using transformational outsourcing (Linder, 2004). Conventional outsourcing approaches that focus on incremental cost savings have outlived and business process offshoring (BPO) as well as emerging knowledge process offshoring (KPO) are the likely next generation outsourcing activities. At present, the Internet technology-based computing deployed for Web services and outsourcing comprises of a broad range of processors, communication networks, and information reservoirs. The trustworthy computer systems encompassing a spectrum of information processing technologies will play a major role in the impressive growth of the BPO sector. The technology to support next generation outsourcing is likely to witness large scope computing instead of large scale computing to withstand attacks and to ensure greater security, dependability, and reliability. Multimedia, multilingual network operating software (MISNOS) supports large scope computing permitting application semantics (Ban-

dyopadhyay, 1996). It has potential for contextsensitive and secure OS architectures to facilitate e-services needs of conventional and emerging ubiquitous embedded systems deployed in BPO sectors. Outsourcing, in the past, has evoked a response, which is a combination of excitement for corporate management and fear/worries like loss of jobs for employees in the host country. In addition to these social issues, the technological issues like data thefts, privacy protection, and timely deliveries have been concerns in the past few years. Figure 1 depicts problems triggered by outsourcing. The Internet must also provide substantive benefits to the various stakeholders of outsourcing business community as opposed to merely offering traditional subcontracting disguised with technology. The early managementoriented outsourcing studies focused on employment issues instead of productivity aspects. The job losses due to direct impact of offshoring and indirectly due to productivity enhancements are

Figure 1. Problems triggered by outsourcing A Typical View of Problems Triggered by Outsourcing

Issues at the Destination Location

Issues at the Souce Location

Job Loss

Data Theft, Breach of Privacy

Increasing Crime Rate

Poor Health Due to Odd Working Hours

Economic Disparity in the Society

Solutions Framework Technology Domain

Absorption into the e-Service Sector for Outsourcing

Concurrency Control and Security Web based services

Governace GovernanceDomain Domain

Health Care Schemes and Stress Relieving Excercises During Office Hours

Govt. to take initiatives to bridge the gap by creating more opportunities

817

Innovative Technological Paradigms for Corporate Offshoring

concerns of transient nature (Bednarzik, 2005). Lo (2005) has demonstrated using a mathematical approach that the international outsourcing trade and technology improvements have potentials to make the world better off with higher real wage and more product variety. Outsourcing failure is termed as a situation when a deal is either terminated or re-negotiated (Brudenall, 2005). High rate of outsourcing failure is attributed to factors like poor planning, choice of partner, or lack of proper strategy. The importance of identifying short-term and long-term goals to prevent outsourcing failures is discussed in the context of vendor selection and cultural match (Chandrasekar, 2005). Lee, Huynh, Chi-Wai, and Pi (2000) identify key research areas for deeper understanding on outsourcing as a two-phase exercise. Evolution of several identified outsourcing issues from motivation, performance angle, to management control has been the focus of first phase. The second phase describes partnershipbased outsourcing trend. A management checklist (Kobayashi-Hillary, 2004) focuses on preparation as a critical part of transition and redundancy process for managerial commitments. However, the preference of the “touch-and-feel” factor over the impersonal virtual environment and the lack of adequate security systems to safeguard strategic information may limit the extent and pace of outsourcing. A need to structure and equip the outsourcing business community for content sharing and control has arisen in the Internet technology framework. With the continued globalization and technology push, outsourcing is seen as the growth engine of the global economy (Roger, Smith, & Kidd, 1999). The IT infrastructure currently available to small- and medium-sized enterprises (SMEs) does not provide sufficient integration amongst different application components of business to support trustworthy inter-organizational outsourcing process. As a stopgap arrangement to improve trustworthiness, we suggest an eservice-oriented methodology for outsourcing

818

for addressing trustworthiness concerns. The approach suggested in the section on establishing concurrency control and security is on the lines of TIOBE programming community index that is updated once a month (TIOBE, n.d.). Flexibility in arranging trans-organizational BPO is a key requirement for a common middleware. Shifting of skill set up the value chain is useful (Fowler, 2005). As a long-term goal, underutilized skill sets arising out of job losses due to outsourcing must be deployed for assessing global methodologies for benchmarking BPO/KPO infrastructure on the lines of supercomputer ranking initiatives (Top 500 supercomputer Sites, n.d.) that are updated half yearly. Technological approaches suggested in this article are useful from this perspective.

status of Initiatives taken by developing nations to support outsourcing In order to gain economic benefits of the BPO boom, a number of developing nations responded in a multipoint fashion. This included focus on the science and technology policy, introduction of cyber legislation, the creation of supportive legal infrastructure, and reforming academic/ educational courses (Matsuura 2002; NASSCOM & BCG, 2001; Patki, 2004). Outsourcing principles and practices never addressed the cybernetic angle of the process. Issues of the cyber-legislative status and the cyber-crime rate of the outsourced/ outsourcing nation were not given due attention. Community centers, Internet kiosks, cyber cafés, cyber marts that are the Internet access points in metropolitan cities, and townships are the objects of attack (Matsuura, 2002). The profile of cyber café usage, types of browsers used, and time of day vis-à-vis the physical locations are among the major criteria for assessing cyber crimes through the potentially floating user population. In the present form, cyber forensic tools concentrate merely on electronic records and need to extend their scope to network forensics. This is one issue

Innovative Technological Paradigms for Corporate Offshoring

that is an impediment in the growth of the BPO industry, and needs to be handled at the research and implementation levels. While statistical data on the quantum of business of BPO sector are published to encourage investments, no data are readily available in open source for assessing legislative potential prior to the commencement of any outsourcing contract-based project. The print media offers some basic narrative information and completely overlooks the analytical and technological aspects of outsourcing. These areas call for further detailing and need to be addressed at the national and international levels. Previous studies related to offshoring have concentrated on a developed nation (primarily U.S.) offshoring to a developing nation (India/China), resulting in an economically win-win situation for both the participating nations. The ACM report (Aspray et al, 2005), has, to some extent, succeeded in overcoming such constraints by addressing broader issues from both national and company perspectives, including the globalization of research, and educational changes. Thus, the initial concept of establishing an offshoring base in a developing nation needs to be altered for the sustained growth, especially for partnership-based outsourcing.

way for new avenues using high-speed computation and DBMS. All through, the Boolean-logic based data items continued to be a basic micro unit and the concepts of raw data, processed data, raw information, and processed information were implemented at application-level instead of CPU hardware (instruction set level) or system software level. This mindset resulted into OS commands of delete type for removal of data as well as information. However, the information weeding is much different than simply deleting a file or the contents of a directory from a computer system. Subsequently, algorithms were developed for data compression to overcome storage, transmission, and retrieval problems. With the introduction of information transfer through the Internet (video graphics, sound, and images), the data compression algorithms grew more popular. Such patchwork approach was acceptable for in-house, networked IT installations. However, the lack of built-in cognitive supports at computational/operational levels adversely influenced outsourcing. It has led to situations of outcry toward outsourcing ranging from labour dissatisfaction to data thefts, forcing countries to resort to legislation. The authors identify the limitations of the current outsourcing technologies and focus on using soft computing based solutions.

technologIcAl Issues Reifer (2004) brings out the views of both sides of the outsourcing debate and highlights that in order to succeed in outsourcing, it is necessary to avoid conflict arising out of lawyers and contract administrators. In this article, we discuss the technology aspects (viz. hardware/software) to avoid the conflict. The present day information systems designed on von Neumann philosophy and the applications tailored for such architectural platforms are successfully running on various hardware/software platforms. Electronic data processing (EDP) was the sole purpose of the early generation of computers. Their extensions to scientific and commercial applications paved the

cognitive support for data Processing With the availability of Internet, EDP-oriented methodology has been directly extended to the BPO sector for establishing dedicated application-oriented servers (e.g., ftp, mail, and dbms) to preclude the intermixing of data and information. However, concept modeling as per the user specifications and requirements is not incorporated in these dedicated servers. Unlike the EDP applications of the bygone century, the future information systems will require computers with capabilities to handle imprecise and partial information, approximate reasoning, and

819

Innovative Technological Paradigms for Corporate Offshoring

learning, both for scientific and commercial applications. Capturing and representing knowledge and inferencing are major challenges in classical computing techniques due to the imprecise or gray nature of real-life decisions. Since computer programming is the ultimate vehicle for the practical realization of outsourcing plans, it is necessary to cater to imprecision and context through software construction approach (Hunt & Thomas, 2003; Patki, 2004). Fuzzy logic (Zadeh, 1965, 1976) techniques allow system modeling using linguistic hedges for handling imprecision, partial truth, uncertainty, and approximations. The focus should be on reducing the cognitive load of the end user leading to the simplification and ease of use of the data processing framework. We provide a brief review of the basic concepts of fuzzy logic (FL) next.

a = sup µF (x) = 1 The membership function can be generated with the help of mathematical equations. Typically, it can be in trapezoidal, triangular or in the form of S or π - curve. The support of a fuzzy set, F, S(F) is the crisp set of all x ∈ X such that µ (x) >0. The three basic logical operations of intersection, union, and complementation can be performed on fuzzy sets. 1. The membership µC (x) of the intersection C = A ∩ B satisfies for each x ∈ X, µC (x) = min {µA (x), µB (x)} 2. The membership µC (x) of the union C = A ∪ B satisfies for each x ∈X,

Fuzzy logic µC (x) = max {µA (x), µB (x)} The theory of binary logic is based on the assumption of crisp membership of an element to a certain set. An element x thus either belongs to (i.e., has a membership value of 1) or does not belong to (i.e., has a membership value of 0) a particular set X. Conventional logic systems can be extended to encompass normalized values in the range of [0,1]; thus introducing the notion of partial membership of an element to a particular set. The variable in a fuzzy system is generally described linguistically prior to its mathematical description, as it is more important to visualize a problem in totality to devise a practical solution. A fuzzy set F, on a collection of objects, X, is a mapping µF (x): X → [0,a] Here, µF (x) indicates the extent to which x ∈ X has the attribute F, thus it is the membership function. In general, we use a normalized fuzzy domain set, for which

820

3. The membership µC (x) of the complementation C = A satisfies for each x ∈X, µC (x) = 1- µA (x) Example: Fuzzy logic hardware modules (Alag & Patki, 1996; Hung, 1995; Watanabe, 1991) as well as disk operating system (DOS) level FL software (Patki, Raghunathan, & Khurshid, 1997) have potential for ameliorating outsourcing/offshoring infrastructure. Basic DOS level commands like dir, list, copy, move, and del have been provided with FL support. The use of variables like old and recent in the time domain and large, average, and small in the size domain have been used to modify the existing DOS commands. A further support using hedges such as very, moreorless, and not is demonstrated in the fuzzy logic-based operating system, FUZOS© (Patki et al., 1996). This concept can be extended to the data processing unit of a BPO, in which the FL based browsers, text editors,

Innovative Technological Paradigms for Corporate Offshoring

call support utilities etc., can be incorporated. For real time response, software approaches are not adequate and there is a need for fuzzy hardware support. Although, add-on cards for computing hardware have been suggested, the practical solution calls for instruction set based processors with hardwired or micro-programmed implementations (Patki, 1997; Watanabe, 1991).

Machine Intelligence Quotient In the past, the performance of computing systems was judged purely by its constituent hardware. Thus, MIPS (million instructions per second), GFLOPS (giga floating point operations per second), and Gibson mix were the metrics for the computer performance assessment. Subsequently, with the developments in the fields of artificial intelligence and fuzzy logic, the software performance index like FLIPS (fuzzy logic inferences per second) appeared in the hardware dominated era to determine the combined hardware and software (i.e., integrated technological performance). FLIPS did not become as popular as MIPS since there were not many occasions to benchmark fuzzy logic hardware/software systems. MIPS rating for benchmarking computing hardware is slowly being replaced with machine intelligence quotient (MIQ) and is likely to have potential impact on offshoring. MIQ permits the understanding of any machine through multiple perspective analysis (Jamshidi, Titli, Zadeh, & Boveriv, 1997). Any numerical or linguistic index/ structure indicating the degree of autonomy of an intelligent system module can be regarded as MIQ. Although it is difficult to obtain an absolute measure of MIQ in the strictest sense, a relative value based on a comparison of the system with an existing baseline machine in use can be determined. This allows us to rate a particular system with respect to an already established machine in use, thus, allowing us to determine its efficiency and effectiveness that can be deployed to tackle a certain problem.

MIQ differs significantly from indices like control performance, reliability, fault-diagnosis (Park, Kim, & Lim, 2001). MIQ has been defined as the measure of autonomy and performance for unanticipated events. The MIQ approach can link the infrastructural needs of an offshoring/ outsourcing institution with its throughput. Issues regarding the measurement of MIQ have been discussed by analyzing human-machine cooperative systems. MIQ (M) can be considered as a union of machine control intelligence (MC) and machine interface intelligence (MF). M = MC + MF Engineering systems or products that are said to be intelligent have been analyzed and a threedimensional construct space representation as entities has been suggested (Zeungnam, Bang, Kim, & Han, 2002). In order to determine the numeric value of MIQ, Sugeno fuzzy integral and Choquet fuzzy integral have been adopted. An important characteristic of the future outsourcing information systems will cater to a situation in which information needs are not defined precisely at the time of the system design and awarding the contract. This brings the focus on dynamically integrated intelligent information systems instead of the computer hardware and software as disjoint infrastructure entities for service sectors. In the near future, when we consider outsourcing, we shall also encompass the broad category of information producing and information lending industries that are likely to usher in a new type of global market. Thus, MIQ will occupy special significance since the outsourcing contract awarding and project-executing organizations will be part of same MNC where current trend of country-oriented legislation will serve no purpose. Example: The offshoring procedure poses an operational threat in deploying commercial off-the-shelf

821

Innovative Technological Paradigms for Corporate Offshoring

(COTS) product procuring strategies for building IT based critical infrastructure. Such a view is expressed (Aspray et al., 2005) in the context of source and application code of COTS products procured through offshoring. This situation can be improved by introducing MIQ evaluation of subassemblies/assemblies using individually certified COTS products. Recommended methodology could include in-depth research in introducing the concept of MIQ authorization and type approval of the COTS products and the evaluation of the host and the destination companies by an international agency.

can be applied for assessing CCI. Independent agencies should be setup centrally that provide a Web-based portal for these parameters and also provide periodic updates on a regular basis for assessing cyber trustworthiness. The data access to such an e-service must be standardized so that processing of requests for proposals (RFPs) is more effective. •

establishing concurrency control and security As brought out in the previous sections, there is a strong need to assess the figure of merit from the security point of view for any city-based infrastructure in an outsourcing/outsourced nation where the project is being executed. The infrastructure does not merely refer to the physical hardware/software setup; but also encompasses dynamic parameters like the cyber crime index (CCI), customer satisfaction rate (CSR), and civil infrastructure status (CIS). These parameters are extremely important to compute cyber trustworthiness of a particular service unit, and to assess how far the unit succeeded in reaching its targets. This approach calls for a technological development and is not possible by merely adhering to standards and/or certification practices like the ISO. The CCI, CSR, and CIS term set has been briefly described next, as elaborate explanations are beyond the scope of this article. This methodology is on the lines of TIOBE programming community index, which is updated every month (TIOBE, n.d.). However, unlike TIOBE, the trustworthiness assessment requires online project data collection based on inherent cognitive styles prevailing in offshoring. In order to illustrate a cognition-based approach for such situations, we discuss how rough set theory (RST)

822

•

•

Cyber crime index (CCI): It is the cumulative measure of the various cyber crimes that occur at a particular service unit in a city where the outsourcing infrastructure has been installed and involves inter-nation as well as intra-nation successful illegal attempts that have taken place in the time period of observation. The term illegal attempt is based on a cognitive factor and cannot be determined directly. Customer satisfaction rate (CSR): It determines the percentage-based value of the number of satisfied customers per unit time (this time is the time-period of observation). The CSR value determines the reliability and the serviceability of the infrastructure unit. Weekly project progress of the targets as per the PERT chart serves as an important parameter. This value is fuzzy in nature as it is used to plot a membership function of CSR with the help of parameters like satisfied and dissatisfied. Furthermore, hedges like moreorless and very can be applied to these values. This membership curve can be used to determine the efficiency and the effectiveness of a service center unit. Civil infrastructure status (CIS): This is a value that is computed from the join of various other factors like the present population of the city, the administrative status of the city, the present need and urgency of a request, and several such related factors. This factor uses type-II fuzzy sets representation. This is a highly variant quantity and it generally fluctuates with parameters

Innovative Technological Paradigms for Corporate Offshoring

like the current climate/season, the socioeconomic condition of the city, the language and culture of the people, the percentage of academicians in the city, the business base of the city etc. This is a very important value as it determines the usability and accessibility of a service unit for offshoring, and needs to be consulted before investing in a particular location prior to the finalizing of the outsourcing project. In the context of the previous discussions, when we talk of outsourcing at the most fundamental level, we refer to a collection of operations that form a single logical unit that need to be executed to perform a specified task to fulfill a particular request. This collection of operations is referred to as a transaction. Transaction management (TM) and concurrency control (CC) are thus evolving issues in outsourcing. To support such schemes, technological solutions have to be provided in the form of cognition-based protocols for TM and CC. Some important considerations with regard to TM include atomicity, consistency, isolation, and durability, popularly referred to as ACID properties. When several transactions take place simultaneously, the isolation property may not necessarily be preserved and to ensure that it holds, a separate CC algorithm must be designed to control the interaction between simultaneous transactions. Serialization of transactions is one such method to establish CC. We can do this by the use of protocol-oriented techniques. Techniques such as lock-based, timestamp-based, graph-based, and validation-based protocols have been previously employed for database systems (Elmasri & Navathe, 2004; Silberschatz, Korth, & Sudarshan, 2002). However, these techniques fail to deliver a good output, as they are not based on the real-life problems. A major limitation of these protocol-oriented solutions is that they have been founded on the grounds of example situations, and they do not by any means address

the grass-root reality of outsourcing/offshoring setup, as they cannot take intelligent decisions. In order to develop more practically efficient solutions, we have to move to the soft-computing based options (Kapoor, Patki, & Khurana, 2005). Proposed TM could be implemented using rough set theory (RST) approach, which also supports the powerful concept of information systems (IS). We provide a brief introduction to RST (Pawlak, 1982, 1984) as well as IS in this article and then discuss how these can be applied for security and concurrency control.

Information Systems A system that is capable of storing information for archival and reference purposes can be thought of as an IS. It is quite similar to a relational database (Silberschatz et al., 2002) in terms of its physical structuring. The difference lies in the powerful concepts of reduction and abstraction that it uses. It can also perform the task of a decision making system, allowing us to select a few attributes as decision parameters. The attributes can also be classified as relevant and irrelevant. Mathematically, an IS is defined as a 4-tuple system (Marek & Pawlak, 1976; Pawlak, 1984) S = {U, D, V, ρ} where U is a non-empty finite set of objects known as the Universe of Discourse; D is a non-empty finite set of attributes or descriptors used to represent the objects; V is the set of values, such that for every a∈D, we associate a set Va, called the domain of attribute a; and ρ is the mapping function such that ρ : U x D → Va

823

Innovative Technological Paradigms for Corporate Offshoring

Rough Set Theory Rough set theory, as the name suggests, is based on the concept of roughness or approximation of the crisp sets. It extends the conventional set theory to include a concept known as an approximation space, which can be defined mathematically as an ordered pair, A = (U, R) where U refers to the universe of discourse, and R refers to a binary relation over U, also called the indiscernibility relation of the IS (Marek et al., 1976; Pawlak, 1984). We assume R to be an equivalence relation, thus broadly classifying R as reflexive, symmetric, and transitive. Thus, if an ordered pair (x, y) ∈ R, we say that x and y are indiscernible or indistinguishable in A. Equivalence classes of relation R are often called elementary sets or atoms in rough set theory. An empty set (i.e., φ) is assumed to be the elementary set for every A. When the union of elementary sets for a set X is finite, we say that the set X is definable or composed. Essentially, for a quantifiable set X, we can talk of two approximations in general, a lower approximation (LA or A), which refers to the greatest definable set in A of which X is a superset, and an upper approximation (UA orA), which refers to the least definable set in A of which X is a subset. The positive region is the union of the lower approximations (Pawlak,

1982). The boundary of X in A is mathematically the set difference of the upper approximation and the lower approximation. Thus, BND (X) = A – A. Figure 2 illustrates these operations. The negative region (or NEG (X)) is the difference between the universe of discourse and the positive region. A set can also be referred to as definable when its LA and UA represent the same set, i.e., when A = A. In all other cases, the set X is said to be undefinable. Undefinable sets in a given approximation space A are of the following four types: Roughly Definable: When for a given set X, A ≠ φ and A ≠ U Externally Undefinable: Whenforagiven set X, A ≠ φ and A = U Internally Undefinable: When for a given set X, A = φ and A ≠ U Totally Undefinable: When for a given set X, A = φ and A = U Example: RST can be effectively applied for determining and analyzing the CCI. To find CCI, we need to follow up a given service unit and approximate its illegal activities/attempts. This approximation can be done in a suitable time frame, which depends on the traffic load of that particular unit. In case of

Figure 2. Basics of rough sets

BND(X)

POS(X) or A Set (X) Universe of Discourse, U

824

Innovative Technological Paradigms for Corporate Offshoring

a heavy traffic, we can approximate the attempts every half-an-hour; and in case of low traffic, the procedure can be carried out every 12 hours. The approximated results would give us a rough idea of the illegal attempts that are taking place. We can thus formulate two extreme limits, given by the upper and the lower approximations. These limits can be overlapped in a cumulative fashion to gather information about that particular service unit. The number of successful illegal attempts can also be determined. This value however, will not be an approximated value, as the number of crimes that have actually taken place, i.e. the number of successful illegal attempts can be determined finitely. The CCI can then be computed by considering the ratio of these two values. RST can also be applied in case of the security of transactions that are taking place in a service unit on an outsourced enterprise. This is done through the development of an intrusion detection system (IDS) for protection of a networked link (Peng, Yun, Douglas, & Dingbang, 2004). An IDS evaluates suspected intrusions and signals an alarm once a suspected intrusion happens. It also watches for attacks that originate from within the setup. The basic process extracts predictive features from the raw data stream being monitored to produce formatted data that can be used for detection. Following this, a detection model determines whether the data is intrusive. RST based methods for the development of IDS is promising in terms of detection accuracy, requirement of training data set and efficiency. In a classical RST based approach, the new attack records are combined with the original training data, and a process of rule generation is employed. The rules generated are used for detection and analysis of further similar attacks. However, this process is not very practical as the entire existing knowledge base has to be re-examined. To solve this problem, an incremental learning procedure is required to approximate the attacks in a more efficient manner in a real-time environment (and not in a post-mortem style of cyber forensics’ analysis). A

rough set based incremental knowledge acquisition algorithm requires that whenever a new attack type or a new variation of attack appears, the rule generation process with the entire training data need not be repeated. The only computation required is that new rules should be generated from the new attack records and these should be used in conjunction with the existing rules. This algorithm has higher speed and recognition rate and can be appropriate for processing huge amounts of data/transactions. Handheld portable gadgets for cyber police patrolling have already been proposed based on the previous ideas (Patki, Patki, Khurana, & Sivasubramanian, 2005).

lIMItAtIons oF exIstIng soFtwAre PrActIces Offshoring operations are heavily dependent on networked computer systems, making it essential to address software and hardware issues. The existing software practices, their limitations, and the scope for improvements are rarely studied in this context. Methodologies focused on producer/ consumer philosophy for software development, upkeep, and maintenance are no longer adequate for outsourcing as they lack of monitoring flexibility. Outsourcing practices have requirements for frequent cognitive interactions. In the absence of technological solutions, retrofit measures in the form of management and administrative directives are adopted. We broadly classify and discuss software issues in order of their immediate significance: operating systems, file systems, database management systems, and computer programming languages.

Issues at the operating system level The traditional approaches to OS focus on memory management (paging/segmentation/overlays),

825

Innovative Technological Paradigms for Corporate Offshoring

process scheduling, multiprocessing environment, and networking (Stallings, 2004). Not only for offshore work assignments, but also in general, OS is considered to be an extension of computer hardware, and as an interface to the users. This has led to an agglomeration of system level calls in OS implementations, to cater to each requirement. The batch processing and multiprogramming oriented approaches need to be modified to support and strengthen outsourcing. In the strictest sense, there is no accepted universal practice for measuring the performance of an OS in an outsourcing environment. On the lines of reduced instruction set computing (RISC) philosophy of microprocessors, OS will have to shed off some of its existing burden onto hardware. Some of the salient points in the context of outsourcing are presented below. •

•

826

Emergence of application specific processor architecture (ASPA) that permits dynamic loading, configuring and remote monitoring of the software environments by the originator on the outsourced contractor’s infrastructure, should be supported by OS. Thus, the concept of information disposal arising out of this will open up issues like weeding of information records (text, graphics, images, video clips, movies, audio sounds, program code--both source and binary executables). Information weeding is different from the delete commands of OS or the data compression methods for storage and retrieval as viewed by cyber forensic professionals. The cognitive aspects of raw data, processed data, raw information, and processed information will gain special significance in outsourcing to overcome today’s data theft problems and associated legislation practices. The conventional approach adopted for servers for different purposes (e.g., application-oriented servers providing ftp, mail, and database will undergo transformations

using concept modeler techniques both at hardware/software modules). This will call for generation of information, determining its contents using fuzzy information inference, and processing of partial/imprecise information. Today’s OS shell programming does not permit such constructs. Thus, if we have to execute an iterative loop for few times, there is no context available or created by programming environment to map the fuzzy term few. We have to state the quantity explicitly--loop 100 times. In an outsourced scenario, to avoid misuse of resources (user’s data is also a resource for unscrupulous people as they can misuse or abuse it), resource aware programming support requires to be incorporated for OS shell programming itself, instead of library support since either deliberately or inadvertently, library support can be switched off in an outsource job processing infrastructure.

Issues at the File system and database levels Outsourcing at the primary level is data-dependent and calls for efficient information systems, which can endorse search and information mining operations. Traditionally, partial information systems were adopted and configured for outsourcing resulting into situations leading to conflict management (Reifer, 2004). File system organization and databases are linked up and we describe them from the perspective of problems associated with data-theft in outsourcing. We suggest a fuzzy logic-based approach to overcome the existing lacuna. Two mechanisms for file systems have been proposed next: 1.

The files can be grouped fuzzily in a dynamic manner according to guidelines inherent to the system installation (or configured by the

Innovative Technological Paradigms for Corporate Offshoring

user), taking into account security policies. Membership function values and fuzzy relations can be computed using following considerations. a. Files open at the same time or in the same session by a single user will be strongly related. b. User as well as system profiles (including privileges) in multi-user systems deployed in BPO installations. c. File extensions and categorization like .cpp, .exe, .jpeg in the case of non-compilatory tasks. 2. The user will specially create types of directories with certain crisp (or fuzzy) attributes for all the files associated with the directory, so that these may be updated dynamically as per the previous principle.

In the existing directory structure, organizational policies may lead to complex access restrictions as well as wastage of disk storage. The present software practices handle such situations and protect information through password-based authorization schemes, which make the system prone to attacks bordering on hacking/password cracking. Generally, there exist fuzzily definable relationships between files like pathological data and medical insurance; hence, a model based on the role theory (Kandel & Lee, 1979) must be employed to handle the complexities. Consider the case of five fuzzily related directories (D1 to D5), having degrees of association ranging from 0 to 1 (membership values), which have been listed in Table 1. A degree of association with the value unity indicates self and direct hierarchical subdirectories, while any real value less than unity means informal influence. Similar maps of associations may be generated among the users of the system logged on during a particular session. Such a session must be dynamically updated in accordance to the logging in and logging out of any user. Matrices to map the relationships between (a) directory/subdirectory, (b) directory/user, and (c) group/user are created in the system to analyze the attribute-value domains. Then, with

Example Consider the directory structure in Figure 3. The directory Medical_data_papers under MrX\Restricted contains laboratory investigations examined by pathologist DrY. Although it is desired that DrY may share rights to access MrX\Restricted\Medical_data_papers, the files under MrX\Restricted\Insurance are not to be shared with DrY.

Figure 3. Directory structure for example Root Directory

Mr. X

Dr. Y

Mr. Z

Public Public

Private

Restricted Public

Insurance

Private

Medical_data_ papers

827

Innovative Technological Paradigms for Corporate Offshoring

Table 1. Degrees of association amongst various directories D1

D2

D3

D4

D5

D1

1

0

1

0.6

0.9

D2

0

1

0.4

0.2

0.5

D3

0

0

1

0.5

0.4

D4

0.5

0.6

0

1

0.1

D5

0.8

0.4

0

0.7

1

the help of fuzzy equations and recursive matrix operations, the influence of different users on each other as well as influence of different directories on the users and system is computed. The time and date of creation in fuzzy format will enable processes to make inferences by considering hedges regarding the file being new, very new, old, moreorless old, etc. This is useful for detecting tampering of files and assessing the damage due to unauthorized access using fuzzy role theory (Kandel et al., 1979). Unlike the text-oriented databases of the current decade, future information systems would primarily use multimedia and non-multimedia databases. The current efforts in the multimedia databases have been restricted to audio, video, and textual stimuli. In order to give them true power of expression, a concept mapping system needs to be viewed as a core, instead of considering these objects merely as collection of symbols, bitmaps, or audio signals. With provision for open ended queries comprising of textual and an ordered group/ring/field-based composition of audio/ image/video clippings as language symbols displayed on the small screen of an optical keyboard (Bandyopadhyay, 1997), multimedia database systems can play a significant role in providing information for the masses (Bandyopadhyay, 1996). It is envisaged that for building large-scope information systems using outsourcing methodology, the data entry, query, and retrieval nodes would naturally be distributed. The data in the form of textual reports, audio/video clippings,

828

and images arriving in all these information reservoir nodes would be un-modeled raw data. The existing password-protected schema view methods of SQL/DBMS environments can be modified to incorporate encryption and decryption methodologies operative through ASPA for sensitive data. Software tools would be required to analyze and aid modeling using raw data for concept generation.

Programming language considerations The conventional programming languages from the era of FORTRAN/LISP to the present day C/C++/Java are based on the following building blocks: • • • •

Iterative statements ( for loop, do loop). Conditional and non-conditional executions (If-then-else, Goto). Recursion oriented structures (Stack oriented). Assignments with associated enhancements (i= i +1, c+= 5).

A need for an effective programming medium in place of a programming language was sensed while examining various issues of information banking related activities in the development phases for SIIIS (Sivasubramanian & Patki, 1996) and FUZOS© (Patki et al, 1997). We discuss the programming medium approach, which

Innovative Technological Paradigms for Corporate Offshoring

encompasses programming languages as one of the building blocks around which other modules for monitoring information disposal, fraudulent attempts, resource aware, and context-based data collections are dynamically configured. In order to facilitate ASPA to load instruction set modules to improve trustworthiness of outsourcing projects, object-oriented programming systems (OOPS) need to include synthesis support. The existing programming languages are more in the form of large suite of tools (with associated integrated development environment IDE), which support algorithmic methodology constructs like iterative loops, multiple branch (switch-case), and conditional controls (if-then-else). These languages emphasize algorithmic programming using an iterative philosophy instead of design using synthesis approach. At present, the existing programming languages used in information systems design do not support synthesis constructs prevailing in the hardware engineering design practice like VHDL for digital VLSI circuit design. This calls for introducing basic primitive modifications at object-oriented programming languages. Ruby programming language has attempted to bring programming closer to the application space of the user (Thomas, Fowler, & Hunt, 2004). Ruby’s object-oriented features are designed to add an instance during runtime, allowing this instance of a class to behave differently from the other instances of the same class. This feature is useful in combination with ASPA loaded partial instruction set to monitor security concerns and prohibit data thefts in real time environment at outsourcing infrastructure. However, Ruby does not address features required for outsourcing. In order to address issues ranging from sharing code development across the globe to asynchronous interactions amongst developers and/or supervisors, it is essential to deploy cognition-based algorithms. We illustrate a case of document support in programming language for outsourcing environment.

The debugger and documentation capabilities of object-oriented programming languages (e.g., Java) are not much useful after the softwaretesting phase is over. Program understanding and documentation, which is useful for software designers, code developers, and testing personnel keeps the end-user out of loop. This bottleneck leads to conflict creation, which should be avoided (Reifer, 2004). The information retrieval and documentation approaches in the past had been traditionally configured for isolated activity and had never been considered for a group activity like outsourcing. The scope for utilizing document features is very limited in the software maintenance and practically no scope exists for its usage by the end users who use such software at their computer installations. We should concentrate on group performance in the outsourcing environment (Damian & Eberlein, 2000). Since existing documentation is not tailored for multiple perspectives, there is no provision to configure the documentation application module on a user selection basis. An end user in an outsourcing scenario rarely uses the software documentation supplied with the systems since it does not provide any cognitive assistance. Thus, OOPS should provide application semantic support on documentation so that cognitive assistance is provided individually to every category of user community consisting of management controllers, cyber forensic analysts, security supervisors, and client managers. Thus, existing broadcasting modes of documentation should be replaced by an interactive categoryspecific mode for users. Intelligent software agents can help to simulate such studies. Support documentation for outsourcing infrastructure should answer cognitive queries and not function as help menus or FAQs. The text analysis orientation in traditional documentation retrieval leads to the situation that two words with same underlying meaning/stem refer to the same concept for indexing, e.g. neutron and neutralize. The index terms

829

Innovative Technological Paradigms for Corporate Offshoring

that are derived from the text of the document use pre-coordinate or post-coordinate principles. The controversy about index language for document retrieving (Farradane, Russell, & Yates-Mercer, 1973) is primarily due to text analysis approaches adopted and can be overcome using synthesis principle. Conventional documentation retrieval techniques do not address mid-operation support and the scope of fuzzy logic and rough set techniques is promising (Bandyopadhyay, 1996; Goguen, & Lin Kai, 2000). A fuzzy logic-oriented documentation support system for programming language that will permit offshoring community to develop a dynamic view of the same output from multiple perspectives like software code obfuscation, trustworthy computing, and forensic examinations to improve the overall group performance has been proposed (Patki & Khurana, 2006). By using the lower and upper approximation techniques of rough set theory, along with fuzzy relational data view, different projections of the same information are feasible for different information consumers (Kapoor et al., 2005). This capability is a must for efficient outsourcing to restrict and partially overcome the data thefts and similar problems.

MultIPlexIng oF bPo InFrAstructure At present, BPO infrastructure is being used in absolute terms with respect to the consumer community. There is a need to think on the lines of relative BPO houses where scheduling of jobs is carried out in a manner corresponding to the demands as well as the feedback of the user. Multiplexing of infrastructure on the basis of geographical locations to provide and serve a larger user community to the fullest extent is a novel idea. Such a scheme may use a three-schema architecture at the grass root level, comprising of a physical (internal) schema, a conceptual (logical) schema, and an application (external)

830

schema. This architecture will aid the development of secure systems and will thus revolutionalize the concept of data protection and safe transfer. The OSI reference model for the TCP/IP network protocol can be extended to accommodate such multiplexed BPOs. Resource allocation should be carried out using platform independent integrated development environment (IDE). This will also cater to the increasing traffic through the network at the peak hours due to the availability of efficient resources, resulting into the optimal utilization of the BPO infrastructure. In order to provide a makeshift arrangement to incorporate concept modeling as per the client requirements, we introduce the concept of an inter-dialoguing processor (IDP). The IDP infrastructure could be based on a simple microcomputer, which takes in machine level inputs (instructions as well as data packets). The IDP acts as a transfer-establishing a resource link between the service center and the customer interface array dynamically. The main task of the IDP is to merge and route the traffic of the N service centers via a single transfer path to the customer interface array, which is responsible for interactions with the actual customer. The CCI value is computed for each service center. This value is used for handling the security issues. At the IDP level, the CIS value is calculated. The customer interface array uses the CIS value for routing information to various customers. It is also responsible for finding the CSR with the help of user feedback. Such an arrangement is depicted in Figure 4. The arrangement shown here is very fundamental in nature and is not necessarily a final solution to the multiplexing concept. It can however be used as a makeshift pattern in this transient phase of offshoring. Since some special customized hardware needed for such a system is not yet available, this section of the article may be considered as a precursor. Refinements of this design are expected. We discuss fuzzy logic-based algorithm for BPO multiplexing in the following subsection.

Innovative Technological Paradigms for Corporate Offshoring

Figure 4. Multiplexing architecture SC 2

SC 1 Network link 1

SC N

Network link 2

Network link N

IDP 1 (N:1 MUX, 1:N Demux) Information Transfer

CCI Det. Level

CIS Det. Level

User Feedback (CSR)

Customer Interface Array Legend: 1. 2. 3. 4. 5

Algorithmic steps for bPo Multiplexing 1.

2.

3.

4.

Create a global FMAP of service centers available to the customers, mapping customers to the multiplexed infrastructure based on the membership function value. FMAP is a resource relation that allows customers to determine which service center stores or caches which files. The structure of a typical FMAP is given in Table 2 where customer interface array (CIA) index of figure 4 is used. Manage metadata through proxy servers that reference the locations where data blocks of different files are placed in an encrypted format. Maintain a cache block so that some permitted, registered requests can be handled without accessing the machine disks and resources directly. Maintain cache consistency metadata (i.e., version information so that no writes can be done on obsolete data) however, read requests for this data are permitted.

SC: Service Center IDP: Inter-Dialouging Processor CCI Det. Level: Cyber Crime Index Determination Level (Misuse/Abuse) CIS Det. Level: Civil Infrastructure Status Determination Level CSR: Customer Satisfaction Rate

The control-system-managing module of inter-dialoguing processor (IDP) of BPO multiplexer acts as a load balancer and changes the FMAP by increasing the membership value of lesser-used BPO infrastructure machines and reducing those of heavily loaded machines. This representation and replication (FMAP is globally replicated and present in different machines with different entries) of FMAP enables the customers to be serviced with minimum number of network hops using BPO multiplexing, by taking into account parameters like link speed, bandwidth, and load status when assigning membership values in the FMAP. This helps in preventing network congestion. As and when a new machine joins the multiplexing infrastructure, the FMAP of the closest link is read, and the system-updating module of IDP modifies its own map accordingly. Updating of FMAPs takes place synchronously. The system can also be expanded using multiple fuzzy variables like distance between client and BPO, cyber trustworthiness, and cost factor to provide other advantages. Such an approach helps in reducing the cognitive load. It is important to observe that the conventional von Neumann architecture is not efficient for handling fuzzy

831

Innovative Technological Paradigms for Corporate Offshoring

Table 2. Fuzzy control for BPO multiplexing CIA Index

Service Center I

Service Center II

0X00

0.5

0.9

0X01

1

0

….

..

..

0XFF

0

0

logic processing and IDP can be only simulated in software environment for demonstrating the effectiveness. ASPA based instruction sets can be introduced for modeling such a system. Instead of general-purpose processors, digital fuzzy hardware is required for acceptable real-time performance. In the absence of such dedicated fuzzy hardware, either the limited scaled down software solutions will be used or the approach may be abandoned altogether, as it requires very high fuzzy inference speeds (Alag et al., 1996; Hung, 1995; Patki 1996; Watanabe, 1991).

conclusIon In the past, computing technologies were framed by developed nations and were deployed domestically as well as internationally. This view of technology producers and consumers must be understood in the context of offshoring by integrating consumer experiences rigorously. Data collected at the outsourced infrastructure destinations will be a useful technology driving parameter. This is now feasible as many MNCs have set up their own infrastructure units in various countries, which are routinely undertaking outsourcing work. Thus, the trend will focus on the transformation of human resources, ethics, practices, and motivations into software intelligent agents involving cognitive processing. The present practice of isolated country specific solutions needs to be replaced with global initiative, as

832

…

Service Center N 0 0.1

..

.. 0.5

outsourcing is emerging as new trade and commerce vehicle for world economic growth. The exploratory and development work carried so far has validated the initial assumption that better integration using MIQ approach at hardware and software module level along with the multiplexing of BPO infrastructure is central to the next generation offshoring technology. Soft computing techniques such as the fuzzy logic and the rough set theory are vital to the expansion of such ideas. The recent announcement of the National Science Foundation of planning an effort to fundamentally re-engineer the Internet and overcome it’s shortcomings, and thus creating a network more suited to the computerized world of the next decade, indicates the willingness to redesign the net for future. The technological paradigms suggested in this article can be thought of as a stepping-stone in this direction.

AcKnowledgMents Authors wish to acknowledge their discussions with industry representatives, academic community, and government policy makers. The experimental work undertaken by various students has been the driving force to consolidate the issues to face the challenges of outsourcing technological revolution. Interactions with Mr. Mahesh Kulkarni, Group Coordinator, Center for Development of Advanced Computing (CDAC), Pune and Mr. S. Sivasubramanian, Scientist-E,

Innovative Technological Paradigms for Corporate Offshoring

Department of Information Technology, New Delhi, have been enlightening. Suggestions from editors have been useful in shaping the article effectively.

reFerences Alag, S., & Patki, A. B. (1996). Fuzzy logic integrated circuits. In Proceedings of the 1st Online Workshop on Soft Computing (pp. 187-191), Nagoya, Japan. Aspray, W., Mayadas, F., & Vardim, Y. (2005). Globalization and offshoring of software: A Report of the ACM Job Migration Task Force, Association for Computing Machinery. Bandyopadhyay, R. (1997). Engineering schematics and draft specification for multilingual optical keyboard (MLOPKB). SDD Technical Report, DOE, May 1997. Bandyopadhyay, R. (1996). MISNOS—Multimedia, multilingual, information services network operating systems software. Electronics, Information, and Planning Journal, 23(4), 205-230. Bednarzik, R. W. (2005). Restructuring information technology: Is offshoring a concern? Monthly Labor Review, August 2005, p. 11-21, Bureau of Labor Statistics, US Department of Labor. Blunden, R. B. (2004). Offshoring IT: The good, the bad, and the ugly. Apress Publication. Brown, D., & Wilson, S. (2005, May). The black book of outsourcing: How to manage the changes, challenges, and opportunities. Wiley Publication. Brudenall, P. (2005, May). Technology and offshore outsourcing strategies. Palgrave Macmillan Ltd. Chandrasekar, P. R. (2005). Tips for outsourcing. IEE Engineering Management Journal, 6, 24, Dec

2004-Jan 2005. Damian, D., & Eberlein (2000). The effect of communication media on group performance in RE. In Proceedings of the 4th International Conference on Requirements Engineering (ICRE 00) (pp. 91), IEEE CS Press. Desouza, K. C. (2003). Barriers to effective use of knowledge management systems in software engineering. Comm. ACM, 4691, 99-101. Elmasri, R., & Navathe, S. B. (2004). Fundamentals of database systems. PearsonEducation. Farradane, J., Russell, J. M., & Yates-Mercer, A. (1973). Problems in information retrieval: Logical jumps in the expression of information. Information Storage and Retrieval, 9, 65-77. Farrell, D., Kaka, N., & Sturze, S. (2005). Ensuring India’s offshoring future, The McKinsey Quarterly, 2005 Special Edition: Fulfilling India’s Promise. Fowler, C. (2005). My job went to India. Pragmatic bookshelf Publisher. Friedman, T. L. (2005). World is flat: Brief history of the globalized world in twenty-first century. London: Penguin. Goguen, J. A., & Lin, K. (2000). Web-based multimedia support for distributed cooperative software engineering. In Proceedings of International Symposium on Multimedia Software Engineering (pp. 25-32), December 11-13, 2000. Greaver II, M. F. (1998). Strategic outsourcing: A structured approach to outsourcing decisions and initiatives. American Management Association. Hung, D. L. (1995, August). Dedicated digital fuzzy hardware. IEEE Micro, 15(4), 31-38. Hunt, A., & Thomas, D. (2003). Preparing the raw material. IEEE Software, 20(5), 97-98.

833

Innovative Technological Paradigms for Corporate Offshoring

Jamshidi, M., Titli, A., Zadeh, L. A., & Boveriv, S. (1997). Applications of fuzzy logic—towards high machine intelligence quotient systems. NJ: Prentice Hall. Kandel, A., & Lee, A. (1979). Fuzzy switching and automata. Crane Russak, New York. Kapoor, A., Patki, T., & Khurana, S. (2005). Part-I: Analytical methodologies in soft computing, Part II: Exposure to cyber forensic software tools. Technical Report Submitted to DIT, New Delhi. Kobayashi-Hillary, M. (2004). Outsourcing to India--The offshore advantage. Berlin: SpringerVerlag. Lee, J., Huynh, M. Q., Chi-Wai, K. R., & Pi, S. (2000). The evolution of outsourcing research: What is next issue? In Proceedings of the 33rd Hawaii International Conference on Systems Sciences-2000. Linder, J. C. (2004). Outsourcing for radical change. American Management Association. Lo, C. (2005). International outsourcing and intraindustrial trade. International Journal of Applied Economics, 2(2), 69-82, September 2005 Marek, V. W., & Pawlak, Z. (1976). Information storage and retrieval system. Mathematical Foundations, Theoretical Computer Science, 1(4), 331-354. Matsuura, J. H. (2002). Security, rights, and liabilities in e-commerce. Artech House. NASSCOM, & BCG. (2001). e-commerce opportunities for India Inc. Study Report prepared by NASSCOM and The Boston Consultancy Group Report. Park, H. J., Kim, B. K., & Lim, K.Y. (2001). Measuring the machine intelligence quotient (MIQ) of human-machine cooperative systems. IEEE Transactions on Systems, Man, and Cybernetics— Part A: Systems and humans, 31(2), 89-96.

834

Patki, A., Lakshminarayanan, S., Sivasubramanian, S., & Sarma, S. (2003b). Cyber crime information system for cyberethics awareness. In Proceedings of the International Conference on Cyberworlds (pp. 46-52), Singapore. Patki, A.B. (2004). Offshoring and outsourcing opportunities. Lecture Notes for Engineering Student Internship Programme, Department of Information Technology, New Delhi. Patki, A. B. (1996). Fuzzy logic based hardware: Some experiences. In Proceedings of the 1st International Discourse on Fuzzy Logic and the Management of Complexity (FLAMOC’96) (Vol. 3, pp. 247-251), January, 15-18, 1996, Sydney, Australia. Patki, A. B., Kulkarni, M., Sivasubramanian, S., & Patki, D. D. (2003a). Technology development trends for cyber civilization. In Proceedings of the International Conference on Cyberworlds (pp. 40-45), Singapore. Patki, A. B., Patki, T., Khurana, S., & Sivasubramanian, S. (October 17-19, 2005). Product development for female cyber police programme. In Proceedings of Conflux, 2005, New Delhi, India. Patki, A. B., Raghunathan, G. V., & Khurshid, A. (1997). FUZOS—Fuzzy operating system support for information technology. In P. K. Chawdhry, R. Roy, & R. K. Pant (Eds.), Soft computing in engineering design and manufacturing (pp. 131140), Springer. Patki, T., & Khurana, S. (2006). Software cost estimation and software obfuscation: A fuzzy logic perspective. Technical Report Submitted to Department of Information Technology, New Delhi. Patki, T., Khurana, S., & Neha (2005b). Cyber civilization: Advantages and shortcomings. VISION MSIT, New Delhi.

Innovative Technological Paradigms for Corporate Offshoring

Pawlak, Z. (1984). Rough classification. ManMachine Studies, 469-483. Pawlak, Z. (1982). Rough sets. International Journal of Computer and Information Sciences, II(5), 342-356. Peng, N., Yun, C., Douglas, R., & Dingbang, X. (2004). Tools and techniques for analyzing intrusion. ACM Transactions on Information and System Security, 7(2), 273-318, May 2004. Reifer, D. J. (2004). Seven hot outsourcing practices, IEEE Software, 14-16. Roger, J. Y., Smith, B., & Kidd, P. T. (1999). Business and work in the information society: new technologies and applications. IOS Press. Silberschatz, A., Korth, H.F., & Sudarshan S. (2002). Database system concepts. NY: McGraw-Hill. Sivasubramanian, S., & Patki, A. B. (1996). Software industry intelligent information system. Electronics Information and Planning Journal, 23(9), 513-518. Stallings, W. (2004). Operating systems (4th ed.). Pearson Education.

TIOBE Programming Community Index. (n.d.). Retrieved September 15, 2006, from http://www. tiobe.com/tpci.htm Thomas, D., Fowler, C., & Hunt, A. (2004). Programming ruby: A pragmatic programmer’s guide (2nd ed.). O’Reilly Media Inc. Top 500 supercomputer Sites. (n.d.). Retrieved September 15, 2006, from http://www.top500. org Watanabe, H. (1991). Some consideration on design of fuzzy information processors--from a computer architectural point of view. In Proceedings of Fuzzy Engineering Towards Human Friendly Systems, IFES’ 91 (pp. 387-398). Zadeh, L. A. (1976). A fuzzy-algorithmic approach to the definition of complex or imprecise concepts. International Journal of Man-Machine Studies, (8), 249-291. Zadeh, L. A. (1965). Fuzzy sets. Information and Control, (8), 338-353. Zeungnam, B., Bang, W., Kim, D., & Han, J. (2002). Machine intelligence quotient: Its measurement and applications. Fuzzy Sets and Systems, 127(1), 3-16.

This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 57-76, copyright 2007 by IGI Publishing (an imprint of IGI Global).

835

836

Chapter 3.2

Hybrid Offshoring:

Composite Personae and Evolving Collaboration Technologies Nathan Denny University of Arizona, USA Shivram Mani University of Arizona, USA Ravi Sheshu Nadella University of Arizona, USA Manish Swaminathan University of Arizona, USA Jamie Samdal University of Arizona, USA

AbstrAct Inspired by round-the-clock manufacturing, the 24-Hour Knowledge Factory endeavors to transform the production of software and other intangibles into a process of continuous development. While the concept of offshore software development is well established, few enterprises are currently able to develop the same code artifacts around the clock. We discuss the benefits of applying the 24-Hour Knowledge Factory to

software development. We also present a representative scenario highlighting the problems of asynchronous communication in current offshore software development practices. Further, we introduce the notion of composite persona as a potential collaboration model within the 24-Hour Knowledge Factory and explain its ability to mitigate problems arising from communicating across cultures, languages, and time zones. Finally, we present a suite of new collaboration tools and techniques that are being developed specifically

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Hybrid Offshoring

for use by composite personae in the 24-Hour Knowledge Factory.

IntroductIon Inspired by the paradigm of round-the-clock manufacturing, the concept of 24-Hour Knowledge Factory endeavors to transform the production of intellectual property and intangibles into a process of continuous development (Gupta & Seshasai, 2007). More specifically, we envision a 24-Hour Knowledge Factory as an enterprise composed of multiple sites that are evenly distributed around the globe. As the sun sets on one site, it rises on another; like an ongoing relay race chasing the sun, the day’s work is handed off from the closing site to the opening site. The benefits of implementing a software development enterprise as a 24-Hour Knowledge Factory are several. We expect to realize gains from significant compression in development schedules, faster turnaround time for localization and customization of existing products, and bug fixes and critical security patches released with greater celerity. However, we also admit that the challenges of establishing a 24-Hour Knowledge Factory are significant. More specifically, we anticipate technical challenges arising from asynchronous communication, which will likely be exacerbated by cultural and linguistic differences (Seshasai & Gupta, 2007). Non-technical challenges may grow from political and legal circumstances, and from difficulties in managing and operating in such a nontraditional business environment. In this article, we discuss the current state of offshored and globalized software development and some of the underlying difficulties. Next, we introduce the concept of the composite persona. Finally, we discuss evolving collaboration technologies that support the concept of composite personae in the context of hybrid offshoring.

globAl soFtwAre develoPMent Software development projects that involve multiple international sites have been a reality since the 1960s (Carmel, 1999, p. 17). However, those early efforts were relatively rare compared to the near ubiquity of contemporary global software development (GSD) (Gupta, 2007). By the year 2000, 200 of the Fortune 500 companies relied upon global software development teams or outsourced development to firms that use them (NASSCOM, 2000). Our vision for the 24-Hour Knowledge Factory for software development is not synonymous with currently accepted GSD methods. Rather, the 24-Hour Knowledge Factory is a special case of GSD that has several unique properties while inheriting most of the problems of GSD. Subsequently, we present a brief survey of contemporary GSD methods to better define the problem of software development in the 24-Hour Knowledge Factory.

convention and Practice Engineering is the process of designing systems to solve problems. The activity of software engineering produces software systems to solve problems. Like nearly all engineering disciplines, software engineering advocates that large problems be recursively decomposed into smaller sub-problems and their corresponding sub-system solutions. Decomposition proceeds recursively until the problem-solution pair is tractable in both understanding the sub-problem and the resulting complexity of the sub-system. In modern parlance, the ultimate result of decomposition is a set of modules and classes (expressed in an object-oriented language such as Smalltalk, C++, or Java), where each class can be more-or-less completely understood by one person. These modules and classes are then assigned to developers who then own that artifact throughout

837

Hybrid Offshoring

the process of coding, unit testing, and possibly even maintenance. Each module or class has one owner, and only that individual may alter that artifact. Ownership confers the benefits of accountability for defects and preserves the continuity of the actual state of the artifact with the expected state of the artifact. Although a few software practices advocate otherwise, single ownership is the most generally accepted practice (Nordberg, 2003). Ideally, sub-problems can be solved in complete isolation from lateral, sibling sub-problems. This allows for sub-systems to be viewed as black boxes: entities that have defined behavior and state, and whose inner workings are not visible to those outside of its development. With respect to coding and implementing, black boxes confer autonomy on the developer and permit development to proceed concurrently. If the problem was initially well defined, with complete knowledge of the domain of interest, and there is little change in the environment in which the software is to be deployed, then there should be little lateral communication between implementers of subsystems. It is, most unfortunately, a rare case where these perfect conditions exist. More typical is the case where, during the process of development, the problem is more complex than what was originally believed or conditions external to the project have changed. Either case causes alteration to the requirements which were used to produce the original design. Software, like a machine, requires that all of its components operate in harmony. Changes in the requirements and subsequent behavior of one subsystem propagate to those sub-systems with which it interacts, creating a rippling wave of secondary changes in those sub-systems, and so on. The result of this phenomenon is a need for lateral communication between sub-system developers. In the context of GSD, lateral communication between sites often introduces delays, costs, and risks. As an illustration, consider the following fictional, yet representative, scenario.

838

A typical scenario in gsd Yankee Software, Inc. is developing a new clientserver application for clinical use by physicians in hospitals and other high-tech treatment centers. The new software is to be marketed internationally and must conform to local laws and standards. After thoroughly studying the problem, consulting many potential customers, the architects at Yankee Software develop a design and subsequently produce the models and documents that will be used by the programmers to implement the software. In order to reduce coding costs and leverage significant experience and talent with coding for highly reliable networking software, Yankee Software is partnering with Muscovite Technologies in Russia. Yankee Software will develop the end user client, workflow engine, and validating rules, while Muscovite Technologies will develop the database, cache, and network server system. After the design phase and an initial kick-off meeting where both parties sign off on the design, coding begins. The designers had anticipated several risks; key among these known risks was the vulnerability of the validating rules. These rules localize the software for operation in the various legal and standards frameworks in which each potential customer must operate. During development, this risk becomes realized in a change in record keeping standards in the United Kingdom’s National Health Service. The change is significant enough to necessitate an adjustment in both validating rules and database structure. At this stage of the project, such a change will be quite costly in terms of redesign and coding. However, the market potential for the NHS is second only to the domestic U.S. market, and Yankee Software does not want to lose such an opportunity. Consequently, the requirements are altered and parts of the system undergo redesign. Several weeks later, Kathy, a programmer for Yankee Software in San Jose (California, USA)

Hybrid Offshoring

comes across an ambiguous condition in the specification for the software. It appears to her that there is a conflict in how the server handles errors. The prior documentation, before the NHS redesign, and the posterior documentation issued after the redesign disagree in several cases. Since the affected server component has already been coded, Kathy decided to contact the owner of that code. Following is an outline of the (fictional) discussion that these two developers might have. (Note that Moscow is 11 hours ahead of San Jose.) On Day 1, Kathy discovers the ambiguity. She consults with a few co-workers at her site in San Jose and decides to e-mail the owner of the component, a developer named Feodor in Moscow, Russia. Kathy puts further development of her component on hold and continues with other work. When Feodor logs in to read his e-mail at the beginning of Day 2, he sees the message from Kathy asking for clarification. The problem is complex, English is Feodor’s second or perhaps even third language, and Kathy’ writing style is not very expressive. Feodor is confused as to the exact meaning of Kathy’ query and sends a reply asking for more details and further clarification. Later in Day 2, after Feodor has signed off, Kathy logs in and reads Feodor’s reply. She takes a few minutes to think of a better way of explaining what she had found and what she was asking, citing the specific sections of the documents in conflict and including a fragment of the code. She sends the improved, clarifying question to Feodor. It is Day 3 and Feodor logs in to find Kathy’s question easier to understand. Feodor believes he understands the problem and takes a few minutes to compose the reply. Later that same day, Kathy reads Feodor’s response and believes that she understands Feodor’s answer. However, Feodor accidentally replied with a double-negative, and since this potential defect may be harmful to their market in the UK, Kathy composes another question for Feodor to verify his answer.

On Day 4, Feodor logs in to read his e-mail. He shakes his head for a moment, amused at his own mistake and writes a response agreeing with Kathy’s statement and verifying his own prior e-mail. After the sun has set in Moscow, Kathy reads Feodor’s response and alters the client-side code that she is developing to be in harmony with the server-side code that Feodor has already written. In the preceding story, Kathy and Feodor, separated by an 11-hour time zone difference and speaking across languages and cultures, spent four days solving a problem. Had the two developers been co-located, this problem would likely have been solved within a few hours.

coMPosIte PersonAe The pressure to collaborate has increased with the use of offshoring, in which developers need to be addressed at different locations, according to Booch and Brown (2003). About 70% of a software engineer’s time is spent on collaborative activities (Vessey & Sravanapudi, 1995). As demonstrated above, this need for communication can confound software development when the distributed teams span multiple cultures, languages, and time zones. As a mechanism to correct for asynchronous communication lag and ambiguity introduced by cultural and linguistic differences, we introduce the notion of composite persona. A composite persona (CP) is a highly cohesive micro-team that, like a corporation, has simultaneous properties of both individual and collective natures. That is, a composite persona to an external observer has a unique name and acts as a singular entity, even though it is the composition of several individuals. With respect to CPs, each site is a mirror of the other, having exactly the same CPs as each other site. (Note that this does not imply that

839

Hybrid Offshoring

each site has the same number of staff, as one developer may belong to more than one CP.) As the world turns and sites turn on and turn off, each CP remains active, but the “driver” of each CP changes with each site. Using CPs, development proceeds in the same manner as in a more traditional, local process. Problems are decomposed into modules and classes as they are when only single developers are assumed. However, when modules and classes are assigned ownership, the owner of each artifact is no longer an individual developer but rather a CP. Similarly, in the process of conflict resolution, discussion, and debate, each CP contributes as a single entity. In the following subsection, we present three scenarios that exemplify what we anticipate will be common interactions within a CP and between CPs.

A composite Personae scenario For the purposes of illustration, we assume three development sites: Tucson (USA), Wroclaw (Poland), and Sydney (Australia). We will focus on two CPs: CP Mercury and CP Minerva. CP Mercury will be composed of Tom (USA), Grzegorz (Poland), and Molly (Australia). CP Minerva is staffed by Rachel (USA), Sylwester (Poland), and Jack (Australia). Furthermore, our scenario will take place in early November. Tucson is at GMT-7, while Wroclaw is at GMT+1. November is in Austral Summer. When the residents of Sydney set their clocks ahead at the end of October, they are at GMT+11.

Forward Communication and Handoff The most basic operation in the context of CPs is the handoff, depicted in Figure 1. This occurs at the change of every shift, when the current driver signs off and the new driver, as the next site turns on, signs on and takes over responsibility

840

Figure 1. Handoff

for the CP. Our prototype handoff procedure is inspired by the daily stand-up meeting used in the Scrum agile process (Schwaber & Beedle, 2002). Scrum daily stand-up meetings, for co-located developers, are done first thing in the morning. All attending are asked to briefly summarize what they accomplished the previous workday, what problems they encountered, and what they expect to accomplish today. We think this to be a very succinct set of questions to be used as a basis for the handoff from one driver to the next. Following is brief story that demonstrates a handoff. It is nearly 15:35 GMT, 25 minutes before Grzegorz’s shift ends at his office in Wroclaw. He looks up at the clock and decides to wrap up his work for the handoff to Tom. Grzegorz opens up the handoff tool and begins filling in template forms and following a scripted workflow. At 15:50 GMT, Grzegorz completes the last of the handoff forms and officially ends his workday. At 15:55 GMT, Tom signs on and becomes the driver for CP Mercury. He takes several minutes to read what Grzegorz accomplished and finds that Gzegorz has found what he thinks is a bug in a class owned by CP Minerva. He recommends

Hybrid Offshoring

to Tom that he query CP Minerva and continue working on a couple of troublesome methods of a class owned by CP Mercury. Tom agrees and sets about his day, accordingly. At 22:05 GMT, Tom gets an instant message from Molly. It is just after 9:00 a.m. DST in Sydney and she is beginning her day. She and Tom chat online to divide up the work recommended by Grzegorz. Tom is still driving CP Mercury and has checkout priority for any code artifacts owned by CP Mercury. At 23:30 GMT, Tom walks through his handoff report and submits it at 23:50 GMT. Since there are still a few minutes of overlap, he sends an instant message to Molly. She sends an instant message back to Tom informing him that his handoff report is understood and wishes him a good evening. At 23:57 GMT, Tom signs off and Molly becomes the driver for CP Mercury. The hand-off process transfers knowledge from the driver signing off to the driver signing on. This transfer is unidirectional from past to present and forms the forward dimension in the two-dimensional communications that are possible with CPs.

Resolving a Simple Problem with Lateral Communication Many simple problems can be resolved by real-time communication between drivers. In co-located software development, these small problems are often resolved by a phone call or a quick chat over a cup of coffee. There is no appropriate analog in GSD, where even simple problems can result in significant delay as rounds of conversation ensue over e-mail (Herbsleb, Mockus, Finholt, & Grinter, 2003). Even when developers work off-hours to make real-time contact with other sites, the communication channels available carry less information than co-located face-to-face interaction. Consider the following example from Figure 2: At 21:10 GMT, Tom, driving for CP Mercury, gets an instant message from Rachel. Rachel is currently driving CP Minerva. One of the components owned by CP Minerva is using a component owned by CP Mercury. Rachel asks Tom for an example of how to use a certain feature of CP Mercury’s component. Tom thinks about it

Figure 2. Lateral communication

841

Hybrid Offshoring

for a moment and then sends a reply with a code fragment for her to study. She thanks Tom for the example. This form of communication is lateral between CPs and is orthogonal to the forward communication dimension. The third communication pattern is established when information is flowing along both dimensions.

Resolving a Complex Problem Using Both Communication Dimensions For the purpose of clarification, we will define a complex problem as a problem that involves two or more CPs and cannot be solved within a single working shift. This problem must therefore be handed off from one driver to the next. A complex problem that can be handled completely internal to the CP can be resolved in much the same way as development. (Writing code is somewhat equivalent to solving a long and complicated problem.) At 13:10 GMT, Grzegorz reads an e-mail sent to CP Mercury about a test that had failed and indicating a fault in a component owned by CP Mercury. Fortunately, the message contained a trace of the code that created the fault as well as the parameters of the test. Grzegorz finds that the problem seems to arise only in test cases where the component owned by CP Mercury is used by a component owned by CP Minerva. Grzegorz contacts Sylwester via instant messenger and they begin the work of tracking down the bug. At the end of their shift, each of them completes their respective sign-off procedures and ends the day hoping that Tom and Rachel will be able to find the solution. Tom and Rachel sign in within a few minutes of each other. Tom, seeing that Rachel is also at work, sends her an instant message, and they agree to continue working on the problem. Each takes a few minutes to catch up on the notes from their counterparts. Grzegorz and Sylwester have done most of the work, and it does not take much

842

longer before Tom and Rachel find the source of the fault and have it corrected.

Benefits of CPs in the 24-Hour Knowledge Factory We anticipate several benefits of applying the composite personae strategy in the context of the 24-hour Knowledge Factory.

Smooth Transition The process of decomposition, design, and assigning ownership is essentially the same whether development is done by individuals or by CPs. The introduction of CPs augments the body of engineering knowledge and does not deprecate anything. Furthermore, during migration from current practices to one that incorporates CPs, an enterprise is able to mix and match as needed. Some artifacts may be owned by individuals, others by CPs.

Increased Trust Trust is notoriously difficult to establish in GSD projects (Handy, 1995; McDonough, Kahn, & Barczak, 2001) but essential for success (Sarker et. al., 2001). Humans in collective efforts work best in teams where each member of the team shares the common goal of the team, and members trust the intentions and efforts of each other member. Here we are looking for the jelled team described by DeMarco and Lister (1987). As group size increases and the frequency and expressiveness of communication decreases, trust within the team suffers greatly (Carmel & Bird, 1997). CPs are very small, typically comprising of three or four individuals, and trust is easier to establish between these few members than it would be within a larger group. Although most communication will be done asynchronously, communication between members of CPs will be frequent and informative. While asynchronous

Hybrid Offshoring

communication is much less expressive than synchronous communication (Sproull & Kiesler, 1991), we expect that such persistent, frequent communication will lead to greater trust than is common in contemporary GSD projects (Jarvenpaa, Knoll, & Leidner, 1998; Javenpaa & Leidner, 1999; Maznevski & Chudoba, 2001).

Convergence At this conceptual stage of our development of the CP, we believe that communicating the changes made by each driver to the other members will require less costly communication than associated with current global software development practices. We expect that after working on the same artifact for some time, the knowledge held individually by each member of a CP will converge. That is, we expect that developers within the same CP will, after some warm-up period, have essentially the same concept of the problem domain, solution options, and the utility space of those options. For a given question about some code artifact, each member of the CP that owns the artifact is likely to give very similar answers. Consequently, between members of a CP, communicating the purpose of incremental changes and the overall state of the artifact will become increasingly efficient as their mutually shared experience grows with time. Here we can draw upon the experience of Extreme Programming (XP), from which our CPs are inspired (Beck, 1998, 1999). XP advocates collective ownership of code, allowing anyone in the project to alter any artifact. This is made possible by creating mutual experience and shared knowledge through pair programming: the process of having two people work on the same artifact, simultaneously, using the same workspace. While XP is not without controversy, especially for larger projects and distributed development, we believe our CP method to be an especially useful balance for the 24-Hour Knowledge Factory. CPs prevent surprises and preserve accountability as per the

single ownership model, yet enable many other collective ownership benefits that are discussed here.

24-Hour Access to Owner The practice of single ownership of code artifacts works well when all development is done in the same time zone. However, for sites that have very little or no overlap in work schedules, the single ownership model becomes a hindrance. For instance, in the coding phase of the linear development model, bug fixes are typically routed through the owner of the artifact. In this way, the owning programmer is knowledgeable of any changes made to the artifact and understands how those changes alter the behavior of the artifact. If we assume only one owner and three nonoverlapping development sites, then 16 of the 24 work hours in a day are done by centers which do not have direct, synchronous communication with the owner. Necessary changes must wait until the owner’s site turns on, creating a bottleneck for related work in the other two centers. Accordingly, by our method of assigning ownership to CPs, each piece of code artifact can be modified at almost any time.

Higher Truck Number So-called from the imagined worst-case scenario where a project member gets struck by a runaway truck, the truck number of a project is an amusing but useful metric for expressing vulnerability to the loss of critical talent. The collective code ownership model and consequent degree of redundancy of knowledge about any given artifact increases the truck number of the project and decreases development risks introduced by the possibility of losing critical talent and specialized knowledge (Nordberg, 2003). With three-member CPs, a CP could lose a single member and the enterprise will still retain two people that have intimate knowledge over the

843

Hybrid Offshoring

artifacts owned by that CP. While productivity may decrease for the period that the CP remains understaffed, the project survives. When a new member is brought into the CP, the new member has the project artifacts and notes from the previous developer; in addition, (s)he has direct and frequent access to the two remaining members in the CP. This feature may be particularly important when including labor from nations where worker turnover is high. Indeed, some recent observations imply that high employee turnover in offshore companies often is a significant risk in contemporary offshoring strategies (Carmel & Agarwal, 2002; Lewin & Peters, 2006; Offshoring Times, 2006). This makes the higher truck number inherent to CPs to be a major advantage over current offshore development practices.

Localizing Lateral Communication In a case study done by Herbsleb et al. (2003), little difference was found in the number of lateral communication delays incurred by a local development project and a GSD project. However, the GSD project experienced longer delays. In this particular study, the mean delay time for the locally developed project was 0.9 days, while the mean delay time for the GSD project was 2.4 days. Our own work on studying communication in technical USENET conversations (Denny, 2007) suggests an average delay of between two and five days. With each CP represented at each site, lateral communication is now mostly local. Consider a question by CP Minerva about a code artifact owned by CP Mercury. If the Tucson site is on, then Tom will be answering a question by someone else co-located at his site. If Tucson is off and Sydney is on, the Australian driver for CP Minerva will be asking Molly instead. Further, since each site is relatively mono-cultural (with respect to the entire enterprise), lateral communication will be nearly free of ambiguity introduced

844

by differing linguistic and cultural norms. That is not to say that communication will be completely unambiguous, but the prevailing ambiguity will be resolved more easily by synchronous conversation between the drivers of the CPs engaging in active, spontaneous dialog. We have not completely done away with asynchronous communication, but have instead moved into a different realm. Each member of a CP must have nearly equivalent knowledge of the artifacts owned by the CP. If the current driver modifies a code artifact owned by his CP, then the next driver must be familiar with that alteration. So within the CP there will be significant communication, almost all of which will be asynchronous in nature.

evolvIng collAborAtIon technologIes DeSanctis and Gallupe (1987) described a space and time classification framework in a 2x2 matrix (see Figure 3) that classifies tools based on the temporal characteristics of activities and location of the teams. The 24-Hour Knowledge Factory paradigm fits into the 4th quadrant. More sophisticated tools than available asynchronous communication tools are needed to tap and effectively transfer tacit knowledge. In distributed collaboration software development, tools that seamlessly enable communication without loss of tacit knowledge are critical. The communication methods that were successful in multi-site transfer of knowledge, particularly when dealing with remote or global teams, included teleconferencing, videoconferencing, chat, e-mail, and document exchange. While some of these methods are not necessarily effective for most of each shift in the 24-Hour Knowledge Factory system (those involving real-time communication), they might be particularly important during the handoff between each shift in order to

Hybrid Offshoring

Figure 3. Tool matrix

convey a large amount of information in a short amount of time. Synchronous handoff is shown to be successful in the following tools. Microsoft’s NetMeeting (2006) facilitates the social interaction required for sharing tacit knowledge. IBM’s Workplace Collaboration Services provides a full range of integrated communication and collaboration tools (IBM, 2005). Integrated development environments (IDEs) such as Eclipse are useful collaborative software development tools. Collaber is a collaboration framework that is built on Eclipse Software and includes features such as task management and group discussion. Eclipse goes a step further by its integration of JAZZ (Cheng, Hupfer, Ross, & Patterson, 2003), an awareness tool that allows developers to initiate and archive synchronous communication from the IDE in the code context. In all these distributed collaboration environments including the tools mentioned above, the developers rarely have a time overlap and hence synchronous communication tools are of no avail. The tools required for a 24-Hour Knowledge factory using the CP model necessitate not only distributed remote collaboration, but are also limited to an asynchronous mode. Wiki (Cunningham, 2001) is a Web-based collaborative tool to use the strength of collective intelligence. MASE

(Chau & Maurer, 2004) extends the wiki concept into the realm of agile software processes, and can be used for knowledge sharing by both colocated and distributed teams. The limitations with such tools are that users have to explicitly store documents and there is little to no context from which decisions can be analyzed by succeeding shifts. Furthermore, there is a strict dependency on the exact terminology in order to relate different content in the repository, which is a weak data mapping model. Distributed document management is also critical in a collaborative development environment. There are many configuration management systems such as CVS (Berliner, 1990), IBM’s ClearCase (Allen et al., 1995), and Subversion (Collins-Sussman, 2002). These do a good job in defining mechanisms for managing different versions of their work products. In such tools, the developers tend to get inundated with notification/ updates of the various control events. Allowing the developers to configure their artifacts of interest is of good value as it reduces the information overload on the developer. Software tools such as CVS Watch (Berliner, 1990) allow the developers to define their artifacts of interest for which they get automatically notified on any access or modification. WorkSmart.net (2007) is a hosted

845

Hybrid Offshoring

asynchronous collaboration service that provides the ability to configure a set of events whenever any action is taken. For example, an event may be triggered when a new folder is created, a document is deleted, or a new version of a document has been checked in. Most of the commercial collaboration tools that have been built are either add-ons to existing tools or those that integrate several existing tools tuned to a synchronous mode. These tools rely significantly on user-initiated annotation and documentation, and do not address the project handoff from one user to another in an efficient manner. The free flow of information and assistance is vital to the 24-Hour Knowledge Factory environment. All of these needs have created an environment that requires innovative and more useful processes and tools.

cPro: composite Personae software Process Software processes typically aim to improve quality and productivity. Quality and productivity are measured in terms of cost, effort, delivery schedules, and defects. However, many of these processes like PSP (Humphrey, 1995) assume single ownership of code. Extreme Programming (XP) (Nagappan & Williams, 2003) supports multiple ownership of code and assumes horizontal decomposition of work, with more than one developer sitting together working on the same task. This is no longer the case where CPs are collaborating in the 24-Hour Knowledge Factory. This work model poses many more challenges in terms of estimation, work allocation, knowledge transfer, and defect control. To overcome these problems and to facilitate offshoring in the 24Hour Knowledge Factory model, we have come up with a software process that we call CPro.

846

Planning When an overall schedule of the CP to complete a task needs to be obtained, one developer cannot estimate for the whole CP. This is because more than one developer present in the CP share the same task, and productivity can vary greatly from one programmer to the other. This has long been observed to be quite wide (Sackman, Erickson, & Grant, 1968; Humphrey, 1995). Due to a variety of factors, we can know a priori neither the subtask allocation within the CP nor the exact productivity of each member on any given task. Therefore, in CPro each developer gives his or her own estimates for all of the subtasks within a task. A schedule caster then executes a Monte Carlo simulation on the possibilities for productivity and project evolution. The result is a probabilistic schedule that project managers can use to estimate the delivery date of project artifacts within a specified degree of confidence.

Knowledge Transfer and Defect Control Defect reduction is one of the primary goals of any software process that aims at improving quality and productivity. In the CP model, since tasks are vertically decomposed among drivers of the CP, each driver changes the state of the task. In the absence of a structured handoff procedure, defects may also occur due to lack of understanding of the current state of the task. Therefore, many of the current defect-reduction techniques cannot be utilized as is. CPro makes use of the existing project artifacts as implicit handoff documents. This by itself not only conveys the work done in the previous shift, but also provides input to the current driver in the form of a project artifact. When the current driver reads the artifact to continue the work, he would be equipped with the knowledge of the job done by the driver in the previous shift. While reading the artifact, the developer in the current

Hybrid Offshoring

shift would in effect review the artifact and could give suggestions and other feedback. To achieve this, we suggest the use of TestDriven Development (Williams, Maximilien, & Vouk, 2003). Test cases for some methods are written by one driver, which would act as a unit test document for that method. This also would serve as a handoff document. In this way, the current driver who codes on the method receives input from the previous driver in the form of unit test casesthe effect of this being that any discrepancies in understanding the design are clarified at this stage. Test cases must be machine interpretable and consequently lack the ambiguity of natural language. The developer in the second shift would then code the method defending the unit test cases, and the CP peer in the next shift would review the code. In this way, all three members of the CP would be aware of the code artifact in good detail, and extra communication in the form of status e-mail or documents are avoided.

Software Processes

MultiMind

Objects and events relevant to the project are posted and logged into a monotonically increasing persistent database along with a time stamp. This database, sometimes called a Lifestream (Freeman & Gelernter 1996), allows human users and intelligent agents to create a local or comprehensive view of the state of the project at any given time. This capability is central to justify decisions made by one user to a different user that is trying to understand why a particular decision was made and the original acting user cannot be contacted in real time. Towards facilitating the driver’s understanding of the current state of the task, we have designed a study tool which draws inspiration from Activity theory. This is, of sorts, a decision support system in reverse: a decision justification system that justifies the decisions made by the previous workers. The integrated project knowledge base (Lifestream) is mined for relevant knowledge objects (project artifacts, speech acts, events) that were consumed by the previous worker during

Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a shared language and mental models. MultiMind is a novel collaboration tool under development and experimentation which aims to provide a semantically rich environment for developers collaborating using the CP method. MultiMind aims to improve upon DICE (Sriram, 2002) and other collaborative engineering tools. Our initial implementation efforts have focused on providing a proof of concept for the 24-Hour Knowledge Factory model. Based on feedback from the initial users, we plan to judge the efficacy of the model and tune our development efforts accordingly. MultiMind is founded on the following technologies.

MultiMind is process-aware and guides the CP members along the CPro process. In addition to CPro, MultiMind also incorporates concepts from XP and Scrum. The tool automates some of the Scrum process, keeping developer intervention to a minimum. More specifically, the responsibility of creating work summaries has been offloaded from the developers to the embedded project management system. A templated scrum-style system is incorporated which, on sign-out, gathers quick statements about the anticipated future state of open tasks. On sign-in, during the subsequent shift, a scrum report is automatically generated by synthesizing information from the previous scrum entry and the state of various archived project artifacts. Figure 6 depicts the usage of Scrum and CPro processes during handoff.

Lifestream

847

Hybrid Offshoring

Figure 4. Handoff process in MultiMind

the course of his action. The aim is thus, to supply the driver with only relevant and condensed knowledge objects.

Speech Acts Theory Speech Acts (Austin, 1963; Searle, 1975), used in linguistics, are acts of communication. The Speech Act theory systematically classifies communication messages into various acts, thereby establishing a common ontological base by which agents can communicate and understand each other. Both KQML (Knowledge Query Manipulation Language), developed by DARPA (Finin et al., 1993), and ACL (Agent Communication Language), developed by FIPA (O’Brien & Nicol, 1998), rely on the Speech Act theory for their protocol for communication between software agents in knowledge-based systems. In the CP model, Speech Acts assist in synthesizing relevant information based on the high-level semantic nature of communication events. Existing asynchronous communication mechanisms that use free text lack significant semantic structure, making it impractical for a

848

tool to classify the communication type or do meaningful analysis. In the MultiMind tool, the communication entity is embedded as a conversation panel and it appears in the context of every project artifact. The conversation panel provides the facility to post messages based on a communication act, and these messages are logged to the Lifestream.

vocal Annotations in Program source code The best scenario for transferring code from one programmer to the next is to have the first programmer sit with the next programmer to go over the code line by line, and have him or her explain what the program does and why it was designed and implemented the way is was (Chiueh, Wu, & Lam 2000). This is not likely in the 24-Hour Knowledge Factory. In the absence of appropriate documentation, maintenance of the code becomes a nightmare and grows worse over time (Miller, Johnson, Ning, Quilici, & Devanbu, 1992). Dekleva (1992) cites in these surveys that lack of documentation is one

Hybrid Offshoring

of the biggest problems people who maintain the code have to face. She takes the survey one step further and uses the Delphi technique to ask system maintainers what their largest obstacles are. The Delphi technique consists of three rounds of surveys where the consensus increases with each survey round. In all three rounds that were conducted, system documentation was in the top four issues seen by system maintainers, and it ended up tied for third when the survey was over. Raskin (2005) explains the need for the thorough use of internal code documentation, not only for improving code understandability but also improving reusability and productivity. Literate programming, introduced by Knuth (1984), is a methodology that combines the programming language with documentation language. The most well-known languages of literate programming are TeX, Cweb, and METAFONT (by Knuth himself). The most apparent drawback is that it necessitates a competent writing ability to be an effective literate programmer. Fletcher (1997) describes how dictation becomes a more relaxed process since the user can now concentrate on the content of what is being dictated instead of the process of getting the text into the computer. Combining code documentation and voice recognition may be a good way to use an established technology to solve a problem that is continuing to grow in the software industry. The prototype developed takes audio comments, translates them to text, and displays the text comments in the code. It also has the feature that the audio comments can be played back so if the translation is incorrect or not comprehended by the next programmer, he can playback the audio comment and hear exactly what was said.

eclipse extensions While e-mail is a commonly used asynchronous communication method, the knowledge-sharing requirements of the 24-Hour Knowledge Factory

make any one-to-one communication methods a poor choice for project communication. However, in order to convince software developers to move away from this method of communication, a convenient alternative that makes information available to the entire team must be provided. Project communication is not always technical in nature. Often, target dates, requirements decisions, priorities, and even team member schedules must be shared such that an entire team, regardless of where they are located, must be able to quickly assimilate. The solution under development proposes integrating tools into a common development environment. The Jazz project at IBM (Cheng et al., 2003) is a recent initiative that begins to address these concerns by providing a framework for distributed collaboration that is also processaware and combines technical and managerial tasks into the development environment. This framework is built as an extension to the Eclipse Development Environment and provides many tools that are ideal for supporting the 24-Hour Knowledge Factory. What Jazz does not provide is an alternative to e-mail that functions as a team-based project communication method. One solution may be discussion forums. Forums allow informal communication to be stored in a structured format that is accessible by all team members. Therefore, work is being done to study the existing functionality of the Jazz platform that would work well in the 24-Hour Knowledge Factory and to create appropriate plug-ins that integrate discussion forums into the Jazz platform.

conclusIon As long-term strategic offshore partnerships evolve into the 24-Hour Knowledge Factory, new methods of work must be employed (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Here, we have introduced the Composite Persona, a long-lived micro-team that has simultaneous in-

849

Hybrid Offshoring

dividual and collective characteristics. CPs have the potential to resolve much of the difficulty in contemporary offshore development by mitigating the cultural, linguistic, and time zone differences between partners. Modern groupware technologies cannot fully realize the possibilities made available by the 24-Hour Knowledge Factory and the CP method. Here, we have presented a new software process (CPro) customized for use by developers organized into CPs. MultiMind, our new groupware tool and framework, builds upon a variety of novel technologies to aid software developers that employ CPro, and automates many management and process functions in order to reduce the need for explicit cooperation between the collaborating developers. Furthermore, we are experimenting with speech recognition technology as it can be applied to vocal annotation of project artifacts in distributed and international development. On the near horizon, we are also preparing extensions to the popular Eclipse integrated-development environment that will provide a smooth path for moving from contemporary offshore development methods into the 24-Hour Knowledge Factory. Beyond technology, we have created an international partnership. With aid from the University of Technology–Sydney and the University of Wroclaw, we can test theory and tools and move closer to the 24-Hour Knowledge Factory.

reFerences Allen, L., Fernandez, G., Kane, K., Leblang, D., Minard, D., & Posner, J. (1995). ClearCase multisite: Supporting geographically-distributed software development. Proceedings of the International Workshop on Software Configuration Management (ICSE SCM-4 and SCM-5 Workshops, Selected Papers, pp. 194-214). Austin, J.L. (1963). Gothenburg studies in philosophy I. Goteborg.

850

Beck, K. (1998). Extreme programming: A humanistic discipline of software development. Lecture Notes in Computer Science, 1382, 1-16. Beck, K. (1999). Embracing change with extreme programming. IEEE Computer, 32(10), 70-77. Berliner, B. (1990). CVS II: Parallelizing software development. Proceedings of the USENIX Winter 1990 Technical Conference (pp. 341-352). Booch, G., & Brown, A.W. (2003). Collaborative development environments. Advances in Computers, 59. Carmel, E. (1999). Global software teams: Collaborating across borders and time zones. Englewood Cliffs, NJ: Prentice Hall. Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2). Carmel, E., & Bird, B. (1997). Small is beautiful: A study of packaged software development teams. Journal of High Technology Management Research, 8(1), 129-148. Chau, T., & Maurer, F. (2004). Knowledge sharing in agile software teams. Logic Versus Approximation, 173-183. Cheng, L., Hupfer, S., Ross, S., & Patterson, J. (2003). Jazzing up eclipse with collaborative tools. Proceedings of the 18th Annual ACM SIGPLAN Conference on Object-Oriented Programming, Systems, Languages, and Applications/Eclipse Technology Exchange Workshop (pp. 102-103), Anaheim, CA. Chiueh, T., Wu, W., & Lam, L. (2000). Variorum: A multimedia-based program documentation system. Proceedings of the IEEE International Conference on Multimedia and Expo (vol. 1, pp. 155-158). Collins-Sussman, B. (2002). The subversion project: Building a better CVS. Linux Journal, 94, 3.

Hybrid Offshoring

Cunningham, W., & Leuf, B. (2001). The Wiki way: Quick collaboration on the Web. Reading, MA: Addison-Wesley. Dekleva, S. (1992). Delphi study of software maintenance problems. Proceedings of the Conference on Software Maintenance (pp. 10-17). DeMarco, T., & Lister, T. (1987). Peopleware: Productive projects and teams. New York: Dorset House. Denny, N. (2007). The Nexus of Entrepeneurship & Technology (NEXT) initiative technical report #20070518. Eller College of Management, University of Arizona, USA. DeSanctis, G., & Gallupe, R.B. (1987) A foundation for the study of group decision support systems. Management Science, 33(5), 589-609. Finin, T., Weber, J., Wiederhold, G., Genesereth, M., Fritzson, R., McKay, D., McGuire, J., Pelavin, R., Shapiro, S., & Beck, C. (1993). Specification of the KQML agent-communication. Darpa Knowledge Sharing Effort. Fletcher, R. (1997, August 1-2). IBM VoiceType software. Proceedings of the IEEE Colloquium on the Language Toolkit for Engineers in Business. Fletcher, E., & Gelernter, D. (1996). Lifestreams: A storage model for personal data. ACM SIGMOD Record. Gupta, A. (2007, September 15). Expanding the 24-hour workplace: Round-the-clock operations aren’t just for call centers anymore. The Wall Street Journal, R9 Gupta, A., & Seshasai, S. (2007). 24-Hour Knowledge Factory: Using Internet technology to leverage spatial and temporal separations. ACM Transactions on Internet Technology, 7(3). Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership

and 24-hour knowledge factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. Handy, C. (1995). Trust and the virtual organization. Harvard Business Review, 73(3), 40-50. Herbsleb, J.D., Mockus, A., Finholt, T., & Grinter, R. (2003). An empirical study of global software development: Distance and speed. IEEE Transactions on Software Engineering, 29(6). Humphrey, W.S. (1995). Introducing the personal software process. Annals of Software Engineering, 1. IBM. (2005). IBM workplace collaboration services. Retrieved from http://www142.ibm.com/ software/workplace/collaborationservices Jarvenpaa, S., Knoll, K., & Leidner, D. (1998). Is anybody out there? Antecedents of trust in global virtual teams. Journal of Management Information Systems, 14(4), 29-64. Jarvenpaa, S., & Leidner, D. (1999). Communication and trust in global virtual teams. Organization Science, 10(6), 791-815. Knuth, D. (1984). Literate programming. The Computer Journal, 27(2), 97-111. Lewin, A.Y., & Peeters, C. (2006). Offshoring work: Business hype or the onset of fundamental transformation? Journal of Long Range Planning, 39, 221-239. McDonough, E., Kahn, K., & Barczak, G. (2001). An investigation of the use of global, virtual, and collocated new product development teams. Journal of Product Innovation Management, 18(2), 110-120. Maznevski, M., & Chudoba, K. (2001). Bridging space over time: Global virtual team dynamics and effectiveness. Organization Science, 11(5), 473-492. Miller, L., Johnson, J.Q., Ning, A., Quilici, & Devanbu, P. (1992). Program understandingdoes

851

Hybrid Offshoring

it offer hope for aging software? Proceedings of the 7th Knowledge-Based Software Engineering Conference (pp. 238-242).

Searle, J.R. (1975). A taxonomy of illocutionary acts. Language, Mind and Knowledge, Minnesota Studies in the Philosophy of Science, 344-369.

Nagappan, N., & Williams, L. (2003). A software reliability estimation framework for extreme programming. Proceedings of the International Symposium on Software Reliability Engineering.

Seshasai, S. and Gupta, A. (2007). The role of information resources in enabling the 24-Hour Knowledge factory. Information Resource Management Journal, 20(4), 105-127

NASSCOM. (2000). Annual NASSCOM report. Retrieved from http://www.nasscom.org

Sproull, L., & Kiesler, S. (1991). Connections: New ways of working in the networked organization. Cambridge, MA: MIT Press.

NetMeeting. (2007). Homepage. Retrieved from http://www.microsoft.com/windows/netmeeting/

Nordberg, M.E. III. (2003). Managing code ownership. IEEE Software, 20(2), 26-33. O’Brien, P.D., & Nicol, R.C. (1998). FIPAtowards a standard for software agents. BT Technology Journal, 16(3). Offshoring Times. (2006). Top 10 risks of offshore outsourcing. Retrieved May 2007 from http://www.offshoringtimes.com/Pages/2006/ Article_446.html. Raskin, J. (2005). Comments are more important than code. ACM Queue, 3(2), 64-. Sackman, H., Erickson, W., & Grant, E. (1968). Exploratory experimental studies comparing online and offline programming performance. Communications of the ACM, 11. Schwaber, K., & Beedle, M. (2002). Agile software development with Scrum. Upper Saddle River, NJ: Prentice Hall.

Sriram, R. (2002). Distributed and integrated collaborative engineering design. Glenwood, MD: Sarven. Subversion. (2007). Homepage. Retrieved from http://subversion.tigris.org/

Suchan, J., & Hayzak, G. (2001). The communication characteristics of virtual teams: A case study. IEEE Transactions on Professional Communication, 44(3), 174-186. Williams, L., Maximilien, E., & Vouk, M. (2003). Test-driven development as a defect-reduction practice. Proceedings of the International Symposium on Software Reliability Engineering (pp. 34-45). Vessey, I., & Sravanapudi, A.P. (1995). Case tools as collaborative support technologies. Communications of the ACM, 38, 83-95. WorkSmart. (2007). Homepage. Retrieved from http://www.worksmart.net/product/content_management.html

This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 89-104, copyright 2008 by IGI Publishing (an imprint of IGI Global).

852

853

Chapter 3.3

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility Ehap H. Sabri University of Texas at Dallas, USA

AbstrAct This chapter explains the best practice in implementing e-business Technologies to achieve business cost reduction and business agility. Many companies started to realize that gaining competitive advantage is no longer feasible by only managing their own organizations; it also requires getting involved in the management of all upstream supply organizations as well as the downstream network. E-business technologies present huge opportunities that are already being tapped by several companies and supply chains. Although the benefits of implementing e-business technologies are clear, enterprises struggle in integrating e-business technologies into supplychain operations. The author illustrates the strategic and operational impact of e-business technologies on supply chains and explains the performance benefits and challenges firms should expect in implementing these technologies. Also,

the author provides the best-practice framework in leveraging e-business applications to support process improvements in order to eliminate nonvalue-added activities and provide real-time visibility and velocity for the supply chain. Finally, this chapter presents the future trends of using e-business in transformation programs.

IntroductIon Executives realized that producing high-quality products is not enough in today’s competitive environment; the new challenge is to get products to customers when and where they need them, exactly the way they want them, with a competitive price and in a cost-effective manner. Many factors are making this challenge more complicated; globalization, increased complexity of supply chains (SCs) with outsourcing and the move to mass customization and build-to-order

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

(BTO) environments, the need for a shorter time to market to gain competitive advantage, and the shift from vertical to horizontal supply chains make an efficient integration with suppliers and customers more critical. E-business technologies address the above challenges by enabling enterprises to collaborate with their internal and external suppliers and customers, providing visibility, automating the paperdriven business processes, and interconnecting inventory, logistics, and planning systems. The way to survive the competition in today’s business world is to stay ahead of competitors. Leveraging e-business technologies effectively is key to staying competitive and achieving business agility. Although the benefits of implementing e-business technologies are clear, enterprises struggle with integrating e-business technologies into supply-chain operations. Decision makers find themselves asking the most fundamental questions. How can we do it? What is the best practice? Does it apply to us? Does technology add value? If so, what is the best way to quantify it and then maximize it? Since many have failed in achieving value, how can we make sure that we will not be one of them and will be able to minimize the risk? What does senior management need to do to support transformation initiatives? This chapter gives powerful tools for answering these questions. This chapter addresses the strategic and operational impact of e-business technologies on supply chains and explains the performance benefits and challenges firms should expect in implementing e-business technologies. Also, it provides the best-practice framework in leveraging e-business technologies to support process improvements in order to achieve cost reduction and velocity for the supply chain. This framework includes a practical and effective return-on-investment (ROI) model to calculate the benefits of e-business transformation programs.

854

The objectives of this chapter can be summarized as follows. • • • •

Provide a good understanding of the challenges in today’s business environment Identify the impact of e-business technologies on enterprise processes Highlight the benefits of implementing ebusiness technologies Provide guidelines and a framework for implementing e-business technologies successfully

The concepts in this chapter are presented in an easy-to-understand manner that is intended for any reader interested in learning about e-business technologies. Because e-business can be leveraged by several functions within the organization, this chapter has been written for the wide audience that is interested in learning how to leverage e-business techniques in improving processes and slashing waste. This chapter provides strategies for senior managers to use in planning for transformation programs, and also provides middle mangers with tools to effectively manage and implement the best practice. Graduate students can use this chapter to gain an excellent understanding of how e-business technologies work, and then use this knowledge to either extend the research in this field or implement the concepts learned from this chapter in the industry.

bAcKground Valencia and Sabri (2005) stated that the widespread use of the Internet has turned the eyes of many companies to the numerous solutions that the Internet provides. E-business technologies have helped many companies in improving their overall processes and performances.

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

On the other hand, Handfield and Nichols (2002) mentioned that integrated supply-chain management (SCM) is now recognized as a strategy to achieve competitive advantage. When pressed to identify how to achieve this strategy, however, the path forward for executives is not clear. Numerous solution providers offer the “silver bullets” to supply-chain integration, yet the results are never guaranteed.” Devaraj and Kohli (2002) mentioned that executives are concerned that even when there is promise of a payoff, the assumptions may change and payoffs may never be realized. Rigby, Reichheld, and Schefter (2002) mentioned that, in a survey conducted by a CRM (customer-relationship management) forum, when asked what went wrong with their CRM projects, 4% of the managers cited software problems, 1% said they received bad advice, but 87% pinned the failure of their CRM projects on the lack of adequate change management. Any transformation program should encompass three specific phases: initial enablement, followed by implementation, and finally ongoing support and maintenance. An effective transformation plan must support these three phases and address all the challenges around selecting the right strategy, change management, and software provider; maintaining upper management buy-in; managing by metrics; and rolling out a maintenance strategy. Valencia and Sabri (2005) mentioned the several guidelines that are important to consider when e-business technologies are implemented. These guidelines can be grouped as follows. •

Initial enablement:  Synchronize e-business objectives with corporate initiatives  Use e-business as a driver for significant process improvement  Identify operational and financial benefit metrics



•

•

Clearly identify the process and the scope of the transformation program  Obtain consensus from all process stakeholders Implementation:  Simplify processes by eliminating nonvalue-added activities  Deploy in small phases with compelling ROI  Consider proactive enforcement of tobe processes in the solution  Enable exception-based problem resolution Ongoing support and maintenance:  Define the ongoing process for capturing, monitoring, and analyzing metrics data

E-Business Definition E-business can be defined as the use of the Internet to facilitate business-to-business (B2B) or business-to-consumer (B2C) transactions and includes all operations before and after the sale. E-business can also be defined as the adoption of the Internet to enable real-time supply-chain collaboration and integration of the planning and execution of the front-end and back-end processes and systems. E-business has already impacted the industry significantly by providing important benefits like cost reduction, visibility improvement, lower inventory, streamlined processes, better response time, faster time to market, better asset utilization, higher shareholder value, fulfillment lead-time reduction, flexibility improvement, revenue increases by penetrating new markets, improvement in customer satisfaction, and better standards of living. E-business, or the Internet computing model, has emerged as perhaps the most compelling enabler for supply-chain integration. Because it is open, standard based, and virtually ubiquitous, businesses can use the Internet to gain global vis-

855

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

ibility across their extended network of trading partners and respond quickly to changing business conditions such as customer demand and resource variability. The Internet is considered to be the enabler for e-business technologies, while e-business is the enabler for supply-chain collaboration and integration. E-business technologies can support different environments: business to employee (B2E), B2C, and B2B. The B2E environment links the ERP (enterprise resource planning), SCM, warehousing, shipping, and human-resources systems together into a Web-based system. B2E focuses on the internal transactions of a company and affects the internal supply-chain process. The B2C environment allows customers to place, track, and change orders online, and allows sellers to gather information about the consumer in real time. B2C is sometimes referred to in the literature as e-commerce. Other literature differentiates between the direct business customer and the end customer (consumer). The B2B environment links B2E and B2C to the systems of the suppliers and affects the external supply-chain processes. The best practice is to have all of the three environments (B2E, B2B, and B2C) under one portal for seamless information transfer between them. E-business technologies can also be divided into two types: (a) process-focused technologies like online auctions and (b) infrastructure-focused technologies like Web services (XML [extensible markup language], SOAP [simple object access protocol], UDDI [universal description, discovery, and integration], and WSDL [Web service description language]), the wireless application protocol (WAP), the global positioning system (GPS), bar coding, and radio-frequency identification (RFID) to transmit the data into computer applications. Web services are built on platform-independent standards that enable e-business applications to share information over the Internet between internal and external systems.

856

XML provides the best way for companies to pass data and coordinate services over the Internet. In essence, XML is a file format that allows users to include definitions of terms and processing rules within the same file (Harmon, 2003). SOAP and UDDI are additional software protocols, where SOAP is a protocol that enables one computer to locate and send an XML file to another computer, and UDDI is a protocol that allows one company to query another company’s computers to determine how certain kinds of data are formatted. WSDL is the language in which the UDDI protocol is implemented. There are still issues to be resolved, and many groups are working on middleware and security standards to make XML more flexible and secure (Harmon).

todAy’s busIness chAllenges Executives face many challenges today in every aspect of their operations and enterprise integration. The following are considered to be the top 10 challenges. • •

•

•

The need to be customer oriented and at the same time manage cost more efficiently Information delay, which is considered to be a typical concern. Since the processes are the ones that realize the information flow between partners, enterprises need to redesign their business processes to address this challenge. Globalization, which intensifies the competition and makes competitive advantage crucial The increased complexity of supply chains and the growing need for a tighter control of over it. The supply chain can be defined as a network of facilities (manufacturing plants, assembly plants, distribution centers,

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

•

•

•

•

•

warehouses, etc.) that performs the function of the transformation of raw materials into intermediate products and then finished products, and finally the distribution of these products to customers. The increased complexity may result from the involvement of one company in multiple supply chains, the growing complexity of products, the growing complexity of managing information flows, and the increasing trends of thirdparty logistics and subassembly (contract) manufacturers. Long and unpredictable product life cycles. It is important to shorten the product-introduction cycle and be faster to react to the market needs to gain competitive advantage. The shift from vertical integration to horizontal supply chains, which calls for more efficient collaboration with suppliers and customers. The new trend is for companies to buy out competitors in the same business or merge with them (consolidation) instead of buying their suppliers (i.e., to expand vertically instead of horizontally); this requires the synchronized addressing of collaboration, planning, and procurement issues. Outsourcing and having suppliers across the world. Companies nowadays outsource assembly work, information-systems management, call centers, service-parts repair and management, and product engineering to contractors. The bigger challenge is to decide what to outsource, and how to make sure that customer satisfaction, delivery service, or quality are not impacted. Expensive cost structure, especially when companies are facing intensified competition. Related to this is the increase in shipping costs due to outsourcing. The disruption to the supply chain from demand and supply mainly caused by the supply-chain dynamics.

•

Supporting the redesigned processes with leading-edge technology that is easy to integrate, cheap to maintain, fast to achieve results, and low in risk

In order to address the previous challenges in today’s environment, companies should look for certain key enablers to implement in their operations. These key enablers can be grouped as follows. 1.

2.

3.

4.

Cross-organizational collaboration: This can reduce lead time, improve efficiency, reduce quality risk, and streamline processes. Flexibility: Flexibility should be built into product designs and manufacturing processes to become more customer oriented and mitigate the challenge of supply and demand fluctuations by providing the ability to change plans quickly. Flexibility is measured based on the ability to shift production load (flexible capacity), change production volumes and product mix, and modify products to meet new market needs. It is important to mention that cost-reduction initiatives usually inversely impact flexibility. Visibility: Real-time visibility reduces the uncertainty and nervousness in the supply chain, reduces safety stock (i.e., reduces cost), and increases customer satisfaction (i.e., increases revenue) by presenting the real picture and providing the ability to solve potential problems ahead of time. It will also reduce the impact of disruption to the supply chain caused by demand and supply. Process innovation: This enabler addresses the following types of questions. How can companies reengineer their processes to increase speed when introducing new products? What supply-chain-process improve-

857

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

5.

6.

ments and tools should companies invest in to gain competitive advantage? How can companies restructure their supply chains to reduce cost and increase profitability across their total global network? How can companies reduce their supplier base? Risk management: This enabler addresses the new risks related to product quality and service delivery that arise from outsourcing, locating supply-chain activities across the world, and the acceleration of new product introductions. It also addresses the security concerns after September 11, 2001. Technology: Technology should be adopted to enable and support the new or modified processes, and reduce the supply-chain complexity.

E-business is the major driver to implement the first, third, and last enablers, while best practice is the major driver for the rest of the enablers. These two drivers (e-business and best practice) will be discussed later in this chapter. The following section will provide the benefits of implementing the best practice, which is enabled by the right e-business technology.

the IMPAct oF e-busIness technologIes on scM, crM, & srM suPerProcesses The e-business technologies available through the Internet, combined with ongoing advances in advanced planning and scheduling (APS) software development, have given SCM an enormous boost and helped in maximizing business agility. APS is a constraint-based planning logic that emerged in the early 1990s, and it is considered to be the major breakthrough after MRP (material resource planning) logic. SCM is defined as the process of optimizing the flow of goods, services, and information along the supply chain from supplier

858

to customer. It is also the process to strategize, plan, and execute business processes across facilities and business units. It focuses on the internal supply chain, which is under the direct control of the enterprise. Information at all points along the supply chain is captured and well presented by e-business technologies (in a B2E environment), enabling better decision making in SCM businesses processes, especially regarding maintaining appropriate inventory levels and the efficient movement of products to the next production or distribution process, and supporting sales and operations planning (S&OP). E-business has replaced excess inventory with accurate, inexpensive, and realtime information. Also, real-time information about the supply and the ability to collaborate with customers on the forecast have helped producers to balance and match supply with demand. All the above have enabled many companies to transform their supply operations from build to stock (BTS) and mass production to BTO and mass customization. Anderson (2003) defined build to order as the on-demand production of standard products, while mass customization is the on-demand production of tailored products. Supplier-relationship management (SRM) is the process of supporting supplier partnerships in the supply chain, and coordinating processes across product development, sourcing, purchasing, and supply coordination within a company and across companies. CRM is the process of covering all customer needs throughout the phases of customer interaction. CRM is also defined as the process of allocating organizational resources to activities that have the greatest return on profitable customer relationships. Since the best practice of SRM and CRM are built around supply-chain integration, e-business is considered as the enabler for these superprocesses. The B2B environment is typically leveraged for SRM, while the B2C environment is typically leveraged for CRM.

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

Organizations utilize e-business solutions (a solution is a combination of best-practice processes and enabled technology) in the SRM area to eliminate paperwork, streamline shipment and payments, reduce the cycle time of finding and acquiring suppliers, easily monitor contract terms, leverage spend consolidation by supplier and part rationalization, increase supplier awareness during the design and production phases, and automate the procurement process. On the other hand, organizations utilize ebusiness solutions in the CRM area to automate order receiving; to capture, analyze, and leverage customer information; and to reduce order-todelivery cycle time and expediting costs. We will drill down in the next section to detail the SCM, SRM, and CRM business processes and highlight the impact e-business has on them. We will mention the related pain points and show the potential benefits of addressing them using e-business technologies in addition to several success stories in this area. SRM, SCM, AND CRM business processes; Pain Points; benefits of adopting e-business technology; and success stories

Each superprocess (like SCM, SRM, and CRM) consists of several business processes. Each key business process is defined (see Table 2), and typical challenges in the current practice (as-is process) are highlighted. The chapter shows how e-business technology and its different application levels can address these challenges, and finally typical benefits resulting from adopting e-business technology are mentioned.

Key business Processes Table 2 shows the key business processes in each superprocess of SCM, SRM, and CRM. Although the name and scope of these processes may vary across different industries, this table and the following process definitions give companies a good idea on how to map their business to this table and understand the impact of e-business on their own processes. The criteria used to link certain business processes to the appropriate superprocess are the following. •

If a business process has a direct relationship with suppliers based on the best practice, it would belong to the SRM superprocess.

Table 2. Business-Process Distribution SCM

CRM

Strategic

Strategic Sourcing

Supply-Chain Design

Marketing Management

Tactical

Product Design

Sales & Operations Planning

Selling Management

Operational

Level

Superprocess SRM

Procurement

Order Fulfillment

Customer-Service Management

859

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

•

•

•

If a business process has a direct relationship with customers based on the best practice, it would belong to the CRM superprocess. If a business process has a direct relationship with neither suppliers nor customers, and it helps in balancing supply and demand, it would belong to the SCM superprocess. If a business process is in the gray area where it spans across two superprocesses, its own subprocesses should be evaluated, and the business process will be linked to the corresponding superprocess to which the majority of the subprocesses belong to.

a long-term relationship with suppliers. One of the major challenges (pain points) in this process is the inability to identify and manage the total supplier spend and demand because of complex, disconnected purchasing systems. Another disconnection is between the engineering and purchasing systems, which causes the lack of visibility to the design engineers of the approved vender list (AVL). Another related challenge is the inability to consider supplier performance during sourcing decisions by design engineers or purchasing analysts.

Product design In the second dimension of Table 2, the criteria that have been used to decide the level a certain business process belongs to are as follows. •

•

•

If a business process is used mainly to generate strategies to run the business, it would belong to the strategic level. If a business process is used mainly to generate a plan to operationalize the strategies, it would belong to the tactical level. If a business process is used mainly to execute the plans to realize the strategies, it would belong to the operational and execution level.

The strategic level is considered to be the long-term process, the tactical level is the midterm process, and the operational level is the short-term process, which includes execution (for simplicity). Going up the levels from the operational to the tactical to the strategic, the percentage of cost savings goes up and the impact of decisions on the success of the organization is higher.

Strategic Sourcing Strategic sourcing is defined as the process of identifying the best sourcing strategy to reduce cost and raw-material supply risk, and to achieve

860

Product design is the process of collaboration among companies, partners, and suppliers to share product design, schedules, and constraints to arrive at a single bill of material for a finished product effectively. It is a critical process due to its ability to facilitate bringing innovative and profitable products to the market quickly, and to ensure product quality. The product design consists of three phases: concept, development, and pilot. It also includes product-engineering changes (product revisions) as a subprocess. These changes can be due to component-cost change, product improvements, process change, quality corrective actions, material shortages, or product obsolescence. Product revisions involve design engineers, procurement, suppliers, manufacturing and process engineers, contract manufacturers, and service support. Product design is tightly integrated with PDM (product-definition management), which is the database for all designed parts. Product design has several challenges like intensified competition, which increases the need to introduce new products to the market more quickly; complex products, which make optimizing the design more challenging; frequent design changes, which increase prototype-part cost due to the late involvement of suppliers in the design

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

phase; and the inability to identify the right products to launch or fund, the right suppliers to collaborate with during the design, and the right standard items to reuse. Also, subcontracting and outsourcing extends the need for real-time collaboration with partners and suppliers.

Procurement Procurement is the process of executing the selected sourcing strategies by performing a request for quote, reverse-auction, bid-analysis, and contract-processing work flows to select the source of supply, and then managing all daily activities of procurement with the selected suppliers. It is also the process of managing two-way real-time communications with suppliers regarding the part or raw-material supply to achieve and execute a synchronized procurement plan. There are three key pain points for this process. First is the lack of intelligent visibility and consistent supplier performance throughout the life cycle of the purchase order. This results from the inability to conduct reliable bid analysis considering different criteria in addition to the price, the lack of early problem detection for the inbound material and mismatch-resolution framework, a costly and difficult-to-maintain EDI (electronic data interchange) because different versions of the software may result in transmission errors, and the inability to capture supplier performance data. The second key pain point is the many nonvalue-added and time-consuming (paper-based) activities in this process, like manual RFQ and contracting processes, the checking of shipment status, and paper invoices. The high cost of both expedition and mismatch resolution between the receipt and the invoice is the third key pain point.

Supply-Chain Design SC design is a long-term planning process to optimize the supply-chain network or configuration

and material flow. The primary objective of this process is to determine the most cost-effective SC configuration, which includes facilities; supplies; customers; products; and methods of controlling inventory, purchasing, and distribution on one hand; and the flow of goods throughout the SC on the other hand. Sabri and Beamon (2000) mentioned that strategic supply-chain design concerns are the location of facilities (plants and distribution centers), the allocation of capacity and technology requirements to facilities, the assignment of products to facilities, and the distribution of products between facilities and to customer regions. The major pain points or challenges of this process are the inability of the inflexible supplychain configuration to react efficiently to the variability in demand and supply, or to the introduction of new products into the market. The shift from mass production to customized products forces companies to rethink about their physical SC configurations, and nonrepeatable and manual processes.

Sales and Operations Planning The APICS (American Production and Inventory Control Society) dictionary defines sales and operations planning as “a process that provides Management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of the supply chain.” The main objective of this process is to balance demand and supply, which is not an easy exercise due to the dynamic nature and continuous fluctuation of demand and supply. Historically, supply and demand balancing has been done reactively by sales, marketing, and operations teams allocating constrained products to customer orders, expediting product shipments, or reconfiguring products to create the required models. This business process consists of several subprocesses like

861

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

demand forecasting, inventory planning, master planning, and revenue planning. Some of the major pain points of this process are the inability to generate a unified demand plan and to reach consensus across multiple departments, demand and supply volatility, the lack of historical data related to supply and transportation lead-time variability, and the lack of visibility downstream and upstream the supply chain after unexpected events happen.

Order Fulfillment Order fulfillment is a process of providing accurate, optimal, and reliable delivery dates for sales orders by matching supply (on-hand, in-transit, or planned inventory) with demand while respecting delivery transportation constraints and sales channels or distribution centers’ allocations. It is the process of promising what the company can deliver, and delivering on every promise. It is tightly integrated with the selling-management process under CRM. The major pain points for order fulfillment are the inability to provide visibility across the supply chain to ensure on-time delivery to the customer, and the inability to provide flexibility in meeting customer’s expectations. The Internet market forces companies to deal with small shipment sizes more frequently, and changes the destination of deliveries to residential areas.

Marketing Management Marketing management is the process of creating effective marketing programs to increase revenue, and to increase demand for the products in profitable market segments. It is also the process of generating new customers in a profit-effective manner and providing the best mix of products and services. The marketing process is an input to the demand forecasting subprocess to communicate the projected demand upstream for

862

planning and forecasting purposes. The traditional marketing process is company centric, where phone or face-to-face meetings are the primary marketing media. In the past, manufacturing controlled the market by determining the price, quality, specifications, and delivery parameters of their products. Company-centric organizations were organized as isolated departments, each dedicated to specific fulfillment functions along the supply chain (Curran & Ladd, 2000). The other main pain points for this process are the inability to identify appropriate market segments for incentives and promotions, the inability to create effective marketing programs to achieve revenue and profitability objectives while considering supply-chain constraints, and lost revenue due to ineffective new-product launches.

Selling Management It is the process of helping and guiding the customer to decide on what to buy, and providing accurate and reliable information on the price, delivery, and configuration options. Selling management is the trigger point for sales order processing, which is a subprocess under order fulfillment. The main pain points in the current practice are the inability to match offerings to customer needs profitably through intelligent pricing, the configuration and availability checking, and the inability to provide the sales agents with guided selling, pricing, and order-promising information to ensure accurate order generation and provide the best product-service bundle to the customer. Sabri (2005) summarized the challenges that the retail industry faces in the area of selling management. 1. 2.

Managing the complicated pricing process Managing the growing product catalog with the challenge of limited space

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

3. 4.

5.

The need for speed in the complex supply network of short-life products Managing promotions and discounts effectively, and the need for markdown optimization Managing product assortments, phasing out products, and seasonality

Customer-Service Management Customer-service management usually starts through the signing up of a service agreement with the customer, which includes several contract items like discounts on replacement parts, guaranteed response time, technicians’ hourly rates, and support time (Curran & Keller, 2000). This process consists of service planning and scheduling, service contract management, service order processing, replacement-part delivery, damaged-part recycling or returns, call centers, and billing. The call center or help desk is the traditional channel for receiving the service order notification, which represents a request for a customer-service activity that can be used to plan

specific tasks related to the usage of spare parts and resources, allocate resources to the service task, monitor the performance of the conducted service tasks, and settle service costs. Some of the CSM-process pain points are the complexity of today’s products, which makes managing this process more difficult; customer dissatisfaction due to service-part shortage; inaccurate forecasting for service parts that are considered of high-dollar value, and slow-moving items; and the fact that customer service is becoming a competitive advantage due to the intensified competition and the need to compensate for revenue losses in a flat economy.

e-business Application levels and Benefits Application Levels of E-Business Before discussing how e-business can address the aforementioned pain points and provide benefits, let us first discuss the different application levels of e-business technology as shown in Figure 1.

Figure 1. Application levels of e-business Key Enablers

Improvement

Process Innovation

New Innovative Processes

Drastic Improvement

Wisdom Flexibility

Integrated SC Planning

Major Improvement Knowledge

Cross-Collaboration

Workflow Automation

Modest to major Improvement in efficiency and productivity Information

Visibility

SC Visibility (Information Sharing)

Modest Improvement Data

863

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

There are four application levels of e-business as shown in Figure 1. The higher one goes in the pyramid, the more impact these levels have on the success of the organization and business agility. It is important to mention that achieving the higher levels depends on mastering the lower levels. In Level 1 (the base of the pyramid), information is extracted from data. Then, knowledge is extracted from information in Level 2, and wisdom is obtained in Level 3; this enables companies to accelerate to Level 4.

Level 1: SC Visibility SC visibility refers to sharing data across different participants of the supply chain, and presenting the needed information extracted from data to all participants, depending on their roles, online and on a real-time basis. Some examples of data include forecast data, inventory pictures, capacity plans, promotion plans, shipment schedules, and production schedules. SC visibility addresses the challenge of supply and demand uncertainty by providing visibility to supply events like supplier shortages, and demand events like changes to customer orders. SC visibility provides several benefits like forward (proactive) visibility, early problem detection, and increased productivity and efficiency. E-business software providers like i2 Technologies support several important capabilities for this level, like a centralized view into critical supply-chain information, and multiple modes of notification (e-mail, e-mail digests, pagers, or cell phones). Savi Technologies is an example of a company that makes use of RFID technologies to track individual products, containers, and transportation vehicles as they move through the supply chain. The information is put on the Internet so that real-time visibility of movements can be obtained (Lee & Whang, 2001). Another example for providing visibility to in-transit products and for improving the order-

864

fulfillment process is of a contract trucking company that uses a two-way mobile satellitecommunication and position-reporting system to monitor the location of its trucks in order to improve performance under just-in-time programs (Ballou, 2004).

Level 2: Work-Flow Automation Work-flow automation refers to the automation and streamlining of activities between supply-chain participants. For example, the request for a quote (a subprocess of procurement) and the related activities between buyers and suppliers can be automated and tightly coupled to increase productivity and reduce cycle time. Another example is the automation of the request for information (a subprocess of product design) between engineers in the buying organization and suppliers; here, productivity and quicker-time-to-market gains are achieved. In Level 2, shared information (from Level 1) is taken one step further by collaborating on it or resolving mismatch problems (exceptions). In this level, exceptions are prioritized so that the most important supply-chain disruptions are dealt with in the quickest and most optimal manner; this provides the SC partners the ability to respond to problems in real time to minimize the impact of disruptions on the supply chain, which means cost-effective, speedy, reliable, and almost-errorfree SC activities. The automation of critical (core competency) business processes should be done after improving the as-is process by eliminating nonvalue activities, simplifying and streamlining processes, and removing barriers (disconnects) between processes or functions. This means the automation should be done for the redesigned modified to-be process, and the software needs to be customized to follow and support the process to maintain the competitive advantage. On the other hand, automating noncore competency processes can be done by either using out-of-the-box work flows provided by software companies by which such

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

processes are changed accordingly (no value in tailoring the software to fit the process), or by outsourcing the management of these processes to a third party. A good example of work-flow automation is the application of electronic exchange portals in the area of procurement, such as Covisint for the automobile industry, e2open for the electronics industry, and Transora for the grocery industry.

Level 3: Integrated SC Planning The integrated-SC-planning level allows companies to respond quickly and effectively to unplanned supply and demand events that may disrupt information and material flow in the supply chain as one unit. It allows a company to plan based on real-time execution data, and execute based on an up-to-date plan. Integrated SC planning provides a process-centric view coordinating different business subprocesses like product introduction, forecasting, replenishment, manufacturing, fulfillment, and procurement with suppliers and customers, while enabling event management. For example, it supports event-triggered planning and replanning. This level blends information gathered from users using collaboration in Level 2 and multiple transactions and planning systems to allow the exchange of knowledge by the SC partners and create synchronized plans and one global view of the supply chain. Each supply-chain member (buyer, supplier, carrier, third-party logistics, contract manufacturer, etc.) often operates independently and only responds to immediate requirements. If the Internet is integrated with the SC planning process, SC members can share needed information on a real-time basis, and react quickly and efficiently to changes in demand, material shortages, transportation delays, and supplier inability to replenish. One example is the collaborative planning, forecasting, and replenishment (CPFR) initiative.

McDonald’s Japan is a good example of the successful use of CPFR. McDonald’s Japan established a process around the Internet whereby stores, marketing, distribution centers, and suppliers would communicate and collaborate via the company’s Web site to agree on order sizes and supply-replenishment delivery schedules (Ballou, 2004). TaylorMade (a large golf supplier) leveraged integrated SC planning to improve the orderfulfillment process. TaylorMade adopted Provia Software as the warehouse-management system and integrated it smoothly with i2’s planning and fulfillment systems to prioritize orders based on service level, order volume, promised delivery date, and transport mode (Bowman, 2002).

Level 4: New Innovative Processes Once companies master e-business application levels, they start to think of adopting new strategies and models for conducting business, seeking not only incremental improvements, but drastic ones. They might seek to reengineer (redesign) their processes to leverage the most out of e-business technologies. Sometimes, companies start to define new processes, seeking new business opportunities or trying to penetrate new markets and customer segments that were neither apparent nor possible prior to the e-business. Companies seek the new-generation business models to achieve competitive advantage and significant benefits. One example is what Dell Computer did when it adopted the build-to-order strategy and provided flexible configuration capability for customers online. The following are examples that show the range of possibilities for companies that pioneered in these areas.

Example 1: Mass Customization The Internet and e-business technologies facilitate mass customization and allow customers to

865

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

configure specific order options tailored to their preferences. Mass customization is the centerpiece of a strategy that woke the big golf supplier TaylorMade and propelled it ahead of the competition in terms of agility and innovation. Today, TaylorMade can customize virtually any aspect of a club. The results to date are impressive (Bowman, 2002).

Example 2: Public Marketplaces The Internet and e-business technologies helped many companies do business online using a secured specialized Web site. One example is World Chemical Exchange, providing a global market for chemical and plastic manufacturers and buyers. More than 2,500 members can now conduct around-the-clock trading of chemicals and plastics of all types (Lee & Whang, 2001).

Example 3: Supply-Chain Redesign A good example is what many remote discount computer-hardware and -supply houses did to compete with local retail stores. Many of them used the Internet technologies as a strategy to compress the order cycle time and improve the order-fulfillment process: A customer enters the order through the company’s Web site, the inventory and payment are checked, and the order is filled from the warehouse and shipped using UPS, FedEx, or other carriers directly to the end customer.

Example 4: Value-Added Replenishment Programs Companies as part of lean initiatives are trying to focus on value-added activities to cut waste in the supply chain and reduce overhead cost. Therefore, manufacturers are moving away from making products to stock and sell them later. They

866

are moving away from procuring based only on forecast. Vendor-managed inventory (VMI) is a replenishment program that helps companies achieve their objectives. VMI delays the ownership of goods until the last possible moment and delegates managing the stock to the supplier. Western Publishing is using a VMI program in its Golden Book lines. It develops a relationship with its retailers in which these retailers give Western point-of-sale data. Ownership of the inventory shifts to the retailer once the product is shipped (Ballou, 2004). Kanban replenishment is another program in which replenishing parts is based on part consumption. It avoids the inaccuracy in forecasting and eliminates the need for inventory.

Example 5: Online Retailing Amazon.com understood e-business technologies very well. It has based its business model around it. Amazon.com depends on its efficient supply chain to satisfy customer needs worldwide. It mastered the selling-management process by improving the Web shopping experience through providing quick and reliable promises, and suggesting product bundles, among many other features. This makes Amazon.com one of the biggest and early adopters of e-business technologies.

Benefits of Adopting E-Business Application Levels Tables 3, 4, and 5 illustrate how the four application levels of e-business can address the challenges of SCM, SRM, and CRM business processes that were mentioned in the beginning of this section. These tables also show the potential benefits of adopting e-business strategies. Tables 3, 4, and 5 show the operational and financial benefits of adopting e-business application levels. The operational benefits can be grouped under inventory reductions, cycle-time

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

Table 3. The impact of e-business application levels on SRM processes SRM Business Processes E-Business Application Levels

Procurement

Benefits

Real-time visibility on engineering change requests (ECRs)

Sharing supplier and shipment information, real-time exception visibility, audit-trail notification, alerts, and tracking

• Reducing part-inventory obsoleteness • Improving inventory turns • Reducing safety stock • Reducing expedition cost

A single user interface for design, sourcing, and procurement with flexible and configurable work flows

Shared design workbench

Automated procurement subprocesses, bid analysis, and resolution work flow

• Reducing design rework • Reducing process cycle time • Improving productivity

Consolidation of enterprise spend/ demand across separate systems

Tightly integrated to PDM and AVL

Synchronized replenishment, supporting different replenishment types, and matching execution documents like purchase orders, ASN, and invoices

• Increasing reuse of existing parts in the design • Improving on-time delivery

Analyzing supplier and SC performance (slice and dice by site, commodity, time, supplier, and KPI)

Design collaboration

Auctions, marketplace exchanges

• Reducing development cost • Improving time to market • Reducing part/rawmaterial cost • Improving quality

Strategic Sourcing

Product Design

SC Visibility

Sharing AVL with design and procurement departments

Work-Flow Automation

Integrated SC Planning

New Innovative Processes

Table 4. The impact of e-business application levels on SCM processes SCM Business Processes E-Business Application Levels

Supply-Chain Design

Sales and Operations Planning

Order Fulfillment

SC Visibility

Providing an aggregated view on the SC performance and strategic information

Real-time visibility to unexpected events in the SC and audittrail data

Real-time SC visibility for the order-delivery life cycle including contract manufacturers, distribution centers, and logistic providers

• Reducing uncertainty and safety stock • Early issue detection

Work-Flow Automation

Consistent process with friendly user interface

Unified demand plan across different departments

Exception workflow resolution for demand changes and fulfillment delays

• Increasing efficiency • Fast response

Integration with strategic sourcing to reduce supplier base

Synchronized marketing, sales, production, and procurement plans

CPFR

• Speed • Accuracy

SC redesign

Mass customization

Build to order

• Flexibility • Penetrating new markets • Customer satisfaction

Integrated SC Planning

New Innovative Processes

Benefits

867

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

Table 5. The impact of e-business application levels on CRM processes CRM Business Processes E-Business Application Levels

Marketing Management

Selling Management

SC Visibility (Information Sharing)

Capturing feedback from the customers, providing a mix of products and service offerings customized to customer needs

Providing up-sell and cross-sell product recommendations and product bundles, flexible pricing models for markdown and rebates

Providing service order status and highlighting exceptions

• Publicizing product information • Increasing customer satisfaction • Reduce Inv.

Work-Flow Automation

Capturing log records for every visit of a user in the Web servers’ log file, including pages visited, duration of the visit, and whether there was a purchase, demand collaboration with customers

Product configuration, quotation processing

Service order logging, billing of services

• Better prediction of customer demand • Improving response time • Improving productivity

Integrated SC Planning

Considering the supply-chain constraints while executing the marketing campaigns, providing customer profiling and segmentation

Supporting different channels for order capturing (Web based, call center, EDI, phone, e-mail, or personnel meeting)

Warranty check, service order processing, integrating the call center

• Increasing revenues and profit • Creating new market/ distribution channels • Accurate promising date

New Innovative Processes

Real-time profiling that tracks the user click stream, allows the analysis of customer behavior, and makes instantaneous adjustments to the site’s promotional offers and Web pages

Online flexible configuration and real-time promise date

Dealing with products and services as one package during selling

• Long-term relationship and trust with the customer • Gaining competitive advantage

reductions, productivity increase, supplier performance improvement, and customer-service-level increase. The financial benefits are driven from the operational benefits and can be grouped as follows. •

868

Cost reduction due to cost savings. The tight integration of supply-chain processes reduces the cost and time needed to exchange transactions and allows efficient procurement, which helps the purchasing

•

•

Customer-Service Management

Benefits

staff to focus more on strategic activities like building supplier relationships than managing day-to-day transactions. Revenue growth and profit increase due to increased customer satisfaction by delivering on every promise and responding quickly to customer needs, and the ability to penetrate new markets. Better asset utilization by replacing inventory with real-time visibility

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

•

Higher shareholder value due to growing profit.

The next section will provide the needed guidelines to implement e-business technologies successfully. Finally, a case study will be presented.

A FrAMeworK For successFul IMPleMentAtIon oF e-busIness technologIes Many companies are struggling with implementing e-business technologies and achieving the promised value or ROI. In addition, companies are looking for guidelines and strategies for ongoing operational management and support after the go-live, which includes rolling more customers, suppliers, and new business units when implementing e-business solutions to improve SRM, SCM, and CRM superprocesses.

According to a survey of 451 senior executives, one in every five users reported that their CRM initiatives not only had failed to deliver profitable growth, but also had damaged long-standing customer relationships (Rigby et al., 2002). Currently, there is uncertainty and doubt among organizations regarding the new Internet technologies, and although the appeal for best practice and the benefits of implementing e-business technologies are clear, enterprises struggle in integrating them into supply-chain operations because they are encountered by many challenges like the inability to master change management, the need for new skills to support processes that span across suppliers and partners, the need for e-business strategy and continuous upper management support, the lack of comprehensive metrics and continuous monitoring, and the inability to select the right software-providing partner. Figure 2 is proposed to address these challenges and provide best-practice guidelines to implement e-business program transformation successfully.

Figure 2. Framework for implementing e-business transformation programs

869

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

e-business strategy and goals A clear strategy is the first step for a successful transformation. Executives need to understand the big picture, the interactions between all the processes, and the e-business applications to help them in creating an e-business strategy.

benchmarking Benchmarking is the process of comparing and evaluating a firm or a supply chain against others in the industry to help in identifying the gaps and areas of improvement. Benchmarking is used to validate the potential benefit and gain in performance measures from implementing e-business applications.

Process Analysis The purpose of process analysis (also called design and requirements) is to use modeling (process mapping) methods to analyze “as-is” business processes, capture the existing challenges and pain points in the current process and the supply chain, design and validate the to-be process improvements against best-practice benchmarks, determine the extent of process and technology changes possible in the currently existing systems, and identify the additional software (application) capabilities that are required to support the to-be process that cannot be supported by the existing systems. This requirements list will be the base for selecting the new software.

Select the Right E-Business Software As a best practice, organizations need to identify the best-of-breed solution that is most suitable for the required functionality for their business, taking into consideration software-technology maturity and sustainability. Supporting leading industry standards for e-business technology like

870

Java, XML, Linux, and Web services is crucial during the selection process.

cost and Benefit Analysis Cost and benefit analysis is the process that determines the potential benefits from implementing the combination of the best-practice process and the new application or software. It addresses questions like the following. What is the potential value of increasing the loyalty of our customers when new marketing-management software is implemented? What is the cost of implementing the new solution?

Adopt a value-driven Implementation Methodology Adopting a value-driven approach to conduct the e-business transformation programs like Six Sigma is very critical. An effective transformation program typically takes 2 to 5 years, with several intermediate checkpoints (go-lives) to achieve the value needed to pay for the rest of the program.

Performance-Management system A performance-management system consists of two phases. The first phase is to establish a consistent metrics-tracking and -publishing process, and this phase should finish before the implementation of the transformation program. The second phase is to continue measuring the benefits and ROI, which should start during and after the implementation. Since the performance-management system depends mainly on monitoring the metrics (KPIs), it is critical to spend enough time on defining these metrics. The performance-management system should manage and coordinate the development of these metrics. Melnyk, Stewart, and Swink (2004) mentioned that metrics provide the following three basic functions.

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

• • •

Control: Metrics enable managers to evaluate and control the performance of the resources. Communication: Metrics communicate performance to internal and external stakeholders. Improvement: Metrics identify gaps (between actual performance and expectation) that ideally point the way for intervention and improvement.

Sabri and Rehman (2004) provided guidelines for identifying and maintaining metrics based on best practice, recommended to capture all operational metrics because improvement in one area could be at the expense of another, and suggested to summarize benefits in six key areas: revenue increase, cost reduction, process lead-time reduction, asset reduction, customer benefits, and supplier benefits.

and compliance. The lack of a defined and clear plan for maintenance and rollout might impact the whole transformation program negatively. The ongoing maintenance and rollout process should include adding new SC organizations and removing existing ones as necessary. It includes training programs and process compliance by monitoring related metrics. It also includes the identification and description of all user groups, and the process of adding new users, making changes to user authorization levels, maintaining profiles, and deleting users. Finally, contingency plans should be reviewed periodically to make sure its readiness. Contingency plans represent predefined courses of actions to be followed in case of the occurrence of a drastic event like when the sources for inbound information go down.

case study

Effective change management for e-business transformation programs should consider gaining and keeping executive sponsorship. Without executives’ buy-in and support, a transformation program would be much closer to failure than success. It should also involve all SC partners in developing the new to-be process, and should establish a benefit-sharing and incentives mechanism.

This case study is based on an article published in October 2004 by Reuben Slone in Harvard Business Review (HBR), which is about the supply-chain turnaround by Whirlpool in the last 4 years. Whirlpool makes a diverse line of products like washers, dryers, refrigerators, dishwashers, and ovens, with manufacturing facilities in 13 countries. This case study is a real-life example of a company that adopted many of the bestpractice guidelines of implementing e-business applications that were highlighted previously in this section.

Maintenance, support, and rollout

Strategy

Although companies acknowledge the importance of ongoing operational management and support, few of them think ahead of time and allocate the right resources for it. Once the e-business application links are in place, companies find themselves with an urgent need to manage the ongoing maintenance and rollout. Ongoing monitoring and maintenance are necessary to ensure 100% uptime

Whirlpool needed a strategy that not only addresses the current needs, but also anticipates the challenges of the future. Whirlpool wanted a strategy that can optimize supply-chain performance at minimum cost, and include new ebusiness technology, processes, roles, and talents to achieve competitive advantage. Its strategy was to focus on customer requirements first and

change Management

871

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

proceed backward. Therefore, Whirlpool and Sears as a customer studied consumers’ desires with regard to appliance delivery. They found that consumers are asking for accurate promises as a first requirement: “Give a date, hit a date.”

Benchmarking and Process Analysis Whirlpool benchmarked its competitors and obtained cross-industry information and competitive intelligence from AMR, Gartner, and Forrester Research. Then it mapped out what is considered best-practice performance along 27 different SC-capability dimensions. This exercise helped identify areas of improvement.

Cost and Benefit Analysis The program transformation team had to build a compelling business case to get the buy-in from upper management. They had to justify their program wholly on expense reductions and working capital improvements.

Effective Transformation Plans Effective transformation plans include a valuedriven implementation methodology (Six Sigma), performance-management system, change management, and rollout plans. Whirlpool started with improving the S&OP process. Its current process was inadequate with Excel spreadsheet feeds. Now, Whirlpool is able to generate synchronized long and short plans that consider marketing, sales, finance, and manufacturing constraints or requirements. Then, it launched a CPFR pilot to share forecasts using a Web-based application and to collaborate on the exceptions, which enabled it to cut forecast accuracy error in half within 30 days of launch. In January 2002, Whirlpool implemented a suite of software products from i2 to reduce inventories while sustaining high service level. By May 2002,

872

a blind Internet survey showed Whirlpool to be “most improved,” “easiest to do business with,” and “most progressive” in the eyes of their trade partners. It segmented its products and followed a different strategy for each product group. For high-volume SKU like dishwashers, refrigerators, and washing machines, it used the build-to-stock replenishment technique with its customers. For smallest volume SKUs, they followed the pull replenishment technique with the more flexible build-to-order process. The inventory savings on the small-volume SKUs can balance out the costs of stocking up on the high-volume SKUs. Whirlpool also started to move away from having one service level across all products, recognizing that some products are more important or more profitable than others and should have higher service levels. Recently, there has been a focus on systemto-system transactions, in which the Whirlpool system talks directly to a customer’s system for purposes of transmitting purchase orders, exchanging sales data, and submitting invoices and payments. At the same time, customers can check availability and place orders via the Internet. Whirlpool is also looking to implement an event-management capability that provides a notification whenever an action in the process has taken place. A couple things were absolutely critical to keep the transformation program schedule on track: a highly disciplined transformation program office and an effective management system. The key was to think big but focus relentlessly on near-term deadlines. Whirlpool organized the change effort into 30-day chunks, with three new capabilities or business releases rolling out monthly, some on the supply side and some on the demand side. The main job of the program transformation office, which adopted Six Sigma methodology, was to ensure the completion of projects on time, on budget, and on benefit.

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

The transformation program office contracted Michigan State University and the American Production and Inventory Control Society to develop a competency model that can outline the skills and roles required in a top-tier organization. Whirlpool also expanded the compensation system to allow employees to be rewarded for increasing their expertise even if they are not being promoted into supervisory roles. It also put a huge emphasis on developing employees’ management skills and used a model developed by Project Management Institute (PMI) as a standard for evaluating and enhancing the organization’s project-management capabilities. Finally, it assembled a supply-chain advisory board to provide guidance and assess the transformation program results and direction. To summarize, Whirlpool followed the best practice in leveraging e-business technologies, and in return, it has much to show for its transformation efforts. Today, its product-availability service level is more than 95%. The inventory of finished goods has dropped from 32.8 to 26 days. In one year, it lowered its working capital by almost $100 million and supply-chain costs by $20 million with an ROI equal to 2.

conclusIon E-business technologies present huge opportunities that are already being tapped by many companies and supply chains. Leveraging e-business technologies effectively is key to gaining competitive advantage, streamlining processes, slashing waste, and eventually achieving business agility, which is significantly needed in the new age of globalization and intensive competition. More companies will start to realize that gaining competitive advantage is no longer feasible only by managing their own organizations. They need to get involved in the management of all upstream organizations that are responsible for the supply, as well as the downstream network

that is responsible for delivery and the after-sales market. The challenge for companies for the rest of this decade is synchronization across supply-chain processes, from product design and procurement to marketing and customer-service management, in order to be more responsive to customer needs. The new trend of mergers and acquisitions will continue to rise, and big companies that are buying out smaller ones will grow even bigger in the complexity of their supply chains. This will increase the need for e-business technologies to streamline the process of collaboration between the different entities. Therefore, in the next few years, we will see the explosion of e-business-applications use as companies utilize e-business to redefine supplychain processes that span across suppliers and customers, which will result in a significant improvement in efficiency and will help companies achieve competitive advantage. Companies that do not come on board will realize that they are losing ground and customers soon. The widespread use of e-business will lead to new options for improving business-to-business and business-to-consumer collaborations like multitier collaborations and root-cause analysis for exceptions in the supply-chain performance. In addition, it will open new ways of integration between supply-chain partners like system-tosystem integration using Web services (e.g., integrating one firm’s inventory-control system and another’s logistics-scheduling environment), the use of wireless devices, and the tight integration of the Web site with the back-end systems of supply-chain partners. Eventually, e-business technologies will replace electronic data interchange, the benefits of which never materialized for midsized companies because of its high cost. We also expect SMEs (small and medium-sized enterprises) to realize the importance of e-business and to follow one of the following arrangements in adopting e-business technologies depending on the business requirements and cost factors.

873

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

•

•

Microsoft arrangement: Easy to implement due to wide familiarity with the product and its selling process through partners, cheap license, cheap maintenance, and tight integration with other Microsoft products like Excel Public Web-enabled arrangement: Prebuilt solution by a Web-enabled applications provider at a fixed monthly cost, no need for software to be present on the company’s internal network, no maintenance fees, and lower risk due to almost zero-down investment

Intelligent performance-management systems that can capture negative performance trends and select the correct resolutions are expected to come into widespread use in the next few years. To summarize, we will witness, for the rest of this decade, what is called a tightly integrated environment in which supply-chain interactions involve tightly integrated databases and applications; processes are significantly redesigned and streamlined to eliminate redundancies and nonvalue activities.

reFerences Anderson, D. M. (2003). Build-to-order & mass customization. Cambria, CA: CIM Press.

Curran, T. A., & Ladd, A. (2000). SAP R3 business blueprint: Understanding enterprise supply chain management (2nd ed.). Upper Saddle River, NJ: Prentice Hall. Devaraj, S., & Kohli, R. (2002). The IT payoff: Measuring the business value of information technology investment. Upper Saddle River, NJ: Prentice Hall. Handfield, R. B., & Nichols, E. R. (2002). Supply chain redesign: Transforming supply chains into integrated value systems. Upper Saddle River, NJ: Prentice Hall. Harmon, P. (2003). Business process chain: A manager’s guide to improving, redesigning, and automating processes. San Francisco: Morgan Kaufmann Publishers. Lee, H., & Whang, S. (2001). E-business and supply chain integration. Stanford Global Supply Chain Management Forum, 1-20. Melnyk, S. A., Stewart, D. M., & Swink, M. (2004). Metrics and performance measurement in operations management: Dealing with the metrics maze. Journal of Operations Management, 22, 209-217. Rigby, D., Reichheld, F., & Schefter, P. (2002). Avoid the four perils of CRM. Harvard Business Review, 1-9.

Ballou, R. H. (2004). Business logistics/supply chain management (5th ed.). Upper Saddle River, NJ: Prentice Hall.

Sabri, E. (2005). Value chain management to achieve competitive advantage in retail industry. Paper presented at the Middle East Retail Conference, United Arab Emirates.

Bowman, R. J. (2002). TaylorMade drives supply-chain efficiency with 24 hour club. SupplyChainBrain.com. Retrieved December 10, 2004, from http://www.supplychainbrain.com/ archives/10.02.TaylorMade.htm?adcode=5

Sabri, E., & Beamon, B. (2000). A multi-objective approach to simultaneous strategic and operational planning in supply chain design. OMEGA: The International Journal of Management Science, 28(5), 581-598.

874

Best Practice in Leveraging E-Business Technologies to Achieve Business Agility

Sabri, E., & Rehman, A. (2004). ROI model for procurement order management process. Paper presented at the Lean Management Solutions Conference, Los Angeles.

Valencia, J. S., & Sabri, E. H. (2005). Ebusiness technologies impact on supply chain. Paper presented at the 16th Annual Conference of POMS, Chicago.

Slone, R. E. (2004). Leading supply chain turnaround. Harvard Business Review, 1-9.

This work was previously published in Enterprise Service Computing: From Concept to Deployment, edited by R. Qiu, pp. 356-287, copyright 2007 by IGI Publishing (an imprint of IGI Global).

875

876

Chapter 3.4

Open Source and Outsourcing: A Perspective on Software Use and Professional Practices Related to International Outsourcing Activities Kirk St.Amant East Carolina University, USA

AbstrAct

IntroductIon

This chapter examines the role of open source software (OSS) in international outsourcing practices that involve the transfer of knowledge work from one nation to another. Included in this examination are discussions of the benefits and the limitations of OSS use in outsourcing. The chapter also presents organization-specific and industry-wide strategies for effective OSS use in outsourcing situations. The chapter then concludes with a discussion of areas of international outsourcing where OSS might have important future applications or effects. The purpose of such an examination is to provide readers with the knowledge and the insights needed to make effective decisions related to the use of OSS in international outsourcing situations.

International outsourcing now includes the distribution of knowledge-based work to employees in other countries. Much of this work, however, requires the use of software either to perform a task or to provide the technologies that allow clients and outsourcing providers to interact. Conventional “proprietary” software can, however, be prohibitively expensive to outsourcing employees in developing nations. Open source software (OSS) might offer a solution to this problem, for OSS is often free to use and is relatively easy to modify or to update. Yet open source software also brings with it a new series of problems related to product consistency, user support, and digital piracy. While the relationship between outsourcing and software (particularly OSS) has been known for some time, it has received relatively little attention in terms of social and economic implications both

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Open Source and Outsourcing

for those who outsource work and for those who perform outsourced work. Knowledge of these issues, however, is essential to understanding both current and future outsourcing practices and the socio-economic development of nations that engage in outsourcing. The purpose of this chapter is to provide readers with a foundational knowledge of how OSS use could affect international outsourcing practices. After reading the chapter, individuals will understand the relationship between software and outsourcing practices in terms of the opportunities and the limitations it creates for client companies and for outsourcing employees in developing nations. This chapter also presents strategies organizations can employ to use OSS more effectively in international outsourcing situations. The chapter then concludes with an overview of how global computing and OSS use is poised for significant growth and the implications this growth could have for different organizations.

The push to adopt BPO has to do with the perceived benefits related to such practices. Perhaps the most publicized of these benefits is savings related to the cost of skilled labor. Much of today’s knowledge work is being outsourced to skilled employees in developing nations — employees who can perform most technical tasks for far less than what counterparts in industrialized nations would charge. For example, gaming developers in Russia earn roughly $100 U.S. a week, while middle managers in mainland China earn roughly $9,000 a year (Weir, 2004; Nussbaum, 2004). Such wage-based savings, however, are not the only advantage related to offshoring. Rather, proponents of outsourcing note it also offers the benefits of

•

bAcKground the growth of International outsourcing In international outsourcing — or offshoring — situations, companies in one nation transfer the responsibility for completing a task to workers in another country (Bendor-Samuel, 2004). Originally, this transfer of responsibility focused on manufacturing and the production of physical products such as clothing or footwear. The global spread of online media, however, has given rise to a new kind of international outsourcing that involves the export of knowledge-based work. Known as business process outsourcing — or BPO — this practice encompasses everything from computer programming to call center staffing and medical transcription. While such BPO practices have existed on a relatively limited scale to date, they are poised to expand rapidly in the future.

•

•

Improved quality of service: Research indicates overseas outsourcing employees often provide better quality service than “domestic” workers who perform the same jobs (Reuters, July 182004; Farrell, 2004; Hagel, 2004). Certain call centers in the Philippines, for example, take 25% less time to handle incoming calls and receive higher rates of caller satisfaction than do U.S. counterparts (Hagel, 2004). Effective management practices: Because managers are paid less in developing nations, organizations can easily justify the use of more in-country managers to oversee outsourcing activities (Nussbaum, 2004; Hagel, 2004). This increase means managers have more time to answer employee questions and to provide employee training — factors that contribute to the improved quality of work or service perceived by many consumers (Hagel, 2004; Lewis, 2003; Hagel, 2004). Reduced employee turnover: Secure employment is often rare in many developing nations, and outsourcing jobs tend to be among the better paying ones. Therefore, outsourcing workers in developing nations tend to stay with employers for longer periods

877

Open Source and Outsourcing

•

•

of time (Reuters, July 18, 2004; Farrell & Zainulbhai, 2004). As a result, these longterm employees tend to have more experience performing their jobs while reducing the need for and the cost of new employee training. Reduced production time: By using online media to distribute work to employees in different nations and time zones, organizations can keep operations going 24 hours a day, seven days a week. Such continual production means that processes and products can be completed more quickly than if done exclusively in one country (Friedman, 1999; Baily & Farrell, 2004; Bierce, 1999; “America’s pain,” 2003). Increased access to international markets: In many developing nations, marketplace success is often a matter of knowing someone in that region (Rosenthal, 2001). Companies that provide outsourcing services can provide such an “in,” as well as provide advice on how one should proceed with business interactions in a particular nation or region (Rosenthal, 2001).

The manifold benefits of offshoring have prompted many companies to adopt it as a part of their core business strategy. At present, it accounts for $10 billion U.S. in worth and engages the services of some 500,000 workers in India alone (Baily & Farrell, 2004; Rosenthal, 2004b). Moreover, some researchers believe offshoring will grow by 20% a year through 2008, and by 2015, some 3 million business processing jobs will be performed by outsourcing employees (Rosenthal, 2004b; Baily & Farrell, 2004). Some critics expect this number to be much higher and claim at least 5 million international outsourcing jobs will emerge in the next five to 10 years (Garten, 2004). The perceived benefits of international outsourcing have resulted in such practices spreading to a number of countries and to a variety of

878

industries. French companies, for example, have begun working with French-speaking developing nations such as Senegal and Morocco on a variety of outsourcing projects, and these relationships have met with good results (Reuters, July 18, 2004). Similarly, German firms have begun exploring outsourcing relationships with Easter European nations, while the Netherlands has begun using call centers located in South Africa where Dutch-based Afrikaans is spoken (Farrell, 2004; “Sink or Schwinn,” 2004; Baily & Farrell, 2004; Rosenthal, 2004c). Additionally, markets in Spain, combined with the growth in the U.S. Spanish-speaking population, have meant more work is now outsourced to Mexico and to Latin America (Rosenthal, 2004a). Even India, the one time center for international outsourcing, is now outsourcing work to China and to Sri Lanka, where it can be done for less money (Reuters, September 2, 2004). The majority of BPO practices, however, are reliant on software. Aspects related to software use can thus affect if and how organizations realize the advantages related to the offshoring of knowledge work. For this reason, decision makers in the public and the private sectors need to understand the differences between proprietary and open source software — as well as the limitations and advantages of each — in order to make informed choices related to international outsourcing. Only through such informed decision-making can organizations benefit from the advantages related to offshoring.

MAIn thrust oF the chAPter software, cost, and International outsourcing Activities Software is essential to international BPO practices for two key reasons. First, it provides the mechanism for sharing materials and for interacting with others online (e.g., browsers and email

Open Source and Outsourcing

systems). Without the software needed to engage with others quickly, easily, and directly via the Internet, many of the cost, time, and quality benefits associated with the international-outsourcing of knowledge work would not exist. Second, production-related software (e.g., Microsoft Word or Adobe Illustrator) is essential to performing most knowledge-based programming, customer support, and IT tasks efficiently and effectively. Again, without the software needed to perform tasks, the time, cost, and quality benefits of international outsourcing cannot be realized. Unfortunately, the makers of software products have traditionally produced proprietary programs that require individuals to purchase them in order to perform a given activity. The for-profit nature of proprietary software has, however, made it unavailable to large segments of the world’s population — particularly in developing nations where high purchase prices are often associated with such materials (Warschauer, 2003). This restriction, in turn, affects online access and thus outsourcing activities in those regions. One solution to this situation would be for companies to supply prospective international outsourcing providers with free or inexpensive software products that would allow them to participate in outsourcing activities. Such an approach, however, would contribute to a second major software problem — copyright violation. In many developing nations, copyright laws are often weak (if not non-existent) or governments show little interest in enforcing them. As a result, many developing nations have black market businesses that sell pirated versions of software and other electronic goods for very low prices (Balfour, 2005). Such software piracy reduces consumer desire to purchase legitimate and more costly versions of the same product, and thus affects a company’s profit margins within that nation. In fact, global software piracy in 2004 accounted for some $33 billion U.S. in lost profits (“One third,” 2005). Further compounding this problem is the

fact that it is often difficult for companies to track down who is or was producing pirated versions of software products in order to stop that offender. Thus, while the distribution of cheap or free digital materials can help contribute to outsourcing activities, that same strategy can undermine an organization’s ability to sell its products abroad. Open source software (OSS) can offer a solution to this situation.

open source software and International outsourcing Software, in essence, is programming code — or source code — that tells a computer’s operating system how to perform a certain action (Still, 2004). The source code of Microsoft’s software program Word, for example, tells the related operating system how to transfer keystrokes into letters on a page and how to edit or to print that page. In theory, if an individual knows what programming/source code is needed to make a computer perform such activities, then that individual can simply retype that source code into his or her operating system, and the computer will respond as desired — the exact same way the original software would. Accordingly, if and individual can see how someone else programmed software to work (see the underlying source code), all that person needs to do is copy that programming/source code, and he or she no longer need to buy the related software. Rather, that person can now achieve the same action on his or her own. For this reason, many software companies “close” their source code in order to prevent users from seeing the underling programming that allows the software to work (Still, 2004). In these situations, users need to work through an interface that allows them to activate certain commands indirectly within a software program’s underlying source code. Closed software that prevents users from seeing the underlying code is know as proprietary

879

Open Source and Outsourcing

software, for only the creator of that software is allowed to open or to see and to copy or to manipulate the underlying source code. Open source software is a polar opposite in terms of access to source code/programming. That is, the developer of a piece of software creates it in manner that is “open” and permits any and all users to access, copy, and modify the underlying source that allows software to work (Still, 2004). A classic example of such open source programming is the HTML coding that allows Web pages to be displayed on browsers. The coding of these pages is open for anyone to review and copy; all the user needs to do is view a page’s underlying source code by using the “View source” — or related option — in his or her browser. This openness means individuals do not necessarily need to buy open source software in order to use it. Rather, they can directly access and copy the underlying source code in electronic format, or they can re-code/re-type the programming code and create a free copy of the related software. Such openness also means individuals can alter the underlying source code to make a software program perform different functions. So, in theory, a copy of the underlying source code from one kind of software could be modified into a variety of programs — each of which performs a different task. Updating software, moreover, becomes a matter of copying new/updated code versus purchasing the newest version of a product. In the case of international outsourcing, OSS can provide individuals with access to affordable software that allows them to work within outsourcing relationships. Moreover, the flexibility permitted by OSS means outsourcing workers could modify the software they use to perform a wide variety of tasks and reduce the need for buying different programs in order to work on different projects. As the software it is produced by the outsourcing employee and not the client, concerns related to copyright and proprietary materials are no longer stumbling blocks to outsourcing relationships. Thus, it is perhaps no

880

surprise that the use of OSS is growing rapidly in many of the world’s developing nations (“Open source’s,” 2003).

the Problems of open source software in International outsourcing While the free and flexible nature of open source software allows it to contribute greatly to international outsourcing situations, OSS also brings with it limitations that could affect the success of BPO relationships. First, because OSS is open for the user to modify as he or she sees fit, it is easy for each individual to use the same programming foundation/source code to develop a different kinds of non-compatible software or other digital products. Such divergence is know as forking code, for each programmer can take a different “fork” in the programming “road,” and such forking code has long been considered a major problem in OSS use (Still, 2004). These prospects for divergence mean international outsourcing situations are open to a variety of problems related to compatibility. Such problems include

• •

•

•

Employees might generate software or other materials that the related client company cannot use due to compatibility issues. Software products might not work as desired or work in unexpected ways/ways not compatible with the client company’s intentions. Employees working on different parts of the same project might produce component parts that cannot be integrated into the same whole or do not work together correctly or as intended within that same whole due to compatibility issues. Addressing compatibility issues either among international work groups or between offshoring workers and clients could take more time and cost more than if the product had been produced domestically.

Open Source and Outsourcing

Thus, the freedom that allows one individual to operate software might also prevent others from making use of digital materials. Additionally, any or all of these factors could contradict the advantages of reduced cost, quicker production time, and increased quality that encourage organizations to use international BPO. Some OSS companies, such as LINUX, have successfully addressed the problem of forking code through focused oversight processes that govern programming practices (Hamm, 2005). The result has been successful and relatively stable software products that work effectively with other systems. The same kind of management, oversight, and standardization, however, becomes more complicated in an international outsourcing situation where a variety of employees can be working in different nations and different time zones A second problem involves the kind of technical support available to OSS users — both outsourcing employees and consumers using OSS products. Because no individual or organization really owns an open source software product, there is often no formal or standardized mechanism for providing technical support to OSS users. Rather, technical support often comes in the form of a loose network of OSS programmers/developers who interact informally — and sometimes haphazardly — in online contexts such as chat rooms or listservs (Still, 2004). The idea is that a user who is experiencing software difficulty posts a query to one of these online forums and waits for a member of that forum to read the posting and respond to it. A major problem in such an informal system is that technical support/answers are not readily available. Rather, individuals who experience “glitches” related to time-sensitive OSS projects could find themselves missing or offsetting deadlines as they wait for some random programmer to respond to a request for help. Unfortunately, such a response could take anywhere from minutes to days depending on who is reading what lists or

who is posting when. In the fast-paced environment of global business, such delays could have a major effect on production schedules, profits, and access to international markets. These delays also counteract one of the key benefits of and reasons for using international outsourcing — quicker production times. Equally problematic is the fact that such support systems are open for anyone to respond to, regardless of a person’s technical skills or understanding of the situation (Still, 2004). Thus, the quality of the advice related to such a support system can be haphazard, inconsistent, or even wrong. Moreover, different individuals might offer varying suggestions/solutions to the same situation. Thus, requests for assistance could introduce the similar problem of forking/diverging source code into situations where different individuals encounter problems when working on the same project. As a result of these limitations, materials created using OSS could be incompatible, inconsistent, or even non-functional depending on the kind of “help” one received. Finally, open source software creates interesting and often unintended problems related to copyright. Most proprietary operating systems (e.g., Microsoft Windows) and proprietary software programs (e.g., Microsoft Windows Media Player) work by opening digital materials loaded into a computer system. That is, Windows Media Player opens the video files on a DVD or the audio files on a CD so that individuals may view or listen to films or music stored on those DVDs or CDs. This approach means the individual is able to access materials while maintaining the copyright related to such items. Open source software allows users to access the same kinds of files in a very different way. Rather than simply opening files located on a DVD or CD, OSS programs often automatically make a copy of such digital products, store that copy on the hard drive of the user’s computer, and then open that copied file so the user can view or can listen to it (Zoellick, 2001). This automatic

881

Open Source and Outsourcing

copying process, known as ripping, means that users of OSS materials automatically violate copyright just by trying to access or to use certain digital products. These unauthorized copies are available for anyone with access to the related computer — an important problem in outsourcing situations where more than one employee often uses the same terminal for work. Such ripped copies, moreover, can easily be replicated and sold in black market exchanges — a situation of particular importance as such illegal activities are well established and difficult to monitor in many of the world’s premier outsourcing locations (e.g., the People’s Republic of China). As a result, the copyright — or piracy — problems OSS could solve in terms of misuse of proprietary software could affect different products should

•

•

The original client company needs to provide outsourcing employees with proprietary digital materials in order to perform certain outsourced tasks. The original client company sells OSS products resulting from outsourcing work to different customers who can now use such products to make illegal copies of digital materials.

Thus, the use of OSS in BPO can be a double edged sword. Yet, the use of OSS in international outsourcing is a situation that must be addressed if organizations wish to succeed in the global business environment of the 21s t century. For this reason, organizations must find ways to strike a balance between OSS’s benefits and detriments in offshoring situations. Such a balance can be established through the development and the use of various organizational and industry-wide practices and policies.

882

strategies for using oss effectively in International outsourcing While OSS use in outsourcing creates a complicated situation, these complications can be addressed successfully through approaches that create standards for design and for use. What follows are ten strategies that can create an effective foundation for using OSS in international BPO.

•

Strategy 1: Create a programming standard all outsourcing employees will use when working with OSS. By creating and sharing standards for how one should program with OSS, organizations that outsource activities can provide overseas workers with guidelines that impose consistency on the programming process. These guidelines would instruct outsourcing OSS users on what programming choices to make during different points in an overall process. Such instructions would help reduce the prospects of forking code and increase compatibility across employees. Standards should also be created to address the coding of comments — or the bits of verbal explanation that appear within the coding of a program. These comments allow users and clients to know why a particular programming decision was made and to know the effects that decision could have on the operation of the related digital product. By creating standards for when and for how to create such comments, companies that use outsourcing create a built-in mechanism for reviewing materials produced by overseas workers. To make sure that such standards are followed by outsourcing employees, the related client company should suspend all or part of final payment until it has had time to review the final product, and its related comments, in order to confirm standards were followed. While such monitoring could initially slow production, as outsourcing

Open Source and Outsourcing

•

•

employees become aware of the fact their work is being monitored, they will spend more time adhering to standards. In so doing, these employees will create a better product. Thus, over the long term, the time spent monitoring OSS processes would decrease while the quality of products would increase. The increase in quality resulting from such practices would therefore eventually offset any initial slowdown in production caused by the introduction of monitoring procedures. Strategy 2: Require outsourcing workers to identify themselves as OSS users and require those users to complete organizational training programs in standard OSS practices. Such identification and training — which can be completely online — would allow organizations to provide outsourcing workers with instruction in how to follow a particular organization’s standards for OSS use and coding. It would also allow companies to identify which standards seem most problematic for individuals (via automatically reviewed online tests). Organizations could then provide follow-up online training to help individuals address their particular problem areas related to OSS. Initial expenses dedicated to the development and the delivery of such training can contribute to increased later profits in the form of more efficient, more effective, and more standard uses of OSS by outsourcing employees. Strategy 3: Develop an organizational support mechanism for helping outsourcing OSS users. To make sure that outsourcing employees using OSS get consistent and accurate answers to technical questions, organizations should develop their own OSS online support lists or Web sites. Such Web sites would be free access, but they would require individuals to enter a username and password (supplied by the organization) to gain access to such resources. Such a

•

measure would cut down on non-employees taking advantage of this resource and thus diverting attention away from the help given to an organization’s actual workers. This resource would be staffed by employees who have a high degree of proficiency in OSS use, and these “help” persons would be “on call” 24 hours a day to accommodate queries from outsourcing employees in different nations and time zones. These help employees would also be given access to an online database of the kinds of projects being worked on by different outsourcing employees. Help workers could then use this information to determine the prospective problems (and related best solutions) affecting different outsourcing workers. Such help workers would also record all comments and suggestions in a central online database that would cross-reference those suggestions with the names of all outsourcing workers involved in the same project. Such crosslisting would allow other help providers to offer consistent advice (and germane suggestions) to all outsourcing employees working on a project. Strategy 4: Establish a peer-mentoring program for outsourcing workers who use OSS. The effective use of OSS in a business environment is part understanding programming processes and part understanding the culture and the goals of the organizations using those programs. For this reason, the more outsourcing workers know about an employing organization’s culture, goals, and objectives, the more effectively they can use OSS to engage in processes or develop products that address those factors (Clement, 1994; Tan, 2000; Sandholm, 2004). That is, if the outsourcing employee knows how a given OSS product will fit into a company’s objectives, that employee will have a better idea of how to program to meet those objectives (Clement, 1994; Tan, 2000; Sandholm,

883

Open Source and Outsourcing

•

884

2004). Similarly, if the outsourcing employee is aware of the importance of copyright and proprietary products to a company, that employee is less likely to make unauthorized copies — either inadvertently or intentionally. By pairing outsourcing employees with a peer mentor from the client company, organizations provide such outsourcing employees with someone who can provide an introduction to the organization’s culture and its objectives. This mentor could make the outsourcing employee feel more a part of the overall organization. Such a peer could also familiarize outsourcing employees with company standards for OSS use and copyright policy (as well as the consequences for violating such a policy). In so doing, the mentor creates a mechanism for accountability, for the outsourcing employee is no longer a “faceless” worker who exists as a mere payroll number. Such a peer mentor should also have a background in OSS so he or she can provide the outsourcing worker with advice on how to best address a particular programming/ software situation. The mentor could similarly introduce the outsourcing employee to corporate training materials and support services and review programming work to check its quality. Work with such a peer mentor could be made an essential part of the training process associated with outsourcing workers. The mentor’s evaluation of that worker’s progress could likewise serve as an important resource when making the decision to continue using a particular outsourcing employee. Strategy 5: Create protocols for sharing or for forwarding work among international outsourcing employees. In many cases, work that is outsourced to one overseas employee is shared or forwarded to another international outsourcing employee work-

•

ing on the same process (Freedman, 1999). Within such contexts, effective information sharing is essential, for the more time it takes an individual to determine what a predecessor has done and expects that individual to do, the less efficient the international outsourcing process is. For this reason, outsourcing employees need to use a standard mechanism for listing what they have done/how they’ve used or programmed OSS so colleagues can understand this work. Outsourcing employees also need to provide standard directions on how the recipient of that information should use OSS to continue with work on that project. By developing standards ways of reporting such information to colleagues, organizations decrease the chances that confusion or a programming inconsistency will occur. These comments should also be shared with/downloaded to a database controlled by the client company. This database can help organizations anticipate or backtrack to locate prospective problems related to OSS use in outsourcing. Such a database should also be accessible to any individuals providing help in such outsourcing situations. The information in this database could allow help providers to better understand and address prospective problems encountered by one of more of the outsourcing employees working on forwarded materials (Strategy 3). Strategy 6: Require all international outsourcing relationships to be long-term contracts. Many of the disaster stories associated with international outsourcing occurred because of short-term relationships (Goolsby, 2004). In such relationships, neither party feels particularly invested in the long-term success of the other, so the desire to conform to standards or respect copyright is low. Moreover, such short-term relationships often mean that the employment of the outsourcing worker ends just as

Open Source and Outsourcing

•

he or she finally begins to understand and feel comfortable with a client’s expectations. By requiring international outsourcing employees who use OSS to contract for longer times, client organizations can retain experienced employees who are accustomed to working according to a company’s OSS programming guidelines. Such long-term relationships also improve accountability in outsourcing, for outsourcing employees are more likely to conform to programming standards and to respect copyright if they wish to maintain long-term business relations with the client (Atwood, 2004). Thus, long-term contracts enhance accountability in international outsourcing situations. Within such long-term relations, client companies should conduct regular audits of outsourcing employee work to make sure programming and comment guidelines are being followed and that the copyright of materials is respected. Strategy 7: Hire in-house (domestic) employees who are proficient in OSS or train in-house (domestic) employees to be proficient in OSS. Such employees will be essential to an organization, for they can serve as the peer mentors and the trainers of international outsourcing workers. They can also serve as the individuals who provide online support to outsourcing employees and as the individuals who will audit OSS work in long-term contract situations. By having trained OSS employees in house, organizations can rapidly respond to a variety of OSS crisis situations, easily develop new OSS coding practices, and readily share information about new OSS processes. Organizations can also adapt mentoring, training, support, and auditing activities to conform to new computing and business developments. Finally, such in-house employees can help client organizations understand different developments in, successes of, and problems

•

related to OSS when used in an international outsourcing context. Strategy 8: Develop a list of “copyrightfriendly” outsourcing locations and refer to this list whenever considering international outsourcing. To protect materials from piracy, organizations need to make sure they send such materials to nations that will acknowledge and enforce copyright laws and treaties. Such laws and treaties would provide organizations with a method for stopping such piracy if it happens in another nation and provide a method of recourse for curbing sales of and profits made from pirated materials. For these reasons, organizations can benefit from regularly updated listings that overview what international outsourcing destinations offer the best copyright protections. Such listings should include the following information:

•

•

•

•

If a convention or a treaty on copyright protection exists between the nation of the client organization and that of the outsourcing employee; a sample listing of such copyright-based treaties involving the Unites States can be found at www.copyright.gov — the Web site for the U.S. government’s Copyright Office What laws a particular nation has to guarantee copyright protection and how enforceable those laws are, for some nations have copyright agreements that are either not enforced or enforced haphazardly (Doyle, 2004; Orr, 2004) How the client organization should file a grievance or petition according to a particular convention or treaty, or according to the laws of a certain nation With which government agencies — both in the client organization’s own

885

Open Source and Outsourcing

•

•

886

nation and the outsourcing employee’s nation — such a grievance or petition should be filed What actions to expect in response to filing such a grievance and if any losses can be recovered according to international agreements or national laws

By consulting such a listing in advance of distributing work to overseas outsourcing workers, companies can reduce the risks that copyright violations will occur through restricting the distribution of materials only to employees in nations that provide effective copyright protection. Strategy 9: Develop an industry standard for OSS use. While an individual corporate standard can address compatibility issues related to one organization, the OSS-based products created by that organization might be used by other companies within an overall industry. At this level, the compatibility of OSS products again becomes an issue. To avoid compatibility problems across overall industries, the members of those industries should work together to develop an industry-wide standard for how to code, record comments, offer help, and record suggested solutions to programming problems. These standards could then be shared via an online database available to all members of a given industry. As computer programming practices are continually evolving, such a site should also have a “recent developments” section in which member organizations share new information and practices, innovations, or responses to previously unconsidered problems. Industry members should also meet regularly (annually or bi-annually) to share experiences and to update the related standards for OSS use in international outsourcing practices.

•

Strategy 10: Establish and maintain an industry-wide database of individuals and organizations that have violated copyright or violated coding standards in international outsourcing relationships. Several outsourcing experts have noted that the fear of lost employment — and thus lost money — is one of the few ways to force international outsourcing workers to comply with industry standards and procedural (legal) guidelines (Atwood, 2004). The problem with international outsourcing is that an individual might violate the standards or the guidelines of one organization without fear. That is, individuals could think they can simply go to work for a different organization and that new employer would be unaware of an outsourcing worker’s past. In this situation, the fear of reprisal through lost income remains low as the international outsourcing employee can easily move on to other clients. To counter this practice, organizations within an industry should establish a list of outsourcing offenders who have either failed to conform to OSS programming guidelines or who have used OSS to violate copyright. The idea would be to create an easy-access registry (e.g., a Web site) in which companies could record the names of the outsourcing providers with which they worked. Included in such a registry would be a listing of who the violator is, what the nature of the violation was, what the client did in response to this violation, and what results came from this action. Such a registry could help companies avoid working with “disreputable” outsourcing providers as well as offer effective strategies for addressing violations that occur in outsourcing relationships. These industry-wide registries mean that a large number of companies might now avoid “suspect” outsourcing providers

Open Source and Outsourcing

and greatly affect their profits by creating a boycott situation. This fear of boycott could be a powerful incentive for outsourcing providers to abide by data processing practices required by client organizations (Atwood, 2004). Such a site should also allow users to provide a synopsis of the effectiveness with which they felt an outsourcing provider performed work. For such a registry to be effective and open to the widest range of users, it should be online and allow users to perform internal searches for different outsourcing providers. It should also be updated regularly. Perhaps the best organization to oversee such a registry would be industry oversight bodies or the chamber of commerce or the Better Business Bureau in states where a large number of companies engage in international outsourcing. These registries would need to provide users with effective instructions on how to report concerns and locate data on outsourcing providers. They would also need to provide different kinds of information to different companies depending on the size of the company (small business or multinational conglomerate) and the related industry. Such registries could also be made effective by having frequently asked questions (FAQ) sheets or online help functions that facilitate use and provide information on how to address problems related to international outsourcing. Each of the afore-mentioned strategies is crucial to maintaining consistency and protecting ownership in outsourcing situations involving OSS. This list, however, is by no means comprehensive. Rather, it is a starting point that addresses some of the more fundamental aspects of OSS use in international outsourcing. For this reason, organizations might wish to address new developments in or particular uses of OSS in international outsourcing relationships.

Future trends At present, international OSS use might seem to be a peripheral topic related to a limited number of activities. Certain trends in business practices and international markets, however, indicate that organizations need to explore their OSS practices now, in order to prepare for and effectively address these trends.

the Projected demand for computing and It use in International outsourcing Among the areas expected to experience the greatest growth in BPO are finance, accounting, and medicine, and all of these areas of growth have one thing in common — data processing that involves computers and information technology. Many managers and bankers in the United States, for example, see international outsourcing as an effective way to address different accounting practices — particularly those related to information technology (IT). This push is in part due to the Sarbanes-Oxley Act of 2002 — section 404 of which requires chief executive officers and chief financial officers of public companies to review their internal controls over financial transactions (“404 tonnes,” 2004). The costs and time associated with all of the data crunching related to such activities are massive,1 and IT could greatly help with the compiling of information and the coordination of related activities. One way to curb costs, maximize time, and focus on computing in processing would be to outsource such activities. After all, the outsourcing of accounting and of IT work is not new and could address a lack of needed and costly domestic employees in both IT and in auditing2 (“Relocating the back office,” 2003). Given the costs related to such activities and the fact that more complex accounting practices are being outsourced, it seems reasonable to expect that some section 404 activities would be prime candidates for international outsourcing.

887

Open Source and Outsourcing

New U.S. healthcare legislation also seems poised to increase the international outsourcing related to IT work and data processing. The driving force behind this trend is the Health Insurance Portability and Accountability Act (HIPAA), which requires that all of an individual’s medical information be placed in electronic format so it can be easily shared via computer systems (Goolsby, 2001b; Goolsby, 2001c). Under HIPAA, print medical records must be processed into a digital format — a task that is time consuming, costly, and monotonous — and maintained via an IT system for sharing such information. The projected result of such processing is massive IT costs for all health care organizations such as hospitals (Goolsby, 2001a; Goolsby, 2001c). These factors make HIPAA-related tasks, such as medical transcription and IT development and oversight, ideal candidates for international outsourcing. They also make the development and the monitoring of related IT systems prime areas for international outsourcing, especially as most healthcare providers are relatively new to such systems and their operations (Goolsby, 2001a; Salkever, 2004; “Sink or Schwinn,” 2004). As so much of this financial and medical related work involves computers, it would be safe to assume that some — or many — of the outsourcing employees working on such projects would be using OSS. For this reason, the development of standard OSS practices becomes essential, not only to achieving organizational objectives, but to meeting legal requirements.

the value of oss in International Marketing OSS also has important implications for how businesses access markets in developing nations. Until quite recently, the majority of individuals within these regions had little or no access to the online environment. That factor of access, however, has changed markedly in recent years, due in large part to a mixture of public and private sector programs

888

designed to increase global Internet use. In China, for example, the number of Internet users grew from 2.1 million in 1999 to a projected 96 million by the end of 2004, and some experts expect this number to balloon to over 200 million users by 2007 (“Wired China,” 2000; “China’s coming,” 2004). In Africa, the United Nations and private companies have undertaken initiatives to increase online access across the continent, and Africa’s number of dial-up Internet connections has grown by some 20% in the past two years while the sales of laptop computers remain strong in this part of the world (“Tapping in to Africa,” 2000; Kalia, 2001; Reuters, 2002; “Laptop sales,” 2004). In Latin America, Brazil has seen its number of online users grow by 430,000 in recent months, and Global Crossings Ltd. has recently completed a project that uses fiber optics to give, “multinational companies the ability to communicate with Latin America as efficiently as with any other region” (“Active Internet users,” 2004; “Tying Latin America together,” 2001, p. 9). Additionally, the number of individuals going online in Eastern Europe is expected to climb from 17% to 27% by 2006, and laptop sales in the region remain strong (“IDC research,” 2003; “Laptop sales,” 2004). As a result of these developments, companies can now use online media to market goods, supply, and services, and even sell and distribute digital products on an unprecedented scale in the developing world. This concept of scale, moreover, is no small matter, for the poor in many developing nations have a large combined purchasing power. The collective buying power of Rio de Janeiro’s poorest residents, for example, is estimated to be some $1.2 billion (“Beyond the digital divide,” 2004). The value of such aggregate overseas markets is perhaps the reason that certain companies have started developing online communication technologies that could provide the “less well off” citizens of the world with affordable online access (“Beyond the digital divide,” 2004; Kalia, 2001). They have also begun developing inexpensive

Open Source and Outsourcing

hubs for online access in nations such as India, Ghana, Brazil, and South Africa (Warschauer, 2003; “Beyond the digital divide,” 2004). Interaction via the Internet and the Web, however, requires the use of software (e.g., a browser) that allows a wide range of individuals to navigate the online environment. For this reason, the only way companies would be able to effectively tap these poorer overseas markets would be through the use of free or inexpensive open source software. If, however, each prospective consumer in developing nations used a different kind of OSS to interact online, then the ability of companies to tap those markets in a mass, and thus a profitable, manner is lost. The development of standards in OSS programming and use provides a mechanism for avoiding such problems. Moreover, by introducing such standards early on and to the more technologically savvy individuals engaged in international outsourcing, organizations can improve the chances that such standards will either “trickle down” or spread throughout an overall region. Thus, the development of international OSS standards has important financial implications that can extend far beyond international outsourcing.

conclusIon International outsourcing offers a variety of cost, time, and quality advantages to those organizations that use it effectively. In relation to the international outsourcing of knowledge work, such effectiveness often involves access to and uses of software. While open source software can provide a distinct advantage in international outsourcing situations, such uses of OSS must be guided by both client companies and overall client industries. Fortunately, uses of OSS in international outsourcing are still relatively new. For this reason, organizations have some time to develop the standards, protocols, resources, and relationships essential to effective OSS use

in outsourcing contexts. The ideas presented in this chapter provide the reader with a foundation for exploring such developments. By understanding, employing, and building upon these ideas, organizations can improve the success with which they engage in international outsourcing practices both today and in the future.

reFerences 404 tonnes. (2004, December 16). The Economist. Retrieved December 27, 2004, from ht t p:// www.economist.com/displaystory.cfm?story_ id=3503931 Active Internet users by country, August 2004. (2004, September 22). ClickZ. Retrieved October 6, 2004, from http://www.clickz.com/stats/ big_picture/geographics/article.php/3410261 Atwood, M. (2004). The art of governance. Outsourcing Center. Retrieved December 27, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story.jsp?id=4616 Baily, M. N., & Farrell, D. (2004, July). Exploding the myths of offshoring. The McKinsey Quarterly. Retrieved November 11, 2004, from http://www.mckinseyquarterly.com/article_print. aspx?L2=7&L3=10&ar=1453 Balfour, F. (2005, February 7). Fakes! BusinessWeek Online. Retrieved May 31, 2005, from http://www.businessweek.com/@@ISYAAIQQjU40VAkA/magazine/content/05_06/b39 19001_mz001.htm Bendor-Samuel, P. (2004). Lou Dobbs: Here’s why you’re wrong! Outsourcing Center. Retrieved December 20, 2004, from http://www. outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4565 Beyond the digital divide. (2004, March 13). The Economist: Technology Quarterly Supplement, 8.

889

Open Source and Outsourcing

Byrnes, N. (2005, January 1). Green eyeshades never looked so sexy. BusinessWeek Online. Retrieved January 5, 2005, from http://www. businessweek.com/@@na*EhYQQxu80VAkA/ magazine/content/05_02/b3915041_mz011.htm China’s coming of age online. (2004, November 16). eMarketer. Retrieved November 17, 2004, from http://www.emarketer.com/Article.aspx?1 003139&printerFriendly=yes Clement, R. W. (1994). Culture, leadership, and power: The keys to organizational change. LookSmart. Retrieved March 3, 2005, from http://www. findarticle.com/p/articles/mi_m1038/is_n1_v37/ ai_149 Doyle, J. F. (2004). Avoiding outsourcing pitfalls. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcingrequests.com/ center/jsp/requests/print/story.jsp?id=4626 Farrell, C. (2004, November 22). Giving thanks for offshoring. BusinessWeek Online. Retrieved December 30, 2004, from http://www.businessweek.com/pring/bwdaily/dnflash/nov2004/ nf20041122_7377_dbb013 Farrell, D., & Zainulbhai, A. S. (2004). A richer future for India. The McKinsey Quarterly. Retrieved August 16, 2004, from http://www. mckinseyquarterly.com/article_page.aspx?ar=1 440&L2+7&L3=10&srid=6&g Friedman, T. L. (1999). The Lexus and the olive tree. New York: Farrar, Strass and Giroux. Garten, J. E. (2004, June 21). Offshoring: You ain’t seen nothin’ yet. BusinessWeek Online. Retrieved December 30, 2004, from http://businessweek.com/print/magazine/content/04_25/ b3888024_mz007.htm Goolsby, K. (2001a). Healthcare’s biggest challenge. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests. com/center/jsp/requests/print/story.jsp?id=1660

890

Goolsby, K. (2001b). How to get ready for HIPPA. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests.com/ center/jsp/requests/print/story.jsp?id=1686 Goolsby, K. (2001c). Perspectives on HIPPA. Dallas, TX: Outsourcing Center. Goolsby, K. (2004). The disgruntled employee: A holistic model addressing behaviors in outsourcing. Outsourcing Center. Retrieved May 6, 2005, from http://www.outsourcing-requests.com/ center/jsp/requests/print/story.jsp?id=4631 Hagel, J. III. (2004). Offshoring goes on the offensive. The McKinsey Quarterly. Retrieved November 1, 2004, from http://www.mckinseyquarterly.com/article_page.aspx?ar=1406&L2=1 &L3=106&srid=11 Hamm, S. (2004, September 27). Tech’s future. BusinessWeek, 82-89. Hamm, S. (2005, January 31). Linux, Inc. Businesweek Online. Retrieved May 2, 2005, from http:// www.businessweek.com/@@p3fqe4UQ4k80VAkA/magazine/content/05_05/b3918001_mz001. htm IDC research: Net usage up in Central and Eastern Europe. (2003, February 19). NUA Internet Surveys. Retrieved June 23, 2003, from http:// www.nua.com/surveys/index.cgi?f=VS&art_ id=905358723&rel=true Kalia, K. (2001, July/August). Bridging global digital divides. Silicon Alley Reporter, 52-54. Laptop sales continue to climb in third world. (2004, August 20). eMarketer. Retrieved October 27, 2004, from http://www.emarketer.com/Article. aspx?1003006 &printerFriendly=yes Lewis, W. W. (2003). Educating global workers. The McKinsey Quarterly. Retrieved November 10, 2004, from http://www.mckenseyquarterly.com/ article_page.aspx?ar=1357&L2=7&L3=10

Open Source and Outsourcing

Malik, R. (2004, July). The new land of opportunity. Business 2.0, 72-79.

outsourcing-requests.com/center/jsp/requests/ print/story.jsp?id=4718

Nussbaum, B. (2004, September 20). Is outsourcing becoming outmoded? BusinessWeek Online. Retrieved October 11, 2004, from http:// www.businessweek.com/print/bwdaaily/dnflash/ sep2004/nf20040920_0654.htm?cha

Rosenthal, B. E. (2004b). META predicts offshoring will continue to grow at 20 percent clips through 2008. Outsourcing Center. Retrieved December 27, 2004, from http://www.outsourcing-requests.com/center/jsp/requests/print/story. jsp?id=4714

One third of all software in use still pirated, major study finds. (2005, May 18). IDC. Retrieved May 31, 2005, from http://www.idc.com/getdoc.jsp? containerId=prUS00150505 Orr, G. R. (2004). What executives are asking about China. The McKinsey Quarterly. Retrieved October 6, 2004, from http://www.mckinseyquarterly. com/article_pring.aspx?L2=7&L3=8&ar=1478 Relocating the back office. (2003, December 11). The Economist. Retrieved December 20, 2003, from http://www.economist.com/displaystory. cfm?story_id=2282381 Reuters: Internet use increasing in Africa. (2002, October 1). NUA Internet Surveys. Retrieved June 25, 2002, from http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358408&rel=true Reuters. (2004, July 18). France outsources, Senegal calls. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/ print/0,1294,64262,00.html Reuters. (2004, September 2). Outsourcing’s next big thing – Malaysia? News.Com. Retrieved September 7, 2004, from http://news.com.com/21001011-5344618.html. Rosenthal, B. E. (2001). Business risk. Outsourcing Center. Retrieved December 21, 2004, from http://www.outsourcing-requests.com/center/jsp/ requests/print/story.jsp?id=1685 Rosenthal, B. E. (2004a). How real estate choices affect offshoring decisions. Outsourcing Center. Retrieved December 12, 2004, from http://www.

Rosenthal, B. E. (2004c). Why the U.S. and UK are calling South African call centers. Outsourcing Center. Retrieved December 12, 2004, from http://www.outsourcing-requests.com/center/jsp/ requests/print/story.jsp?id=4717 Salkever, A. (2004, July 7). Racing to cure sickly medical security. BusinessWeek Online. Retrieved December 30, 2004, from http://www.businessweek.com/print/technology/content/jul2004/ tc2004077_9847_tc_171 Sandholm, L. (2004). Strategic responses for customer satisfaction. Sandholm Associates. Retrieved March 1, 2005, from http://www.sandholm.se/artiklar/stratrespforcustasais.html Sink or Schwinn. (2004, November 11). The Economist. Retrieved December 6, 2004, from http://www.economist.com/printedition/PrinterFriendly.cfm?Story_ID=3351542 Still, B. (2004). An open source primer. In K. St. Amant & P. Zemliansky (Eds.), Internet-based workplace communications: Industry and academic applications (pp. 278-298). Hershey, PA: Information Science Publishing. Tan, V. S. L. (2000, August 26). Lessons from culture change. New Straits Times. Retrieved February 26, 2005, from http://adtimes.nstp.com. my/jobstory/aug26a.htm Tapping in to Africa. (2000, September 9). The Economist, 49. Tying Latin American together. (2001, Summer). NYSE Magazine, 9.

891

Open Source and Outsourcing

Warschauer, M. (2003). Technology and social inclusion: Rethinking the digital divide. Cambridge, MA: MIT Press.

endnotes 1

Weir, L. (2004, August 24). Boring game? Outsource it. Wired. Retrieved September 20, 2004, from http://www.wired.com/news/ print/0,1294,64638,00.html Wired China. (2000, July 22). The Economist, 24-28. 2

Zoellick, B. (2001). CyberRegs: A business guide to Web property, privacy, and patents. Boston: Addison-Wesley Professional.

General Electric, for example, spent some $30 million in extra payments to auditors to review such documents, while J. P. Morgan Chase has 130 full-time employees working on this project, and PriceWaterhouse Coopers has spent some $40 million in training 9,000 U.S. employees to perform these functions (404 tonnes, 2004). There do not appear to be enough trained U.S. auditors available to meet current demands, and as a result, this lack of supply has driven up U.S. auditor pay by some 10-20% (Byrnes, 2005).

This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 229-247, copyright 2006 by IGI Publishing (an imprint of IGI Global).

892

893

Chapter 3.5

Instrumental and Social Influences on Adoption of Collaborative Technologies in Global Virtual Teams Andre L. Araujo College of William & Mary, USA

AbstrAct Recent advances in Web-based technologies along with investments in international outsourcing and offshore locations have unquestionably increased the importance of global virtual teams. However, because global virtual teams have their members dispersed in different countries and rely extensively on electronic communication to exchange information, complete tasks, and coordinate activities, their implementation is accompanied by challenges beyond those found in traditional teams whose members often meet face-to-face in the same cultural context. One such challenge has to do with cross-cultural collaboration. Although there is a sense that collaborative technologies offer the essential tools for supporting collaboration, it is unknown whether virtual members will actually adopt collaborative technologies in a cross-cultural setting. To gain knowledge about this potential endemic aspect of cross-

cultural teamwork, one needs to examine the factors that influence the adoption of collaborative technologies in global virtual teams. Drawing on the work of organizations, cognitive theory, and information systems researchers, this study offers a framework that describes the key components underlying collaborative technology adoption in global virtual teams by integrating both social and instrumental aspects of group work.

IntroductIon Recent advances in Web-based technologies along with investments in international outsourcing and offshore locations have unquestionably increased the importance of global virtual teams. This flatter and more team-based form of organizational work allows managers of globally dispersed teams to assemble individuals of differing expertise who are not physically and locally

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Instrumental and Social Influences on Adoption of Collaborative Technologies

available. However, because global virtual teams have members dispersed in different countries and rely extensively on electronic communication to exchange information, complete tasks, and coordinate activities, their implementation is accompanied by challenges beyond those found in traditional teams whose members often meet face-to-face and in the same cultural context (Kankanhalli, Tan, & Wei, 2007; Maznevski & Chudoba, 2000). One such challenge has to do with cross-cultural collaboration. When working in global virtual teams, cultural values, beliefs, and behaviors of team members may be so different and disparate that they can hurt cooperation and ultimately result in lowered levels of collaborative technology adoption. Thus, although there is a sense that collaborative technologies offer the essential tools for supporting globally distributed teamwork, it is unknown whether virtual members will actually adopt such technologies (Munkvold, 2005; Quresha et al., 2006; Rutkowski, Vogel, van Genuchten, Bemelmans, & Favier, 2002; Saunders, Van Slyke, & Vogel, 2004). This study addresses some of these issues. Drawing on the work of organizations, cognitive theory, and information systems researchers, this study offers an integrated framework that describes the key components underlying the adoption of collaborative technologies in global virtual teams by integrating both the social and instrumental aspects of teamwork. The framework advances research by examining the following question: What are the factors that influence collaborative technology adoption in global virtual teams? The next section discusses the background of this research. Then, the following section presents the focus of the paper followed by a discussion of the framework and its propositions. The final section discusses the main contributions of this study.

894

reseArch bAcKground Organizational theorists (e.g., March & Simon, 1957; Rogers, 1995) and MIS scholars (e.g., Daft & Lengel, 1984; Fulk, Schmitz, & Steinfield, 1990; Karahanna, 1999; Zmud, Lind, & Young, 1990) have long been concerned with the understanding of IT adoption. Two major schools of thought have offered alternative views on this topic: a) the instrumental school and b) the social constructionist school. Typically, models rooted in the instrumental school suggest that technology directly and positively influences organizational productivity as long as people objectively (or rationally) evaluate and select the technology best aligned to their skills and the requirements of the task. While this view has yielded extensive literature on IT adoption, the social constructionist school argues that such technological determinism fails to recognize that “behavior occurs in a very social world which is far from neutral in its effects” (Fulk et al., 1990, p. 117). In other words, IT adoption is not always as simple and rational as it could be because it is a complex, subjective, and evolving process that is subject to social influences. The social constructionist view suggests that people’s subjective interpretations of their work, the organization, and technology help determine IT adoption. While each of these two schools offers important analytical tools with which to examine technology adoption in organizations, recent theorizations suggest that, in the real world, both instrumental and social aspects of teamwork coexist, making them difficult to distinguish (Fulk, 1993). In other words, social behaviors and subjective interpretations, as much as objective perceptions of technology, help determine IT adoption in organizations. The model developed in this study integrates both instrumental and social views in an effort to examine the adoption of collaborative technologies in global virtual teams. Specifically, the model includes users’ perceptions of self-efficacy, which is an indicator of the instrumental view and

Instrumental and Social Influences on Adoption of Collaborative Technologies

cultural differences, which is in turn an indicator of the social view. Global virtual team refers to a group of people who work on interdependent tasks guided by a common purpose across space, time and organizational boundaries with extensive support of collaborative technologies to communicate and interact over the Web. Examples of collaborative technologies include Web-based systems such as instant messaging, group calendars, video-conferencing, email, and knowledge-management repository systems. In the following section, I will present a research model that explains the impact of such views on global virtual teams.

MAIn Focus oF the PAPer the Instrumental view of collaborative technology Adoption Self-efficacy refers to an individual’s belief in his or her own capability to perform a specific behavior (Bandura, 1986) and is a critical predictor of future intentions (Bandura & Cervone, 2000; Fernandez-Ballesteros, Diez-Nicolas, Caprara, Barbaranelli, & Bandura, 2002; Marakas, Yi, & Johnson, 1998). Recent work in the MIS area defines computer self-efficacy along two dimensions: 1) General computer self-efficacy, which is “an individual’s judgment of efficacy across multiple computer application domains,” and 2) Task-specific computer self-efficacy, which

refers to “an individual’s perception of efficacy in performing specific computer-related tasks” (Marakas et al., 1998, p. 128). The first dimension captures an individual’s experiences developed over time within a diverse domain of computerrelated tasks, whereas the latter is an assessment of an individual’s perception of his or her skills in performing a task using specific computer-related applications. There is strong empirical support for the influence of general computer self-efficacy on decisions involving computers and IT adoption (e.g., Agarwal, Sambamurthy, & Stair, 2000; Compeau, Higgins, & Huff, 1999; Hsu & Chiu, 2004; Igbaria & Iivari, 1995, Marakas et al., 1998). For example, when observing almost 400 IT users over a one-year interval, Compeau et al. (1999) found strong support for the significant influence of self-efficacy on individuals’ reactions to information technology. In another study, Marakas et al. (1998) indicated that users who have had negative general computer-related experiences are likely to hesitate to use new computer applications. Conversely, individuals who perceive themselves as capable of managing IT across multiple computer domains are more inclined to adopt new technologies. Furthermore, Agarwal et al. (2000) found a significant positive relationship between software-specific self-efficacy and software usage. Finally, recently, Hsu and Chiu (2004) have empirically shown that general Internet self-efficacy—an indicator of general computer self-efficacy—plays an important role in shaping

Figure 1. Collaborative technology adoption in global virtual teams GENERAL COMPUTER SELF-EFFICACY

TASK-SPECIFIC COMPUTER SELFEFFICACY

CULTURAL DIVERSITY

COLLABORATIVE TECHNOLOGY ADOPTION

895

Instrumental and Social Influences on Adoption of Collaborative Technologies

an individual’s positive attitude towards adoption of e-services. Taken together, these studies suggest that general computer self-efficacy is positively associated with IT adoption. Hence: Proposition 1: General computer self-efficacy is positively related to the adoption of collaborative technologies. Prior studies have indicated the positive impact of task-specific self-efficacy on technology adoption (Eastin & LaRose, 2000; Hsu & Chiu, 2004; Thompson, Meriac, & Cope, 2002). Thompson et al. (2002) found that task-specific self-efficacy positively influences online search performance. Similarly, when examining the adoption of ecommerce activities, Eastin and LaRose (2000) found that Internet self-efficacy helps predict online shopping. Finally, Hsu and Chiu (2004) found that Web-specific self-efficacy—an indicator of task-specific self-efficacy—directly and positively influences individuals’ attitudes and intentions towards the adoption of Internet-based services. Thus, the more people believe they are capable of performing a task-specific technology, the greater the likelihood of technology adoption. Hence: Proposition 2: Task-specific computer self-efficacy is positively related to the adoption of collaborative technologies. The above propositions capture the instrumental view of collaborative technology adoption. This view suggests that people’s judgments about IT adoption primarily are guided by cognitive evaluations of how capable they are of effectively using a specific technology to accomplish a given task. However, as discussed earlier, decisions toward technology adoption also are influenced by social aspects of group work (Barling & Beattie, 1983; Lent, Brown, & Larkin, 1987; Stumpf, Brief, & Hartman, 1987; Taylor, Locke, Lee, & Gist, 1984). The following section discusses the mediating role

896

of culture—an indicator of the social view—in collaborative technology adoption.

the social view of collaborative technology Adoption Culture has been studied in various areas including marketing (Aaker & Maheswaran, 1997; Clark, 1990; Tse, Lee, Vertinsky, & Wehrung, 1988), international business (Bhagat, Kedia, Harveston, & Triandis 2002), and management (Hosfstede, 1991). According to Hofstede (1980), culture is the collective programming of the mind that builds on shared norms and values. Thus, it is a mechanism of collective sense-making that binds individuals in groups and distinguishes one group of people from another. While several classification schemes have been proposed to study culture (e.g., Adler, 1993; Hall, 1976), most of the cross-cultural research has adopted Hofstede’s (1980, 1991) taxonomy. It categorizes national cultures along five dimensions. 1) Individualism/ collectivism refers to the value of an individual’s rights, characteristics, and identity. It describes whether the common values and beliefs of a society emphasize the need of an individual or the need of a group. 2) Uncertainty avoidance refers to the degree of tolerance of the ambiguous, unknown, and unfamiliar. 3) Power distance refers to the degree of tolerance for social hierarchy and class structure. 4) Masculinity refers to the degree of competition and assertiveness in a society, and 5) Confucian dynamism emphasizes long-term plans over short-term goals and strategies. Recent studies have applied such a framework to examine IT adoption in cross-cultural contexts (e.g., Hewett, Money, and Sharma 2006). The link between self-efficacy and culture has been supported in a number of empirical studies in organizational areas (e.g., Earley, 1993; Hampton & Marshall, 2000; Schaubroeck, 2000), including recent work in the MIS field (e.g., Hardin, Fuller, & Davison, 2007). For

Instrumental and Social Influences on Adoption of Collaborative Technologies

example, Earley (1993) found that individuals from individualist cultures reported a positive relationship between self-efficacy and individual performance conditions, while individuals from collectivist cultures reported a positive relationship between collective efficacy and in-group conditions. In another study, Schaubroeck (2000) reported that individuals from different cultural backgrounds exhibited varying behaviors when working in teams. Extending these notions to the study of globally dispersed teams, Hardin et al. (2007) found that individualist cultures reported higher values of team efficacy in comparison to collectivist cultures. Taken together, these studies suggest that higher levels of cultural diversity are likely to influence the link between self-efficacy and IT adoption. Hence: Proposition 3: Cultural diversity will moderate the relationship between self-efficacy and adoption of collaborative technologies. The three aforementioned propositions suggest that self-efficacy (defined in terms of general computer self-efficacy and task-specific computer self-efficacy) positively influence collaborative technology adoption. That is, individuals make decisions on whether or not to adopt a technology based on the extent they perceive themselves capable of using that technology to work on the task (i.e., the instrumental view). When examining these relationships in cross-cultural settings, however, cultural background (i.e., the social view) influences the strength of the link between self-efficacy and IT adoption. The next section discusses both the theoretical and practical contributions of this study.

Future trends Investments in IT infrastructures and international outsourcing initiatives have unquestion-

ably increased the availability of IT technologies worldwide; however, much of the literature on the use of collaborative technologies deals with teamwork in a single country. This study develops a theoretical framework distilled from the work of organizations, cognitive theories, and information systems to explain the forces underlying collaborative technology adoption in teams with globally dispersed members who rely extensively on technology-mediated tools to communicate, interact, and transact business. This is a critical issue because a number of nations are increasingly becoming main destinations for offshore IT investment. As the number of offshore locations increases, managers need to know how to maximize the benefits of global virtual teams by appropriately assessing workers’ skills and the cultural aspects of offshore destinations. In an attempt to explain the challenges and issues of global e-collaboration, we have suggested an integrative model that includes both instrumental and social processes likely to influence collaborative technology adoption in global virtual teams. This approach is of utmost importance to management scholars and practitioners alike. From a theoretical view, prior research has primarily relied on models that emphasize individuals’ cognitive decision-making processes and organizational structural factors at the expense of social aspects (such as culture) that may be equally relevant in the process of technology adoption in a cross-cultural setting. For example, Dasgupta, Granger, and McGarry (2002) have suggested that an individual’s decision to adopt a technology is dependent on their perceived ease of use and the perceived usefulness of that technology. Thus, although their model incorporates individual cognition, it does not account for the social mechanisms through which cognitive limitations lead to technology adoption and acceptance. In another study, Bajwa, Lewis, Pervan, and Lai (2005) examined the impact of organizational sides, centralization of decision-making, degree

897

Instrumental and Social Influences on Adoption of Collaborative Technologies

of integration, and infrastructure connectivity on collaborative technology adoption behavior. In other words, they have focused on organizational structural factors and IT structural attributes rather than the social factors inherent in team working relationships. Collectively, these studies have not included the social fabric of teamwork, which reflects the actions and interactions that take place between people situated in culturally diverse settings. In a Web-based environment, where individuals from different nationalities are brought together to work on a common project, cultural differences are critical in that individual cognitions and behaviors—through which decisions about adoption necessarily occur—are shaped by social influences—that is, by the attitudes and behaviors of others with whom they work. This study incorporates these social aspects. For managers who need to assemble international teams whose members are located in different countries, I have illustrated that different personal values, beliefs, and behaviors among virtual team members may eventually affect their willingness to cooperate with one another, thereby influencing collaborative technology adoption. Therefore, managers of global virtual teams may benefit from a deeper investigation of the cultural factors that moderate the influence of self-efficacy highlighted in this research. The explosive growth of the World Wide Web has undoubtedly enabled a number of technologies (i.e., Web-based systems, computer mediated communication tools, video-conferencing systems, etc.) to change the way people work, communicate, and coordinate their activities across companies and countries. To the best of our knowledge, this research is the first attempt to offer a set of propositions that capture the effects of self-efficacy along with culture on collaborative technology adoption in global virtual teams.

898

conclusIon My aim in this article has been to provide a theoretical model that explains collaborative technology adoption in global virtual teams. The model advances research by explicitly incorporating both the instrumental and social aspects of group work. In terms of the model described above, if only self-efficacy and the instrumental view primarily govern the IT adoption process, parties are likely to guide their behavior based on how well the collaborative technology matches their skills and the requirements of the task. However, because they operate in a globally dispersed context where team members are likely to exhibit different personal values, beliefs, and attitudes, cultural diversity can fundamentally change the impact of self-efficacy on collaborative technology adoption. I hope this study will help academics and practitioners interested in examining the critical aspects of global e-collaboration.

reFerences Aaker, J. L., & Maheswaran, D. (1997). The effect of cultural orientation on persuasion. Journal of Consumer Research, 24(4), 315-328. Agarwal, R., Sambamurthy, V., & Stair, R. (2000). The evolving relationship between general and specific computer self-efficacy: An empirical investigation. Information Systems Research, 11(4), 418– 430. Bajwa, D. S., Lewis, L. F., Pervan, G., & Lai, V. S. (2005). The adoption and use of collaboration information technologies: International comparisons. Journal of Information Technology, (20), 130-140. Bandura, A. (1986). Social foundations of thought and action: A social cognitive theory. Englewood Cliffs, NJ: Prentice-Hall.

Instrumental and Social Influences on Adoption of Collaborative Technologies

Bandura, A., & Cervone, D. (2000). Self-evaluative and self-efficacy mechanisms of governing the motivational effects of goal systems. In E. T. Higgins, A. W. Kruglanski, & N. A. Edwards (Eds.), Motivational science: Social and personality perspectives (pp. 202-214). Philadelphia: Psychology Press. Barling, J., & Beattie, R. Self-efficacy beliefs and sales performance. Journal of Organizational Behavior and Performance, 5(1), 41-51. Bhagat, R. S., Kedia, B. L., Harveston, P. D., & Triandis, H. C. (2002). Cultural variations in the cross-border transfer of organizational knowledge: An integrative framework. Academy of Management Review, 27(2), 204-221. Carlson, J. R., & Zmud, R. W. (1999). Channel expansion theory and the experiential nature of media richness perceptions. Academy of Management Journal, 42(2), 153-170. Clark, T. (1990). International marketing and national character: A review and proposal for a research agenda. Journal of Marketing, 53(1), 23-37. Compeau, D. R., Higgins, C. A., & Huff, S. (1999). Social cognitive theory and individual reactions to computing technology: A longitudinal study. MIS Quarterly, 23(2), 145-158. Daft, R. L., & Lengel, R. H. (1984). Information richness: A new approach to managerial behavior and organization design. Research in Organizational Behavior, (6), 191-233. Eastin, M. A., & LaRose, R. L. (2000). Internet self-efficay and the psychology of the digital divide. Journal of Computer Mediated Communication, 6(1). Fernandez-Ballesteros, R., Diez-Nicolas, J., Caprara, G. V., Barbaranelli, C., & Bandura, A. (2002). Determinants and structural relation of personal efficacy to collective efficacy. Applied

Psychology: An international review special issue: Challenges of applied psychology for the third millennium, 51(1), 107-125. Fuller, M. A., Hardin, A. M., & Davison, R. B. (2007). Efficacy in technology-mediated teams. Journal of Management Information Systems, 23(3), 209. Fulk, J. (1993). Social construction of communication technology. Academy of Management Journal, 36(5), 921-950. Fulk, J., Schmitz, J., & Steinfield, C. (1990). A social influence model of technology use. In J. Fulk & C. Steinfield (Eds.), Organizations and communication technology (pp. 117-140). Newbury Park, CA: Sage Publications. Hampton, N., & Marshall, A. (2000). Culture, gender, self-efficacy, and life satisfaction: A comparison between Americans and Chinese people with spinal cord injuries. Journal of Rehabilitation, 66(3), 1-10. Hardin, A. M., Fuller, M. A., & Davison, R. M. (2007). I know I can, but can we? Culture and efficacy beliefs in global virtual teams. Small Group Research, 38(1), 130-155. Hewett, K., Money, R. B., & Sharma, S. (2006). National culture and industrial buyer-seller relationship in the United States and Latin America. Journal of the Academy of Marketing Science, 34(2), 386-402. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage. Hofstede, G. (1991). Cultures and organizations: Software of the mind, London: McGraw-Hill. Igbaria, M. & Iivari, J. (1995). The effects of self-efficacy on computer usage. Omega, 23(6), 587-605.

899

Instrumental and Social Influences on Adoption of Collaborative Technologies

Kankanhalli, A., Tan, B. C. Y., & Wei, K. (2007). Conflict and performance in global virtual teams. Journal of Management Information Systems, 23(3), 237-274.

Saunders, C., Van Slyke, C., & Vogel, D. (2004). My time or yours? Managing time visions in global virtual teams. Academy of Management Executive, 18(1), 19–31.

Karahanna, E. (1999). Information technology adoption across time: A cross-sectional comparison of pre-adoption and post-adoption beliefs. MIS Quarterly, 23(2), 183.

Stumpf, S. A., Brief, A. P., & Hartman, K. (1987). Self-efficacy expectations and coping with careerrelated events. Journal Vocational Behavior, (31), 91-108.

Lent, R. W., Brown, S. D., & Larkin, K. C. (1987). Comparison of three theoretically derived variables in predicting career and academic behavior: self-efficacy, interest congruence, and consequence thinking. Journal of Counseling Psychology, 34(3), 293-298.

Taylor, S., Locke, E. A., Lee, C., & Gist, M. E. (1984). Type A behavior and faculty research productivity: What are the mechanisms? Organizational Behavior and Human Performance, (34), 402-418.

Marakas, G. M., Yi, M. Y., & Johnson, R. D. (1998). The multilevel and multifaceted character of computer self- efficacy: Toward clarification of the construct and an integrative framework for research. Information Systems Research, 9(2), 126-163. March, J., & Simon, H. (1957). Organizations. New York: Wiley. Maznevski, M. L., & Chudoba, K. M. (2000). Bridging space over time: Global virtual team dynamics and effectiveness. Organization Science, 11(5), 473-492. McCoy, S., Everard, A., & Jones, B. M. (2005). An examination of the technology acceptance model in Uruguay and the US: A focus on culture. Journal of Global Information Technology and Management, 8(2), 27-45. Rogers, E. M. (1995). The diffusion of innovations. New York: Free Press. Rutkowski, A. F., Vogel, D. R., van Genuchten, M., Bemelmans, T., & Favier, M. (2002). Ecollaboration: The reality of virtuality. IEEE Transactions on Professional Communication, 45(4), 219.

900

Thompson, L. F., Meriac, J. G., & Cope, J. G. (2002). Motivating online performance: The influences of goal setting and Internet self-efficacy. Social Science Computer Review, 20(2), 149-160. Tse, D. K., Lee, K., Vertinsky, I., & Wehrung, D. A. (1988). Does culture matter? A cross-cultural study of executives’ choice, decisiveness, and risk adjustment in international marketing. Journal of Marketing, (52), 81-95. Zigurs, I. & Qureshi, S. (2001). Managing the extended enterprise, creating value from virtual spaces. In G. Dickson & G. DeSanctis (Eds.), Information technology and the future enterprise: New models for managers (pp. 125-143). Prentice Hall. Zmud, R. W., Lind, M. R., & Young, F. W. (1990). An attribute space for organizational communication channels. Information Systems Research, 1(4), 440-457.

Instrumental and Social Influences on Adoption of Collaborative Technologies

Key terMs Asynchronous Collaborative Technologies: Allow geographically dispersed teams to work on a common task but at different points in time. These technologies are particularly useful tools for teams located in different time zones and include Web-based collaborative tools such as email systems (e.g., gmail, hotmail, and yahoo), document management technologies, knowledgemanagement repository systems, intranets, listservs, group calendars, and newsgroups. Collaborative Technologies: Technologies that support collaborative efforts among multiple geographically dispersed teams when carrying out their tasks and social needs over the Web. They can be synchronous or asynchronous. Culture: The collective programming of the mind that builds on shared norms and values (adapted from Hofstede, 1980). General Computer Self-Efficacy: “An individual’s judgment of efficacy across multiple computer” (adapted from Marakas, et al., 1998). Global E-Collaboration: The process of information sharing, communication, and coordination between geographically dispersed teams in two or more countries working together toward a common goal using collaborative technologies over the Web.

Global Virtual Team: A group of people who work on interdependent tasks guided by a common purpose across space, time and organizational boundaries with technology-supported communication substantially more than face-to-face meetings (adapted from Maznevski & Chudoba, 2000). Typically, these teams are located in two or more countries. Synchronous Collaborative Technologies: Allow teams to communicate and exchange information in a real time fashion. Examples of synchronous collaborative technologies include Web-based tolls such as chats, instant messaging, electronic meeting systems or group decision support systems (GDSS) that support same time meetings, voice over IP, and videoconferencing systems. Task-Specific Computer Self-Efficacy: Refers to “an individual’s perception of efficacy in performing specific computer-related tasks” (adapted from Marakas, et al., 1998).preconum diu estient ienium idio vir in veres co est conductum inius consupp linatilis re isum claris. Lem deescerum tam tum omnequitis adessendite, sed cla ia? At quam intem perentilius iliis pritis imus opubliq uemulere, nos detimus...

This work was previously published in Handbook of Research on Electronic Collaboration and Organizational Synergy, edited by J. Salmons & L. Wilson, pp. 400-408, copyright 2009 by Information Science Reference (an imprint of IGI Global).

901

902

Chapter 3.6

Improving Employee Selection with Online Testing Jeffrey M. Pollack Virginia Commonwealth University, USA

IntroductIon

bAcKground

Advances in technology now enable employers to utilize computers to administer online employee selection tests, which result in lower costs, increased efficiency, and fewer transcription errors (Richman, Kiesler, Weisband, & Drasgow, 1999; Tippins et al., 2006). Additionally, online employment testing software can effectively and efficiently assist in identifying individuals best suited to an occupation, reducing poor person-job fit, lowering turnover rates, decreasing training costs, and minimizing errors in hiring (Bingham, Ilg, & Davidson, 2002; Mooney, 2002). This article addresses issues related to online employment testing software including types of tests available, validity and reliability, proctoring, and social desirability. Additional terms are defined and implications and future directions for research are discussed.

For decades, the similarities and differences between written tests and computer-based tests have been assessed (Epstein & Klinkenberg, 2001). Early research investigated how a computerbased medical records keeping and interview system impacted patients (Slack & Van Cura, 1968; Slack, Hicks, Reed, & Van Cura, 1966). Additionally, research in this era investigated the use of computers as data gathering instruments (Evans & Miller, 1969; Vinsonhaler, Molineaux, & Rodgers, 1968). However, it is not until the 1990s that we see a research trend that begins to examine the equivalence of computer-based tests vs. conventional tests in an organizational setting (Donovan, Drasgow, & Probst, 2000; McHenry & Schmitt, 1994). As technology has evolved, tests previously administered in a paper-and-pencil format have been changed to online versions. These tests include

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Improving Employee Selection with Online Testing

clinical measurements, personality tests, attitude scales, cognitive ability tests and training inventories (Mead & Drasgow, 1993). Further examples of computer-administered assessments include medical admissions data, psychiatric evaluation exams, and consumer preference evaluations (Kiesler, Walsh, & Sproull, 1992; Richman et al., 1999; Synodinos & Brennan, 1988; Synodinos, Papacostas, & Okimoto, 1994). The most simple and widely used type of computer-based test is computer assisted testing (CAT). These tests display a question on a computer screen and the respondent enters their response (Epstein & Klinkenberg, 2001). Computer assisted tests enable the online format of a test to very closely resemble the paper-and-pencil version and make the testing situation as similar as possible to a written one (Rozensky, Honor, Rasinski, Tovian, & Herz, 1986). Another type of CAT program uses computer adaptive testing. Adaptive testing settings are different from assisted ones in that adaptive tests allow the computer to “go beyond a simple page turning function” (Epstein & Klinkenberg, 2001, p. 298). Adaptive tests allow a computer to receive a response, score it, and then choose the next appropriate question, either easier or harder based on a respondent’s answer (Green, Bock, Humphreys, Linn, & Reckase, 1984). In adaptive tests, which Epstein & Klinkenberg (2001) assert are similar to most non-computerized intelligence tests, there are multiple types that can “individualize” the testing experience and narrow the number of questions needed to assess the underlying trait (Burke, 1993; Weiss, 1985). There are multiple options when using adaptive formats. A “two-stage” adaptive test is one in which a participant is given an initial pre-test called a routing exam. Based on his or her score on the routing exam, a test is then administered, which corresponds to their knowledge of the content (Epstein & Klinkenberg, 2001, p. 298). Other tests similar to the “two-stage” include the “pyramidal,” “flexilevel,” “stradaptive,” and

“countdown” approaches (for reviews see Butcher, Keller, & Bacon, 1985; Epstein & Klinkenberg 2001; Weiss, 1985). More recent advances include test types called generating examples (GE) and are found described in reviews by Bennett (1999), Bennett et al., (1999) and Bennett, Steffen, Singley, Morley, and Jacquemin (1997). Potential administrators of online tests must consider two main factors. First, the content area of the test must be identified. Whether it is desirable to test hard skills (e.g., proficiency in software or programming) and/or basic knowledge (e.g., ability to solve problems, communication skills) is the key consideration (Mooney, 2002). Second, online test administrators must consider who will compose the test. Many testing service companies will offer “authoring software” that enables users to compose their own questions as an alternative to the standard “menu” of tests available for various job classifications (Mooney, 2002). The authorship issue brings up questions of reliability and validity. This is especially true considering that the “in-house” development of tests may be the lower cost, but less reliable and valid option (Mooney, 2002). Companies often charge more per test administration for tests directly off the “menu” vs. charging a fee for test development but lowering the per test charge if it is modified by the end user (Mooney, 2002). It is important to note that most authoring software only allows for the creation of yes/no and true/false questions (Mooney, 2002). Additional considerations for potential administrators of online tests include the creation of user id’s, whether to use a timed test, whether respondents are proctored, whether respondents can backtrack to previous responses, and how to notify participants of results.

the AcAdeMIc And FInAncIAl bottoM lIne The bottom line is that, in most cases, online employment testing saves companies money and

903

Improving Employee Selection with Online Testing

reduces the recruitment cycle time (Bingham et al., 2002). As the field of online employment testing software evolves, it will be important to keep in mind the following concerns. Critics of online testing procedures bring up issues such as lack of computer familiarity, computer anxiety, lack of equivalency, as well as issues related to proctoring and social desirability as ways in which CAT is not an optimal testing method (Hofer & Green, 1985; Honaker, 1988). Regarding the issue of computer anxiety, research indicates that there exist few correlates of age and gender with computer-based anxiety and that these are generally state, and not trait, characteristics (Chua, Chen & Wong, 1999). Furthermore, with brief mentoring sessions, computer-phobic individuals become easily and quickly more comfortable with the medium (Wilson, 1999). The bottom line with computer anxiety is not that individuals will score differently on the computer-based tests, but rather individuals who are computer-phobic will avoid taking the tests. This could limit or reduce the applicant pool for employers. Along these lines, a new and interesting area of research is evolving regarding high tech testing and organizational justice. This research focuses on how a testing situation is perceived by an applicant in terms of fairness, procedural ease, and appropriateness of testing method (Bauer et al., 2001; Truxillo, Steiner, & Gilliand, 2004). Many employers, for the time being, may still consider the option to offer an alternative to internet testing for certain jobs in order to not limit the potential applicant pool, even though the cost to administer written tests can be substantially higher than the online version (Mooney, 2002; Richman et al., 1999). Another criticism, equivalence, falls into two main types: measurement equivalence and relationship equivalence. Measurement equivalence relates to how similar online testing compared to conventional paper-and-pencil testing assesses an underlying trait (Donovan at el., 2000). Alternatively, relational equivalence refers to how

904

similarly the two test versions (online vs. conventional) relate to other variables the same way (Donovan et al., 2000). The following discussion focuses on measurement equivalence, and not relational equivalence, based on the prevalence of research on the former. Research indicates that there is no difference in respondent attitude or perception of tests in CAT settings vs. conventional tests (Richman-Hirsch, Olson-Buchanan, & Drasgow 2000). Measurement equivalence and reliability and validity have also been shown on various predictor scales such as the job descriptive index (Chang, 2005; Donovan et al., 2000; Layne, DeCristoforo, & McGinty, 1999) as well as through meta-analytic methods (Mead et al., 1993). The bottom line regarding equivalence is who designs the test. If it is in a company’s best financial interest, due to cost, to design a test on its own it will likely do so. However, the lower cost option may not always be the option which affords the highest level of equivalence, reliability, or validity. Another consideration in administering online testing is the implication of using proctored tests vs. unproctored testing. When a test is taken in an unproctored setting, it is generally not possible to verify the test taker’s identity, to know if they received help or assistance, or to count how many times the test content was accessed before completion of the instrument (Tippins et al., 2006, p. 195). Generally, it is recommended that unproctored tests be used in low stakes testing situations only. Possible solutions such as encrypted software and password protection do not seem to alleviate the issues associated with unproctored testing. It is assumed, in unproctored high stakes testing situations, that the respondent may behave unethically and that the content of the test may be compromised. Issues related to cheating and security are not alleviated by simply utilizing an unproctored pencil-and-paper test. The bottom line in determining whether to use proctored or unproctored testing comes down to the financial resources of a company. Ideally, a company would

Improving Employee Selection with Online Testing

monitor all participants in testing situations. However, when it is not financially feasible to do so, outsourcing the process or leaving the applicants unproctored are options as well. The final consideration is how socially desirable responses compare in computerized settings vs. conventional settings. Data are varied, yet ultimately conclusive. Some research finds that computer-based testing increases the propensity for a respondent to give socially desirable answers (Finegan & Allen, 1994; Lautenschlager & Flaherty, 1990; Potosky & Bobko, 1997). However, most research indicates that either there is no difference in social desirability or that computerized tests elicit less socially desirable distortion (Booth-Kewley, Larson, & Miyoshi, 2007; Feigelson & Dwight, 2000; Wilkerson, Nagao, & Martin, 2002). Computer-based testing elicits fewer socially desirable responses when respondents are alone and can backtrack to previous questions (Martin & Nagao, 1989; Richman et al., 1999). Thus, the key consideration is not whether online testing formats elicit fewer socially desirable answers but what testing format and design is used. The concern is that employers will assume that computer-based testing is more efficient at eliminating socially desirable answers when in fact there are other issues more important to consider such as proctoring or test-design.

Future trends Practitioners and academics can benefit from research along the following lines: ethical behavior, relational equivalence, organizational surveys, and the three market-based issues described below. The topic of ethical behavior in testing situations can benefit from research comparing the similarities and differences between computer-based proctoring vs. human proctoring. For instance, can companies or test vendors conserve time and/ or money by utilizing computer-based monitor-

ing systems? In what ways would an individual behave differently if a computer were monitoring their activities and verifying their identity vs. if a human were doing the same job? Answering this question and quantifying how much money, if any, could be saved may prove to be a worthy practical and theoretical line of inquiry. Much attention has been directed towards measurement equivalence. However, future research should look to verify the relational equivalence of online testing software vs. conventional tests. As Donovan et al. (2000) note, the issue of relational equivalence is an important concept and is onehalf of the equation when considering equivalence between online and paper-and-pencil test. One potential overlooked benefit of online testing software is the ability for companies to gather data internally for employee satisfaction, customer satisfaction, and evaluation of personnel and procedures. Limited research has examined organizational surveys in terms of who responds to internal online surveys, how confidential the surveys are considered, and how ratings differ between online and paper versions (Rosenfeld, Booth-Kewley, & Edwards, 1993; Thompson, Surface, Martin, & Sanders, 2003). Additional research may prove beneficial in answering questions of who responds, and why, so as not to “inadvertently silence important segments of the workforce” (Thompson et al., 2003, p. 226). Finally, three market-related issues need attention. First, little if any regulation exists in the test vendor marketplace. Vendors often need no proof of the validity or reliability of a test or measure, and sadly, most employers do not know to ask for such evidence. Second, there is the issue of who owns the data. Test vendors use data they collect to provide proof of their testing preparation methods and ease of use of their instruments. However, there are issues of confidentiality and consent related to the use of the data. Third, as demand for online employment testing software grows, so may the prices associated with these services. Increased prices may prohibit smaller firms from

905

Improving Employee Selection with Online Testing

utilizing the more efficient and effective methods. Instead, in this situation small firms may return to less effective and less efficient pencil-and-paper tests, or in a worst case scenario they may utilize in-house instruments, which could be considered inaccurate, at best.

conclusIon Advances in technology will enable the further proliferation of online employment testing software. Academics and practitioners must provide consistent assessments regarding the validity, reliability, practical utility, and credibility of online testing formats as these processes and procedures evolve. Though the many benefits of online testing such as lower costs, increased efficiency, and fewer transcription errors may be tempting for employers, these benefits must not be traded for reduced reliability and validity of the testing instrument.

reFerences Bauer, T. N., Truxillo, D. M., Sanchez, R. J., Craig, J. M., Ferrara, P., & Campion, M. A. (2001). Applicant reactions to selection: Development of the selection procedural justice scale (SPJS). Personnel Psychology, 54(2), 387-419. Bennett, R. E. (1999, Fall). Using new technology to improve assessment. Educational Measurement: Issues and Practice, 5-12. Bennett, R. E., Morley, M., Quardt, D., Rock, D., Singley, M. K., Katz, I. R., & Nhouyvanisvong, A. (1999). Psychometric and cognitive functioning of an under-determined computer-based response type for quantitative reasoning. Journal of Education Measurement, 36(3), 233-252. Bennett, R. E., Steffen, M., Singley, M. K., Morley, M., & Jacquemin, D. (1997). Evaluating

906

an automatically scorable, open-ended response type for measuring mathematical reasoning in computer adaptive tests. Journal of Education Measurement, 34(2), 162-176. Bingham, B., Ilg, S., & Davidson, N. (2002). Great candidates fast: Online job application and electronic processing. Public Personnel Management, 31(1), 53-64. Booth-Kewley, S., Larson, G. E., & Miyoshi, D. K. (2007). Social desirability effects on computerized and paper-and-pencil questionnaires. Computers in Human Behavior, 23, 463-477. Burke, M. J. (1993). Computerized psychological testing: Impacts on measuring predictor constructs and future job behavior. In N. Schmitt, W. C. Borman, & Associates (Eds.), Personnel selection in organizations (pp. 203-239). San Francisco: Jossey Bass. Butcher, J., Keller, L., & Bacon, S. (1985). Current developments and future directions in computerized personality assessment. Journal of Consulting and Clinical Psychology, 53, 803-815. Chang, T. (2005). The validity and reliability of student ratings: Comparison between pencil-paper and online survey. Chinese Journal of Psychology, 47(2), 113-125. Chua, S. L., Chen, D., & Wong, A. (1999). Computer anxiety and its correlates: A meta-analysis. Computers in Human Behavior, 15, 609-623. Donovan, M. A., Drasgow, F., & Probst, T. M. (2000). Does computerizing paper-and-pencil job attitude scales make a difference? New IRT analyses offer insight. Journal of Applied Psychology, 85(2), 305-313. Epstein, J., & Klinkenberg, W. D. (2001). From Eliza to Internet: A brief history of computerized assessment. Computers in Human Behavior, 17, 295-314.

Improving Employee Selection with Online Testing

Evans, W. M., & Miller, J. R. (1969). Differential effects on response bias of computer vs. conventional administration of a social science questionnaire: An exploratory methodological experiment. Behavioral Science, 14, 216-227. Feigelson, M. E., & Dwight, S. A. (2000). Can asking questions by computer improve the candidness of responding? A meta-analytic perspective. Consulting Psychology Journal: Practice and Research, 52, 248-255. Finegan, J. E., & Allen, N. J. (1994). Computerized and written questionnaires: Are they equivalent? Computers in Human Behavior, 10, 483-496. Green, B., Bock, R., Humphreys, L., Linn, R., & Reckase, M. (1984). Technical guidelines for assessing computerized adaptive tests. Journal of Education Measurement, 21, 347-360. Hofer, P., & Green, B. (1985). The challenge of competence and creativity in computerized psychological testing. Journal of Consulting and Clinical Psychology, 53, 826-838. Honaker, L. (1988). The equivalency of computerized and conventional MMPI administration: A critical review. Clinical Psychological Review, 8, 561-577. Kiesler, S., Walsh, J., & Sproull, L. (1992). Computer networks in field research. In F. B. Bryant, J. Edwards, S. Tindale, E. Posavac, L. Heath, E. Henderson, & Y. Suarez-Balcazar (Eds.), Methodological issues in applied social research (pp. 239-268). New York: Plenum. Lautenschlager, G. J., & Flaherty, V. L. (1990). Computer administration of questions: More desirable or more socially desirability? Journal of Applied Psychology, 75, 310-314. Layne, B. H., DeCristoforo, J. R., & McGinty, D. (1999). Electronic versus traditional student ratings of instruction. Research in Higher Education, 40(2), 221-232.

Martin, C., & Nagao, D. H. (1989). Some effects of computerized interviewing on job applicant responses. Journal of Applied Psychology, 74, 72-80. McHenry, J. J., & Schmitt, N. (1994). Multimedia testing. In M. G. Rumsey, C. B. Walker, & J. H. Harris (Eds.), Personnel selection and classification (pp. 193-232). Hillsdale, NJ: Erlbaum. Mead, A. D., & Drasgow, F. (1993). Equivalence of computerized and paper-and-pencil cognitive ability tests: A meta-analysis. Psychological Bulletin, 114(3), 449-458. Mooney, J. (2002). Pre-employment testing on the Internet: Put candidates a click away and hire at modem speed. Public Personnel Management, 31(1), 41-52. Potosky, D., & Bobko, P. (1997). Computer versus paper-and-pencil administration mode and response distortion in noncognitive selection test. Journal of Applied Psychology, 82, 293-299. Richman-Hirsch, W. L., Olson-Buchanan, J. B., & Drasgow, F. (2000). Examining the impact of administration medium on examinee perceptions and attitudes. Journal of Applied Psychology, 85(6), 880-887. Richman W. L., Kiesler, S., Weisband, S., & Drasgow, F. (1999). A meta-analytic study of social desirability distortion in computer-administered questionnaires, traditional questionnaires, and interviews. Journal of Applied Psychology, 84(5), 754-775. Rosenfeld, P., Booth-Kewley, S., & Edwards, J. (1993). Computer-administered surveys in organizational settings: Alternatives, advantages and applications. American Behavioral Scientist, 36(4), 485-511. Rozensky, R., Honor, L., Rasinski, K., Tovian, S., & Herz, G. (1986). Paper-and-pencil versus computer-administered MMPI’s: A comparison

907

Improving Employee Selection with Online Testing

of patient’s attitudes. Computers in Human Behavior, 2, 111-116. Slack, W. V., & Van Cura, L. J. (1968). Patient reaction to computer-based medical interviewing. Computers and Biomedical Research, 1, 527-531. Slack, W. V., Hicks, G. P., Reed, C. E., & Van Cura, L. J. (1966). A computer-based medical history system. New England Journal of Medicine, 274, 194-198. Synodinos, N. E., & Brennan, J. M. (1988). Computer interactive interviewing in survey research. Psychology and Marketing, 5, 117-137. Synodinos, N. E., Papacostas, C. S, & Okimoto, G. M. (1994). Computer administered versus paperand-pencil surveys and the effect of sample selection. Behavior Research Methods, 26, 395-401. Thompson, L. F., Surface, E. A., Martin, D. L., & Sanders, M. G. (2003). From paper to pixels: Moving personnel surveys to the web. Personnel Psychology, 56(1), 197-227. Tippins, N. T., Beaty, J., Drasgow, F., Gibson, W. M., Pearlman, K., Segall, D., & Shepherd, W. (2006). Unproctored Internet testing in employment settings. Personnel Psychology, 59(1), 189-225. Truxillo, D. M., Steiner, D. D., & Gilliand, S. W. (2004). The importance of organizational justice in personnel selection: Defining when selection fairness really matters. International Journal of Selection and Assessment, 12(1/2), 39-53. Vinsonhaler, J. F., Moilneaux, J. E., & Rodgers, B. G. (1968). An experimental study of computeraided testing. In H. H. Harman, C. E. Helm, & D. E. Loye (Eds.), Computer-Assisted Testing Conference Proceedings, November 1966, Princeton, NJ: Educational Testing Service.

908

Weiss, D. (1985). Adaptive testing by computer. Journal of Consulting and Clinical Psychology, 53, 774-789. Wilkerson, J. M., Nagao, D. H., & Martin, C. L. (2002). Socially desirable responding in computerized questionnaires: When questionnaire purpose matters more than mode. Journal of Applied Social Psychology, 32, 544-559. Wilson, B. (1999). Redressing the anxiety imbalance: Computer phobia and educators. Behaviour and Information Technology, 18(6), 445-454.

Key terMs Computer Adaptive Tests (Tailored Tests): Adaptive tests allow a computer to receive a response, score it, and then select a next question (either harder, easier, or similar) based on the respondent’s knowledge or expertise. Computer Assisted Testing (CAT): A setting in which a respondent views a selection instrument, or analysis measure, on a computer screen is considered a computer assisted test. Conventional Tests: Paper-and-pencil tests, or tests not computer-based, are considered conventional tests. High Stakes Testing: A testing situation where the consequences may impact people other than the respondent. Examples of high stakes testing situations include, but are not limited to, testing for selection, hiring or, promotion. Low Stakes Testing: A testing situation where the consequences likely do not impact people other than the respondent. Examples of low stakes testing situations include, but are not limited to, testing for training purposes, continuing education, or self-diagnosis.

Improving Employee Selection with Online Testing

Proctored Testing: A testing situation in which an individual is monitored by a human test administrator.

screening for applicants, interviewing, doing background checks, hiring, and negotiating salary and/or benefits.

Recruitment Process Outsourcing: When an employer contracts with a vendor to handle some, or all, of the selection and hiring process including the initial stages of data gathering,

Un-Proctored Internet Testing (UIT): A setting in which a respondent is not monitored by a human test administrator when completing an assessment.

This work was previously published in Encyclopedia of Human Resources Information Systems: Challenges in e-HRM, edited by T. Torres-Coronas & M. Arias-Oliva, pp. 504-509, copyright 2009 by Information Science Reference (an imprint of IGI Global).

909

910

Chapter 3.7

Why First-Level Call Center Technicians Need Knowledge Management Tools Joe Downing Southern Methodist University, USA

AbstrAct This chapter argues that first-level call center technicians are the new knowledge workers of the 21st century. As such, these technicians are ideal candidates for knowledge management tools. The objective of the chapter is to introduce these technicians to the IT community and, by way of a case study, show how decision-tree-type help tools can increase technicians’ productivity. The chapter ends with recommendations for IT practitioners who are interesting in implementing these tools in their call centers.

IntroductIon The goal of this chapter is to introduce readers to first-level call center technicians who staff the phones for countless banks, financial institutions,

credit card companies, and help desks around the world (Datamonitor, 2003). The intense knowledge demands required of first-level technicians make them ideal candidates for knowledge management tools. Knowledge management tools refer to communication technologies that index and structure an organization’s “corporate memory” (Walsh & Ungson, 1991; Yates & Orlikowsky, 2002). This chapter is structured as follows. First, I provide a brief historical overview of the call center industry, including the outsourcing trend that began in the late 1990s. Next, I describe why first-level technicians must have knowledge tools to perform their jobs effectively. Then, I discuss two popular types of help interfaces that are used in call center environments. I conclude the chapter with my recommendations and by noting future trends that I see will affect the industry.

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Why First-Level Call Center Technicians Need Knowledge Management Tools

bAcKground

reducing labor costs

Until the late 1980s, most organizations handled their customer service and technical support functions in-house. First-level call center technicians who staffed the phones were often full-time employees who handled only a single product or service (Bagnara & Marti, 2001). However, organizations soon realized it was cheaper, and often more effective, to outsource these support functions to third-party call center providers. The global call center industry was born.

Over the past 20 years, U.S.-based call center providers have struggled to reduce their growing labor costs and to curb the high employee turnover that plagues their industry. According to a study conducted by researchers from Purdue University’s Center for Customer-Driven Quality, annual turnover in U.S. centers averages 26% for full-time technicians. Further, call centers incur one year’s salary to replace each technician who leaves the company (Hillmer, Hillmer, & McRoberts, 2004).

call centers: From the help desk to the sales center Until recently, call center providers had distinct goals for their inbound and outbound operations. Inbound operations focused mainly on resolving customers’ product or service issues. Conversely, organizations used their outbound (telemarketing) operations to attract new customers. In the last five years, though, consumer hostility towards telemarketing practices has increased. According to a study commissioned by the American Teleservices Association (2002), about 40% of U.S. consumers subscribe to a caller ID service. Between 2003-2004, U.S. consumers also registered more than 64 million telephone numbers with the Federal Trade Commission’s National Do Not Call Registry. The negative public sentiment against telemarketers has led some providers to move away from their outbound call center operations. Instead, these organizations use their call centers to generate revenue from existing customers (Lieber, 2002; McDaniel, 2006). Turek (2002) reported that in certain financial sectors, approximately 70% of all upselling and reselling transactions in the United States now take place through one of these centers.

outsourcIng cAll center technIcIAn PosItIons to IndIA In the late 1990s, call center providers addressed these rising labor costs by outsourcing part or all of their operations to India (McDaniel, 2006). India was a popular destination because of the country’s highly educated workforce (Fairell, Kaka, & Stürze, 2005). Also, nearly three million English-speaking college students graduate from India’s universities every year (Ebsco, 2005a). Initially, organizations found that relocating their call center operations to India reduced their operating costs. However, these same multinational companies soon experienced problems attracting and retaining qualified technicians. Across India’s call centers, employee turnover now approaches 50% a year (Clarke, 2006). Privacy laws in India are less strict than in the United States (Ebsco, 2005a). This has resulted in a series of widely publicized public relations snafus involving India’s outsourcing community. For instance, in March 2004, Capital One canceled its telemarketing contact with Wipro, one of India’s largest call center providers, when an internal investigation found technicians had misled U.S. consumers by providing them unauthorized promotions to sign up for credit cards (Krebsbach, 2004).

911

Why First-Level Call Center Technicians Need Knowledge Management Tools

Most troubling to U.S. companies, though, has been the rising number of customer service complaints directed at overseas technicians. In 2004, Call Center Magazine, a key industry trade publication, surveyed call center providers from countries that included both India and the Philippines (Dawson, 2004). Managers in these centers reported that achieving “higher customer satisfaction” was the single most important metric (75%) they used to gauge success in their business (p. 18). Further, the outsource providers estimated that 65% of their customers went away “highly satisfied.” Consumers, however, reported they were “highly satisfied” only 22% of the time (p. 16). Chief among their complaints: technicians who were poorly trained and unable to resolve their problem (Dawson, 2004, p. 18). Customers have also reported issues understanding technicians. These communication barriers are most problematic in certain regions of India where English-speaking technicians have thick accents (Fairell et al., 2005).

From outsourcing to nearsourcing Some multinational corporations responded to customers’ complaints by moving their technical support operations out of India. In the most publicized case, Dell Inc. pulled two of its business product lines out of a Bangalore, India, call center and relocated the operation back to the United States (Chittum, 2004; Edwards, 2004; Heller, 2004). Other companies have moved their centers from India to the Philippines because English-speaking Filipino technicians have accents closer to individuals who live in the United States (Fairell et al., 2005). The current trend is for multinational corporations to adopt a nearsourcing strategy where they open centers in Canada, Mexico, and Latin America (Beasty, 2005). Datamonitor, a leading industry research firm, reported that three Latin American countries—Argentina, Brazil,

912

and Chile—offer call center providers the most qualified applicant pool at the lowest possible wage (Ebsco, 2005b). Whether this nearsourcing strategy will be effective remains to be seen.

cAll center technIcIAns As the 21st Knowledge worKer As I have argued, the knowledge demands of call center work are intense. Technicians who once provided support for a single product line increasingly field calls for multiple clients. As product development cycles shrink, there is also increased complexity within the products or services firstlevel technicians’ support. The challenge facing call center management is how to keep these low-paid, rather unskilled first-level technicians up to date on the rapidly changing technologies they support. A related problem is that individuals who apply for these first-level technician positions often lack the necessary computer skills and requisite product or service knowledge to address customers’ issues effectively. In response, call center providers spend millions of dollars each year to train these new first-level technicians (Downing, 2004). However, even the best designed training curriculum rarely provides incoming first-level technicians with the details they will need to correctly diagnose, and then answer, their customers’ questions. Consequently, technicians, like any knowledge worker, use various strategies to search for the information they need to perform their jobs effectively. In most centers, management has developed formal knowledge tools, also called online help systems, for this purpose (Das, 2003). The quality of these knowledge management tools varies widely across the industry. This helps explain the surprising results from a recent study conducted at Consumer Reports’ National Research Center. In that study, researchers found that only 55% of consumers who contacted their

Why First-Level Call Center Technicians Need Knowledge Management Tools

computer manufacturer for technical support had their problem resolved (Consumer Reports, 2006). There are several possible reasons why this could happen; however, I will address two of the most likely scenarios. First, it is possible technicians failed to use the knowledge tools management had made available to them. Instead, they relied on more interactive search strategies such as face-to-face communication with colleagues or participating in chat room sessions. Second, even if call center management mandates the use of such tools, the tools simply may have been too difficult for first-level technicians to use.

the Problems Associated with technicians Asking colleagues for the Answer When customers call with questions first-level technicians cannot immediately answer, technicians’ natural tendency is to ask their colleagues who sit nearby if they know the answer (Downing, 2004). It is usually easier for employees to ask someone they know and trust a question rather than rely on printed manuals or to call someone outside their immediate communication network (Holman, Epitropaki, & Fernie, 2001). In a call center environment, customer satisfaction depends, in large part, on how quickly technicians can solve customers’ problems. The first problem with technicians’ asking their colleagues for answers is it requires first-level technicians to place their customers on hold. This, in turn, increases talk time on the call. Low talk time is important since customers placed on hold are up to 25% less likely to repurchase a product or service from the company (Clegg, 2004). The call center management also evaluates its first-level technicians on whether they can successfully answer customers’ questions on the first call (high first-call resolution rate). First-call resolution, along with talk time, are both positively related to increased customer satisfaction on an

account (Feinberg, Kim, Hokama, de Ruyter, & Keen, 2000). Yet another issue associated with asking colleagues for help is that there is no guarantee they will provide a correct solution to the customer’s problem. If this proves to be the case, the customer will have to contact the center again to resolve the issue. This, in turn, negatively affects first call resolution scores.

Alternative strategies First-level technicians use to Find solutions Sometimes call center management will develop interactive channels that allow technicians to share knowledge. For example, in a synchronous chat room environment, first-level technicians can request help from their more experienced colleagues who are second-level technicians. Using Microsoft Chat or a similar technology, technicians can either talk to the entire community of technicians that are logged on to the system or they can whisper to individual users. Second-level technicians also can monitor first-level technicians’ talk times. If a first-level technician’s talk time reaches a critical threshold, experienced second-level technicians can jump in to ask if the technician needs help with the call.

Knowledge MAnAgeMent tools In cAll centers Instead of having first-level technicians’ ask their colleagues for answers or developing “informal” knowledge tools like chat rooms, call center providers are better off developing formal knowledge tools that their first-level technicians will voluntarily adopt. A formal knowledge management tool is viable in a call center environment since roughly 80% of the support calls first-level technicians field have already been answered by another technician on the account (Hollman, 2002). As I argued in the previous section, if these tools are already in place but technicians have

913

Why First-Level Call Center Technicians Need Knowledge Management Tools

chosen not to use them, one likely culprit is that the tools are too difficult to use. Indeed, researchers (Davis, 1989; Rogers, 1995) have long argued that for a new technology to be successfully adopted in the workplace, the technology must not only be easy to use (perceived ease of use), but employees also must see how using it will help them perform their jobs more efficiently (perceived usefulness). Thus, a new knowledge tool must help first-level technicians meet their performance metrics, which include achieving high first-call resolution scores and low talk and average handle times. (Average handle time is the average amount of talk time a technician spends with his or her customer, including any time customers’ spend on hold.) The problem, as we shall soon see, is that traditional (Web-based) knowledge tools in use at many call centers fail to meet this criterion.

(2001) argued that novice users have difficulty using this type of help interface because they lack the requisite technical knowledge and cognitive complexity to enter “correct” keywords into the search box. To illustrate, Juniper Research, a market research firm, surveyed more than 2,700 consumers and found that among the 80% of respondents who had used this type of knowledge tool, fully 46% had difficulty constructing their search queries (Daniels, 2003). After the tool searches the database, it returns the title and often a brief abstract of technical documents that match the keywords. Users can then click on the hyperlink to receive the full text of the document. A second and related problem with this type of interface is it returns too many documents to be helpful to the user (Daniels, 2003).

two types of Formal Knowledge tools

Decision-Tree-Type Help Interfaces

Online Help Tool with a Search Box Query Most knowledge tools use a Web-based interface that requires users to enter a keyword query directly into the tool’s search box. The tool then searches for documents housed in its help database that match these keywords. Microsoft’s Online Help (support.microsoft.com) provides an example of this type of knowledge tool. A knowledge tool’s effectiveness is related to the accuracy and comprehensiveness of the documents that software engineers have selected to populate the tool. Typically, product engineers, technical writers, and learning design specialists create this technical documentation. Interestingly, first-level technicians often use the same help tool the client makes available for free to its consumer end user. Both first-level technicians and consumers share a common trait: both are novice users. Tsoukas and Vladimirou

914

Software designers also can develop an alternative knowledge tool for call center technicians that use a decision-tree-type help interface. As with the other tool, first-level technicians ask their customers to describe the symptom(s) of the problem they are experiencing with the product or service. Technicians then type the symptom into the tool. After technicians hit Enter, the software application that drives the tool directs technicians to ask their customers a series of questions, one symptom-related issue at a time. This serves to narrow down the likely cause of the problem. Initially, the scope of these questions is broad. However, the tool uses case-based logic—also called a decision tree—to narrow down possible solutions to the customer’s problem. At the end of this deductive process, the tool interprets the probability level of its proposed solutions. In his recent study, Downing (in press) reported how ClientLogic, a global call center provider based in the United States, worked with one of its clients to develop a knowledge tool that incorporated a

Why First-Level Call Center Technicians Need Knowledge Management Tools

decision-tree-type help interface. The new tool replaced an existing search box interface ClientLogic technicians already used on the account. Approximately 600 first-level ClientLogic technicians used the new knowledge tool for four months. ClientLogic officials then applied internal performance metrics (average handle time and first-call resolution) to compare the decision-tree-type interface with the more traditional search box tool. At the end of four months, average handle time on the account decreased by 2%. Further, over the course of the study, issue resolution rates increased by an average of 1% a week. Downing concluded that a decision-treetype interface holds special promise in call center environments because of the limited knowledge required of first-level technicians to use this type of tool properly.

Keeping Knowledge tools up to date Regardless of what type of knowledge tool first-level technicians’ use, they will still field non-routine calls from their customers. Since the answer to a customer’s problem is not yet included in the tool, first-level technicians will have to escalate the call to second-level technicians who support the account. The second-level technician, in turn, may have to conduct outside research to find a solution to the customer’s problem. Call center management must have a process in place where second-level technicians take this (often tactic) knowledge and make this knowledge explicit. Only then can this knowledge later be added to the tool. Further, management also must gather information from chat room transcripts, e-mails, and other material collected through informal search procedures, catalog it, and then index the information so it can later be incorporated into the system.

the Importance of securing buy-In from second-level technicians An important success criterion is for second-level technicians to participate in the decision-making process to adopt any new knowledge tool that is brought into the center. In many call center environments, second-level technicians earn the esteem of their first-level colleagues because of the specialized knowledge they have learned on the job. A formal knowledge tool tries to codify this specialized knowledge and include its contents in the tool. Once first-level technicians discover that the tool contains this knowledge, second-level technicians’ informational power can dissipate quickly. Second-level technicians, then, often have the most to lose if a knowledge tool is implemented in their center. This creates a paradox for center management. Second-level technicians’ technical savvy and expertise position them as excellent candidates to be early adopters of new technologies in the center. At the same time, how these opinion-leaders frame the new tools to their firstlevel technician colleagues will go a long way to determining if the knowledge tools will reach a critical mass of users within the center.

Incentives for First-level technicians to use the tools For call center management to implement a tool that will achieve this critical mass, management needs to understand the incentives that drive employee behavior. Unfortunately, little is known about first-level technicians’ subjective experience with knowledge management tools. However, IT scholars have published many empirical studies that investigate why employees choose to adopt different technologies in the workplace. Earlier, I argued that perceived usefulness and perceived ease of use of a new innovation (Yi, Fiedler, & Park, 2006) are perhaps the two most critical factors in this adoption decision. In a call center,

915

Why First-Level Call Center Technicians Need Knowledge Management Tools

a knowledge tool that takes too long to answer a customer’s question, and worse, does not include relevant knowledge for this purpose, is unlikely to be used by technicians (Downing, 2004). Moore and Benbasat (1991) have claimed that to be successfully adopted in an organization, employees’ use of the new innovation must be visible to others in the company. Thus, the adoption will be successful to the extent it strengthens employees’ social status in their work group (Venkatesh & Davis, 2000). Another interesting line of research seeks to understand why employees voluntarily adopt a new technology. For instance, the perceived enjoyment employees’ gain from using the innovation, Chin and Gopal (1995) argued, helps explain why a particular technology succeeds or fails in the workplace. A related research area that holds much promise is studying how the structure of a particular job task—in this case, the use of a knowledge tool— invites employees to become immersed in the task. Csikszentmihalyi (1997) calls this state of total attention to the task at hand flow. To achieve flow, employees must undertake job tasks that include clear and achievable goals. Further, employees must receive immediate and relevant feedback about how they have achieved these goals. Employees’ individual skill levels must also meet the cognitive demands of the task. Tasks must be demanding enough to challenge the employee, but not so demanding that completing the job task leads to increased employee stress. A productive line of future study for call center researchers will be to study how the structure of a particular knowledge tool—that is, using an online help tool with search box vs. a decision-tree-type help interface—affects first-level technicians’ feelings of personal accomplishment to solve their customer’s problems. Further, researchers must continue to study how differences across cultures (Heijden, 2003; Igbaria, Livari, & Maragahh, 1995) affect first-level technicians’ decisions to adopt and continue to use online knowledge tools in call centers.

916

recoMMendAtIons For multinational organizations to attract and retain their call center operations, companies must develop knowledge tools technicians can quickly and accurately use to answer their customers’ issues. Call center research is in its infancy; as a result, few empirical research studies have investigated this phenomenon. Indeed, most call center research consists of individual case studies. Clearly, more longitudinal research is needed on this topic. Nevertheless, the following three recommendations can help ensure this process flows as smoothly as possible: 1.

2.

3.

Ask key opinion-leaders to participate in the decision to adopt the knowledge tool. Second-level technicians who participate in the process are also more likely to later contribute knowledge into the tool (Klein & Ralls, 1995). Develop a tool that is easy for technicians to use and that provides technicians with a quick solution to their customer’s problem. Management also should consider using a decision-tree-type help interface, not a traditional search box tool, if first-level technicians on the account lack the technical knowledge needed to enter the “correct” keywords into the tool. If the tool takes too long for first-level technicians to use, they may regress to the more informal search process, where customers are placed on hold and technicians ask colleagues who sit nearby if they know the answer to the customer’s problem. Design a formal reward and recognition system that acknowledges those technicians, especially second-level technicians, who often contribute new information into the tool. If users are allowed to “sign” their contributions to the knowledge tool, they may be more motivated to share their information.

Why First-Level Call Center Technicians Need Knowledge Management Tools

Future trends And conclusIon The U.S. Department of Labor, Bureau of Labor Statistics (2005) expects customer service positions, which include call center technicians, to grow by 18-26% by 2014. To decrease costs, call center providers are investigating online support channels like e-mail and chat—both of which are less expensive than having a technician speak with a customer on the phone (Hollman, 2002). Regardless of what form the communication takes, first-level technicians will still have to use some type of formal knowledge tool to answer their customers’ questions. In many ways, the key to building a successful knowledge tool is tied to innovations in natural language search protocols (Daniels, 2003). Natural language search will allow technicians to construct a search query using their own vocabulary and will not require technicians to learn the complex technical lexicon that is needed to use most of the knowledge tools in use today. In this chapter I have argued how formal knowledge tools can help first-level call center technicians perform their job more effectively. Technicians who work in these centers offer researchers a different type of “knowledge worker” relative to the engineers, consultants, and other types of “professional” knowledge workers that most researchers study. As such, call center environments hold promise for researchers interested in how knowledge workers use help tools to perform their jobs more efficiently.

reFerences American Teleservices Association. (2002). Consumer study. Retrieved February 17, 2006, from http://www.ataconnect.org/IndustryResearch/ ConsumerStudy2002.html

Bagnara, S., & Marti, P. (2001). Human work in call centers: A challenge for cognitive ergonomics. Theoretical Issues in Ergonomic Science, 2(3), 223-237. Beasty, C. (2005). Outsourcing south of the border. Customer Relationship Marketing, (April), 13. Chin, W., & Gopal, A. (1995). Adoption intention in GSS relative importance of beliefs. Data Base, 26(2/3), 42-63. Chittum, R. (2004). Call centers phone home. Wall Street Journal, (June 9), B1. Clarke, T. (2006). Why Indian summer is drawing to a close. PrecisionMarketing, (May 12), 14-15. Clegg, C.H. (2004). Best practices in telephone customer service. Portland, OR: Portland Research Group. Consumer Reports. (2006). Computer technical support survey. Consumer Reports, (June), 21. Csikszentmihalyi, M. (1997). Finding flow: The psychology of engagement with everyday life. New York: Basic Books. Daniels, D. (2003). Self-service: Creating value with natural language search. Call Center Magazine, 16, 8-9. Das, A. (2003). Knowledge and productivity in technical support work. Management Science, 49(4), 416-431. Datamonitor. (2003). Call centers in the United States. Industry profile. New York: Author (reference code: 00720758). Davis, F.D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Quarterly, 13, 319-340. Dawson, K. (2004). Customers: Not as happy as you think. Call Center Magazine, 17, 16-22.

917

Why First-Level Call Center Technicians Need Knowledge Management Tools

Downing, J. (in press). Using customer contact center technicians to measure the effectiveness of online help systems. Technical Communication. Downing, J. (2004). ‘It’s easier to ask someone I know:’ Call center technicians’ adoption of knowledge management tools. Journal of Business Communication, 41(2), 166-192. Ebsco. (2005a). Busy signals. Economist, (September 9), 60. Retrieved March 3, 2005, from http://www.ebsco.com Ebsco. (2005b). Offshore contact centers. MarketWatch: Global Round-Up, 4(October), 229-230. Retrieved February 15, 2006, from http://www. ebsco.com Edwards, L. (2004). Overseas call centers can cost firms goodwill. Marketing News, (April 15), 21. Fairell, D., Kaka, N., & Stürze, S. (2005). Ensuring India’s offshoring future. McKinsey Quarterly, 74-83. Feinberg, R.A., Kim, I., Hokama, L., de Ruyter, K., & Keen, C. (2000). Operational determinants of caller satisfaction in the call center. International Journal of Service Industry Management, 11, 131-141. Heijden, H. (2003). Factors influencing the usage of Web sites: The case of a generic portal in The Netherlands. Information & Management, 40, 541-549. Heller, M. (2004). Outsourcing. Workforce Management, 83, 95-97. Retrieved May 17, 2006, from http://www.ebsco.com Hillmer, S., Hillmer, B., & McRoberts, G. (2004). The real costs of turnover: Lessons from a call center. Human Resource Planning, 27(3), 34-41. Retrieved February 17, 2006, from http://www. ebsco.com Hollman, L. (2002). The power of knowledge management software. Call Center Magazine, 15(1), 30-38.

918

Holman, D., Epitropaki, O., & Fernie, S. (2001). Understanding learning strategies in the workplace: A factor analytic investigation. Journal of Occupational and Organizational Psychology, 74, 675-681. Igbaria, M., Livari, J., & Maragahh, H. (1995). Why do individuals use computer technology? A Finnish case study. Information & Management, 29(5), 227-238. Klein, K.J., & Ralls, R.S. (1995). The organizational dynamics of computerized technology implementation: A review of the literature. In M.W. Lawless & L.R. Gomez-Media (Eds.), Advances in global high-technology management (pp. 31-79). New York: JAI Press. Krebsbach, K. (2004). Lessons from the dark side: Avoiding mistakes in overseas outsourcing. Bank Technology News, (May), 31, 54. Lieber, R. (2002). ‘Operator, I demand an automated Menu.’ Wall Street Journal, (July 30), D1. McDaniel, C. (2006). 2006 call center employment outlook. Available from M.E.R. Inc., 866991-3555. Moore, G., & Benbasat, I. (1991). Development of an instrument to measure the perceptions of adopting an information technology innovation. Information Systems Research, 2(3), 192-222. Rogers, E.M. (1995). Diffusion of innovations (4th ed.). New York: The Free Press. Tsoukas, H., & Vladimirou, E. (2001). What is organizational knowledge? Journal of Management Studies, 38, 973-993. Turek, N. (2002). Call centers: Here, there, and everywhere. InformationWeek, (October 23), 168-174. U.S. Department of Labor, Bureau of Labor Statistics (2005). Customer service representatives. Retrieved February 17, 2006, from http://www. bls.gov/oco/ocos280.htm

Why First-Level Call Center Technicians Need Knowledge Management Tools

Venkatesh, V., & Davis, F.D. (2000). A theoretical extension of the Technology Acceptance Model: Four longitudinal field studies. Management Science, 46(2), 186-204.

Yates, J., & Orlikowski, W. (2002). Genre systems: Structuring interaction through communicative norms. Journal of Business Communication, 39, 13-35.

Walsh, J.P., & Ungson, G.R. (1991). Organizational memory. Academy of Management Review, 16, 57-91.

Yi, M.Y., Fiedler, K.D., & Park, J.S. (2006). Understanding the role of individual innovativeness in the acceptance of IT-based innovations: Comparative analyses of models and measures. Decision Sciences, 37(3), 393-426.

This work was previously published inStrategic Knowledge Management in Multinational Organizations, edited by K. O’Sullivan, pp. 53-62, copyright 2008 by Information Science Reference (an imprint of IGI Global).

919

920

Chapter 3.8

Application Service Providers Sathasivam Mathiyalakan University of Massachusetts Boston, USA

IntroductIon Technological changes within the last decade have dramatically changed the business climate. The use of Internet by firms has lead to global production, consumption, and competition. Electronic commerce, or e-commerce, “is a modern business methodology that addresses the needs of organizations, merchants, and consumers to cut costs while improving the quality of goods and services and increasing the speed of service delivery” (Kalakota & Whinston, 1996, p. 1). The benefits of e-commerce include cost savings, direct and quick interaction with the (potential) customer, competitive advantage through business intelligence, digital production sales and distribution, collaborative development with partners, new product development, direct sales, marketing and advertising, publicity, customer service and enhanced customer relationship, and communication.

Small businesses play an important role in the nation’s economy. They are the fastest growing segment of all business types. The importance of small businesses to the U.S. economy can be gauged from the following statistics provided by U.S. Small Business Administration (SBA): •

• •

Small businesses represent 99.7% of all employers, employ 50% of all private sector employees and account for 44.3% of total U.S. private payroll; Small businesses generate 60 to 80% of net new jobs annually; and Small businesses are employers of 39% of high-tech workers.

Researchers have argued that the use of Internet has created a level playing field whereby a small business can compete effectively against larger competitors. Studies have shown that larger firms have made significant progress in e-commerce.

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Application Service Providers

But, the same cannot be said of small businesses. In a 2001 report, SBA noted that less than 2% of Internet use is directed at e-commerce. The lack of progress in e-commerce adoption by small businesses has been cited in several studies (Mathiyalakan, 2002, 2004). Small businesses face numerous e-commerce technology adoption barriers and as a result the pace of adoption has been slow. In addition to capital and access to latest technology, employees’ knowledge, expertise, and experience is an important determinant of technology adoption (Kwon & Zmud, 1987; Rogers, 1983). To overcome the technological and skill limitations identified above, several strategic options are available for small businesses. These include the use of external consultants, outsourcing, and the use of ASP amongst others. The focus of this article is on examining issues related to the use of ASP by small businesses. This article is organized in terms of five sections. After this introduction, we provide a background to ASP. Thereafter, we identify and discuss issues that are pertinent to the use of ASP by small business. This is followed by a discussion on future trends and our concluding remarks.

bAcKground to APPlIcAtIon servIce ProvIders The roots of ASP go back to the concept of “time sharing.” A review of literature on ASP definition (see Table 1) indicates that there exists a multitude of definitions of ASP. Although all researchers agree that ASP provide software applications and services exist, a consensus does not exist on other key features of ASP. Although some have stressed that ASP is akin to a rental agency (ASPstreet. com, 2005; Bennett & Timbrell, 2000), others advocate a broader and management oriented role (Deloitte Research, 1999; Webopedia.com). A common theme across many of the definitions is the use of the Internet to distribute the software applications (ASPstreet.com, 2005; Bennett & Timbrell, 2000, p. 196; Brian, 2005; Kern et al., 2002) who reviewed other definitions of ASP in an attempt to distinguish them from outsourcing note “it is difficult to distinguish a modern ASP from the 1963 Payroll Bureau Service provided by Ross Perot’s Electronic Data Systems to Frito Lay and Blue Cross.” The ASP uses the Internet to make applications available to firms. It is essentially delivers and

Table 1. Definitions of ASP Source

Definition

Benett and Timbrell (2000)

A form of selective outsourcing where a third-party organization rents generally available packaged software applications and related services.

Kern, Kreijger, Willcocks (2002)

These are service firms that provide on contractual basis, rental based or ‘pay-as you-use’ access to centrally managed applications made available to multiple users from a shared data centre over the Internet or other networks.

Smith and Kumar (2004) ASPstreet.com Brian (2005) Deloitte Research

A single point of contact for all telecommunications, hardware, software, and consulting services necessary to deploy, run, and maintain hosted applications remotely. Offer individuals or enterprises access to software applications and related support services over the internet. Companies that supply software applications and /or software-related services over the Internet. A service firm that deploys, hosts, and manages application solutions for rent to businesses residential customers.

Information Technology Association of America

An Application Service Provider, or ASP, is any company that delivers and manages applications and computer services to subscribers/clients remotely via the Internet or a private network.

Webopedia.com

A third-party entity that manages and distributes software-based services and solutions to customers across a wide area network from a central data center.

921

Application Service Providers

manages the applications and services through the Internet and other networks. Examples of applications that can be used through ASP are payroll, travel and expense accounting, desktop productivity, messaging & collaboration services, information distribution, e-commerce, product configuration, sales force automation, manufacturing, logistics, and supply chain management.

(a) drivers within the business environment that precipitate the need for the use of ASP, (b) firm resource base, (c) ASP value proposition, (d) ASP business model, (e) ASP selection, and (f) Organizational outcomes and ASP evaluation. Next, we discuss each of these issues in detail.

drivers Present in the business environment

Issues In the use oF AsP by sMAll busIness

Rapid developments in the global marketplace, including technological advances, mushrooming consumer demands, new products, escalating globalization, and the implications of corporate reengineering and the restructuring, have fundamentally transformed the contemporary business climate. To compete in this changing business and

In Figure 1, we present our framework. We use this framework to identify issues of concern to both academics and small business managers. The noteworthy features of our framework are:

Figure 1. Model for ASP selection, use, and evaluation

AsP value Proposition Advantages

Disadvantages

Focused offerings

Outside dependency

Immediate access to latest technology

Lack of IT staff motivation

IT expertise, knowledge, & support

Security, privacy, and loss of control of strategic data

Increased productivity

High switching cost

evaluation

Financial flexibility

Organizational Outcomes

Suitable for mobile employees Security & reliability

AsP selection business environment

Use ASP?

Business Drivers Technology Drivers

• Finance • technology • reliability • service

Firm resource base • Technology • Skill set • Knowledge Base • Monetary

922

AsP business Model • Revenue strategy • Offerings

Profitability Productivity Culture Satisfaction Trust Usage ASP Service & Support Appearance Attitudes Customization Features Network Capabilities Reliability Responsiveness

Application Service Providers

technology environment, small businesses are constantly revising strategies to better manage their businesses. ASP are seen as a way for a small business to overcome its technology, knowledge, and monetary limitations and compete with much larger firms.

Firm resource base: why use AsP? Larger businesses have a greater access to capital (money, material, employees, technology, and knowledge) and have greater freedom to engage in new technology adoption. Larger firms can easily overcome their technical expertise limitations by hiring additional staff, using consultants, or using third-party vendors. Small businesses are different from large businesses in many areas such as capital availability, access to capital markets, technical capabilities and availability of professionals. In small businesses, very few people or possibly an individual may function as the IT staff. Premkumar and Roberts (1999) asserted that firms without the required employee skills may not be aware of new technological innovations or may fear the risk associated with adoption of such technology within their organization. Lack of access to education and training within small business may affect their willingness to adopt new technology (Fariselli, Oughton, Picory, & Sugden, 1999). Hiring suitably qualified personnel or motivating them to work within a small business setting may be a daunting task for a small business decision maker. For developing a home page or for other less knowledge and/or capital-intensive task, a small business may make use of off the shelf books, software, and tutorials. Small businesses with restricted technical expertise may require the use of external expertise or personnel in the form of consultants, vendor support, outsourcing, or the use of ASP.

AsP value Proposition: Advantages and disadvantages of using AsP Prior to using ASP, a small business decision maker who faces technical and skilled personnel limitations needs to decide on whether to use ASP to avail the opportunities in the marketplace. Both the advantages and disadvantages must be carefully considered and evaluated prior the decision on ASP use is made. The advantages of using ASP are as follows: •

• •

•

•

•

ASPs are aimed primarily at small business (Paraskevas & Buhalis, 2002) and thus the ASP can have more focused offerings. A small business (or a startup) can have immediate access to the latest technology. A small business has the access to the same technology that their large counterparts have and thereby levels the playing field. ASP provides IT expertise and eliminates the need for a large and technically capable IT department to deal with support, maintenance, and upgrades. By using ASP, small businesses can focus on using the applications immediately to support their business activities and eliminate the learning curve and the time and cost associated with installing and managing applications. A small business does not have to expend time and money in software development and thereby the small business can increase its IT productivity. Rather than purchasing hardware and software, and acquiring relevant personnel (new or trained) which necessitates in capital outlay, small businesses can “rent” ASP and thereby decrease initial capital requirements, lower the total cost of ownership, and provide financial flexibility. Further, as managing

923

Application Service Providers

•

•

•

and supporting the applications and services falls within the purview of the ASP, small businesses do not have to provide extensive IT staff training. ASP provides viable solutions for a small business with mobile and or distributed employees as the applications are hosted on remote servers. There is a reduced risk for technology obsolescence as small businesses are renting the applications. There is a greater provision of security and reliability.

The disadvantages of using ASP are as follows: •

•

•

By depending on outside parties, small businesses face the risk of high switching costs, access to organizational strategic asset by external parties, lack of security and privacy, and potential collapse or downfall of their ASP. By depending on external IT staff, small businesses face the risk of alienating internal IT personnel who may feel that they are relegated to performing routine mundane tasks with no avenue for career advancement or for learning new technology. A small business decision maker may fear that perhaps due to their lack of or limited IT knowledge ASP may pursue their own agenda (Yao, DeSouza, & Watson, 2004).

AsP business Models A business model specifies how a firm will generate money to sustain its operations and to generate the desired rate of return. Business models usually specify how the firm will generate revenue and the specific tactics it will use to operate within the industry. An ASP generates a revenue stream either through monthly fees or

924

through per user fees. Based on target markets and products, ASP may be classified into Enterprise ASP, Local/Regional ASP, Specialist ASP, Vertical Market ASP, and Volume Business ASP (ASPnews.com). Enterprise ASP deliver high-end business applications such as enterprise resource planning software, e-commerce applications and supply chain management applications. Local/ Regional ASP supply wide variety of application services for smaller businesses in a local area. Specialist ASP provides applications for a specific need, such as Web site services, human resources, customer-relationship management software. Vertical Market ASP provides support to a specific industry, such as healthcare, finance etc. Volume Business ASP supply general small and medium-sized businesses with prepackaged application services in volume.

AsP selection It is important that ASPs are selected after a careful study of the needs and requirements and the capabilities. A small business decision maker must carefully consider issues related monetary, technological, reliability, and service during the section of the ASP. Focacci, Mockler, Gartenfeld, and Dologite (2003) provide 10 guidelines that can form the basis for ASP selection. These 10 guidelines deal with business strengths of the ASP, capabilities and certification of ASP personnel, architecture, data center and infrastructure analysis, recovery and backup plans, security, service and support, scalability, pricing, guarantees on system availability. Grover, Teng, and Cheon (1998) suggested that as ASP possess more technical knowledge than a typical small business manager they may play a dominant role during negotiations leading to a lower degree of control by the small business. Such a loss of control could result in incomplete or inflexible contracts (Kern et al., 2002). Yao et al. (2004) pointed out that such a lack of control could lead to ASP pursuing its own agenda.

Application Service Providers

organizational outcomes and AsP evaluation It is important that periodic evaluation be made both of the organizational outcomes and services and support provided by the ASP. Given the newness of the ASP concept, there exists a dearth of studies that have as their primary focus the evaluation of services and support provided by the ASP (Ma, Pearson, & Tadisina, 2005). There is also no agreement among researchers on the ways to define and operationalize quality (Reeves & Bednar, 1994). However, a good starting point is the study of Ma et al. (2005) who identified seven dimensions (features, availability, reliability, assurance, empathy, conformance, and security) for evaluating the service quality of ASP. Trust is also an issue that may affect ASP choice and usage (Seltsikas, Currie, & Tebbourne, 2002). The task of a small business decision maker is to ensure that the use of the ASP results in net positive outcomes. In addition to quantitative factors such as performance, productivity and usage, we argue that a small business decision maker must use nonquantifiable measures such as culture, satisfaction (with both the process and outcomes) and trust to assess the impact of the ASP.

Future trends The research firm of IDC expects the ASP market to by 92% over the 5-year period 1999 to 2004 to an estimated $7.8B in 20041 . However, this forecast represents a drastic reduction from the earlier estimate of Gartner Research Group, who predicted that the market would be around $22B (Mears, 2003). While there are many different estimates on ASP spending, it should be noted that all of them have revised their estimate downward from the projections made in late 1990s. A possible reason for the downward revision of ASP spending could be due to the crash of

many dot-com firms in early 2000. In late 1990s, many firms entered the ASP market with a lot of fanfare and with the expectation that the premise behind their business model of customers renting software applications over the Internet would hold true. However, the collapse of the dot-com firms in part has lead to the demise of many ASP. Those that do remain can be considered as the survivors. This second generation ASP have altered their business model and have changed their tactics to provide more and high quality offerings and superior service.

conclusIon Small businesses face resource limitations. Both academics and practitioners have suggested that ASP can be used to overcome financial and technical limitations experienced by small businesses. However, it should be noted that ASP should not be thought of as panacea for all the problems experienced by small businesses. A small business decision maker must carefully consider the value proposition offered by the ASP prior to engaging its services. Performance requirements must be carefully specified prior to the start of the contract and constant monitoring and evaluation is necessary. In this study, we presented a framework that may be of use to both academics and practitioners in identifying issues and considerations in use of ASP by small businesses. There are several opportunities for additional research. It would be interesting to develop a profile of firms that use ASP and the applications they use. Information, education, training, and supplier incentives have a positive effect on adoption (Deeter-Schmelz, Bizzari, Graham, & Howdyshell, 2001) and thus studies should also focus on how the small business decision maker characteristics impacts ASP use. Studies should focus on identifying ASP usage barriers. Mathiyalakan (2004) found that as the

925

Application Service Providers

size of the firm increases, the knowledge about ASP also increases. But this knowledge does not get translated into use of ASP possibly suggesting the existence of barriers other than knowledge. There may be several reasons for the lack of use of ASP by small businesses (Mathiyalakan, 2004). First, a small business decision maker may be concerned with security, privacy, and loss of control associated with ASP usage. Second, a small business decision maker may fear that perhaps due to their lack of or limited IT knowledge, ASP may pursue their own agenda (Yao et al., 2004). Third, a small business decision maker may not believe in an ASP’s value proposition as evidenced by Roberts (1998), who found that many small businesses have problems in using computers and translating IT investments into business value. Therefore, future research should focus on whether additional barriers to ASP usage exist and the ways to overcome such barriers. We also note that there is a need for research that is longitudinal in nature as technology adoption and implementation is often an ongoing process.

reFerences ASPstreet.com. (2005). Retrieved December 9, 2005, from http://www.aspstreet.com/resources/ faq/d.taf#qal1760 Bennett, C., & Timbrell, G. T. (2000). Application service providers: Will they succeed? Information Systems Frontiers, 2(2), 195-211. Brian, M. (2005). How ASP work. Retrieved February 11, 2005, from http://computer.howstuffworks. com/asp.htm Deeter-Schmelz, D. R., Bizzari, A., Graham, R., & Howdyshell, C. (2001, Winter). Business-tobusiness online purchasing: Suppliers’ impact on buyers’ adoption and usage intent. The Journal of Supply Chain Management, 4-9.

926

Deloitte Research. (1999). The Internet-based ASP marketplace: Renaissance of the on-line value added network. Retrieved December 9, 2005, from http://www.aspforum.nl/data/files/ f66_The_ASP_Market.pdf Fariselli, P., Oughton, C., Picory, C., & Sugden, R. (1999). Electronic commerce and the future for SMEs in a global market-place: Networking and public policies. Small Business Economics, 12, 261-275. Focacci, L., Mockler, R. J., Gartenfeld, M. E., & Dologite, D. G. (2003). How to choose an ASP: Selection guidelines. Information Management and Computer Security, 11(2), 67-73. Grover, B., Teng, J. T. C., & Cheon, M. J. (1998). Towards a theoretically based contingency model of information system sourcing in IS outsourcing. In L.P. Willcocks & M.C. Lacity (Eds.), Strategic sourcing of information systems: Perspectives and practices (pp. 79-102). New York: Wiley. Kalakota, R., & Whinston, A. B. (1996). Frontiers of electronic commerce. Reading, MA: AddisonWesley. Kern, T., Kreijger, J., & Willcocks, L. (2002). Exploring ASP as sourcing strategy: Theoretical perspectives, propositions for practice. Journal of Strategic Information Systems, 11, 153-177. Kwon, T. H. & Zmud, R. W. (1987). Unifying the fragmented models of information systems implementation. In R. J. J. Borland & R. A. Hirschhiem (Ed.), Critical issues in information systems research (pp. 253-270). New York: Wiley. Ma, Q., Pearson, J. M., & Tadisina, S. (in press). An exploratory study into factors of service quality for application service providers. Information and Management, 42(2), 1067-1080.

Application Service Providers

Mathiyalakan, S. (2002, November 23-26). An empirical investigation of Web use and capabilities of small businesses. Proceedings of the 33r d Annual Meeting of the Decision Sciences Institute, San Diego, CA.

Vertical Industry Report: Opportunities within financial services, healthcare, & telecommunications. (2001). (Cherry Tree & Co Research Report). Retrieved December 9, 2005, from http://www. itaa.org/itserv/ctvertical.pdf

Mathiyalakan, S. (2004, November 20-23). Are small businesses on the ASP bandwagon? Proceedings of the 35t h Annual Meeting of the Decision Sciences Institute, Boston.

Wainwright, P. (2001). Industry basics: Application service providers. Retrieved December 9, 2005, from http://www.aspnews.com/strategies/ asp_basics/article.php/769151

Mears, J. (2003). Application service providers still alive and kicking. Retrieved February 10, 2005, from http://www.nwfusion.com/ news/2003/0922carrspecial focus.html

Webopedia.com. (n.d.). Retrieved from http:// www.webopedia.com/TERM/A/Application_ Service_Provider.html

Paraskevas, A., & Buhalis, D. (2002). Outsourcing IT for small hotels. Cornell Hotel and Restaurant Administration Quarterly, 43(2), 27-39. Premkumar, G., & Roberts, M. (1999). Adoption of new information technologies in rural small business. Omega: The International Journal of Management Science, 27, 467-489. Reeves, C., & Bednar, D. (1994). Defining quality: Alternatives and implications. Academy of Management Review, 19(3), 419-445. Roberts, J. (1998). Small business IT hang-ups. Computer Reseller News, 774(2), 19. Rogers, E. M. (1983). Diffusion of innovations. New York: The Free Press. Seltsikas, P., Currie, W. L., & Tebbourne, D. E. S. (2002). Strategic alliances in application service provision. Proceedings of the 2002 Information Resource Management Association (IRMA) International Conference, Seattle, WA. Smith, M. A., & Kumar, R. L. (2004). A theory of application service provider (ASP) from a client perspective. Information and Management, 41(8), 977-1002.

Yao, Y., DeSouza, K. C., & Watson, E. (2004). The role of application service providers in the development of small and medium sized enterprises. In N. A.Y. Al-Qirim (Ed.), Electronic commerce in small to medium-sized enterprises: Frameworks, issues, and implications. Hershey, PA: Idea Group Publishing.

Key terMs Application Service Providers: “These are service firms that provide on contractual basis, rental based or ‘pay-as you-use’ access to centrally managed applications made available to multiple users from a shared data centre over the Internet or other networks” (Kern, Kreijger, & Willcocks, 2002, p. 154). E-Commerce: “Is a modern business methodology that addresses the needs of organizations, merchants, and consumers to cut costs while improving the quality of goods and services and increasing the speed of service delivery” (Kalakota & Whinston, 1996, p. 1). Enterprise ASP: Deliver high-end business applications such as enterprise resource planning software, e-commerce applications and supply chain management applications (Wainwright, 2001).

927

Application Service Providers

Local/Regional ASP: Supply wide variety of application services for smaller businesses in a local area (Wainwright, 2001). Specialist ASP: Provides applications for a specific need, such as Web site services, human resources, and customer relationship management software (Wainwright, 2001).

Volume Business ASP: Supply general smalland medium-sized businesses with prepackaged application services in volume (Wainwright, 2001).

endnote 1

Vertical Market ASP: Provides support to a specific industry, such as health care, finance, and so forth (Wainwright, 2001).

http://www.itaa.org/asp/about.htm

This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 7-12, copyright 2006 by Information Science Reference (an imprint of IGI Global).

928

929

Chapter 3.9

Enterprise Application Service Model George Feuerlicht University of Technology, Australia Jiri Vorisek University of Economics, Czech Republic

IntroductIon Following the recent changes in the global business environment, many organizations are reevaluating their approach to delivering enterprise applications and are looking for more effective ways to control IT costs. There is growing evidence of reluctance to fund large-scale implementation projects, and of tighter budgets forcing more careful cost-benefit analysis to justify IT investments. It is becoming increasingly clear that the traditional model for delivering enterprise applications that involves the implementation of licensed software such as ERP (enterprise resource planning) applications within end-user organizations is not suited to the fast-evolving business world of the 21s t century. Almost invariably, situations in which organizations own and maintain their entire IT infrastructure lead to very high costs of ownership, and consequently high levels of IT spending, which can detract from the core busi-

ness in which the organization is engaged. This has led to a situation in which some businesses doubt the benefits of IT (Carr, 2003), and some observers even contend that productivity improvements, once assumed to be the result of IT, are more likely to be the results of other factors such as longer working hours (Nevens, 2002). This backlash that followed the IT boom at the end of the last century has forced software vendors to seek more cost-effective models for the delivery of enterprise applications, and has led to the reemergence of the ASP (application service provider) model as an alternative to licensed software. Today, the ASP model (or software-as-a-service model) is a part of a more general trend toward utility computing, where the service provider delivers highly scalable application services to a large population of end-user organizations in a reliable and cost-effective manner, typically from a remote data center. Utility computing aims to supply application services on demand, similar

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Enterprise Application Service Model

to other utility services (e.g., gas or electricity), and relies on new technologies and architectures that enable the virtualization and sharing of resources across a large number of users in order to minimize costs and maximize utilization. The use of advanced service-oriented architectures (SOAs), grid computing, cluster technologies, and failure-resistant configurations enable the delivery of highly scalable application services in a reliable manner to a large population of users. These technological advances distinguish utility computing from the earlier ASP and outsourcing models, and will ultimately result in significant reduction in the costs of enterprise software solutions and wide adoption of the software-as-aservice model. Major IT vendors including IBM, Microsoft, Sun, Oracle, and HP are promoting utility computing, albeit under different names (e.g., on-demand computing, etc.), and are investing vast resources into the construction of data centers and related facilities (Abbas, 2003). Others, such as Salesforce.com, have been successful with providing hosted services for CRM (customer-relationship management) and other related types of applications, validating the ASP model and further confirming the trend toward utility computing. As the enterprise application software market matures, major ERP vendors are changing their revenue model to decrease their reliance on new software licenses toward income generated from software-license upgrades and product support (Karpecki, 2004; Levy, 2004). This change combined with the fact that most organizations spend as much as 80% of software-related costs on software maintenance and related activities (Haber, 2004) creates a situation in which licensed software is de facto rented. It is precisely this high level of ongoing costs that motivate many organizations toward alternatives such as outsourcing and the ASP model. In this article we first examine the business drivers for the ASP model and contrast the software-as-a-service model with the traditional

930

software-as-a-license approach. We then discuss future enterprise computing trends, focusing on the reemergence of the ASP model for enterprise applications and the likely impact of the wide adoption of this model on the IT landscape. In conclusion, we summarize the main arguments in this article.

bAcKground The economic downturn at the beginning of this decade resulted in organizations dramatically reducing IT budgets, leading to scaling down existing projects and in some cases discontinuing projects altogether. In this section, we consider the background of these developments and the main business drivers that are forcing the transition to a new model for the delivery of enterprise applications as services.

high cost of It Projects Problems of controlling the costs associated with IT projects are well documented. Notwithstanding the long experience that the IT industry has with the implementation of enterprise applications, costs of many projects significantly exceed their original budgets. According to a study of ERP implementation projects of 117 U.S. companies, 25% exceeded their budgets, 20% were abandoned before completion, and 40% failed to achieve business objectives (Cooke, Gelman, & Peterson, 2001). There have been other studies of this type that clearly demonstrate that the traditional model that involves the in-house implementation and maintenance of enterprise applications is associated with significant risks that are not being addressed by new, improved implementation methodologies and more technologically advanced software platforms. Equally, there is ample evidence that the outsourcing of the implementation and support of enterprise applications to a third party does not always bring the anticipated ben-

Enterprise Application Service Model

efits (i.e., cost savings, improved responsiveness to new requirements, etc.); this is most likely because the implementation methodologies and technology architectures used by outsourcing organizations are essentially the same as those used by end-user organizations.

Fast rate of technology change Another significant risk factor associated with enterprise applications is the rapid development of underlying technologies, often necessitating the time-consuming reengineering of applications and costly upgrades. There is growing evidence that end-user organizations are no longer able to keep pace with new technological developments as delivered by IT vendors. New technology platforms and new versions of enterprise applications are often mandated by vendors who are reluctant to support older versions of their products, delivering no direct business benefit to end-user organizations.

high demand on It skills The traditional licensed-software model is associated with the high demand on IT skills needed to implement enterprise applications. Many small and medium-size enterprises (SMEs) cannot justify the cost of retaining their own internal IT staff with the appropriate expertise. Another contributing factor is that the expertise of IT specialists employed by end-user organizations and third-party consulting companies is not fully up to date and often significantly lags behind the expertise available from technology vendors. This factor leads to poor implementation results and is a major cause of the high rate of failure of IT projects.

complexity of enterprise Applications Enterprise applications are becoming increasingly more sophisticated and complex. This complexity is particularly evident in large (horizontal) ERP application systems that provide comprehensive functionality designed to address requirements across a range of end-user organizations irrespective of the industry and the needs of individual businesses. While providing a complex and comprehensive solution, the actual utilization of the overall functionality of an ERP system by individual end users is relatively low. Customization to suit the needs of individual client organizations requires a high level of expertise and often involves the setting up of a large number of configuration parameters. Limited knowledge of the client’s business processes by third-party consultants is another key factor, according to recent studies, that inhibits the successful implementation of ERP systems (Karpecki, 2002). ERP systems are characterized by high complexity of operation, even in situations in which the corresponding business process is relatively simple, and that leads to a high cost of end-user training. Because of the increasing size and complexity of new software versions, there is a corresponding growth in the demand on hardware resources. All these factors lead to increased implementation costs of enterprise applications that the client organizations are no longer willing to accept.

globalization of the business environment Globalization impacts enterprise applications in two important ways. First, as a result of globalization and the formation of regional economic blocks with standardized business practices and regulations, ERP applications can be used across a larger (international) user base without extensive customization to suit individual countries. For example, in the European Union, with the

931

Enterprise Application Service Model

growing number of member countries using similar business laws and regulation, enterprise applications are becoming standardized across the entire region. Second, the global deployment of enterprise applications is becoming a growing trend. Many large, multinational companies implement global applications across the entire enterprise, in some cases using a single centralized data center and centralized applications accessible via the company’s intranet. This simplified environment, with standardized business practices across the entire global organization, is highly suited to implementation using the software-asa-service model.

Increased Acceptance of Alternative Models for enterprise Application delivery Over the last 5 years, there has been an increase in awareness of alternative models for the delivery of enterprise applications, in particular, the outsourcing model. Given the highly competitive global business environment, organizations are becoming aware of the need to focus on their core business and avoid devoting resources to ITrelated activities. This leads to the willingness to consider outsourcing noncore business functions, including the implementation and support of ERP applications to external providers.

Table 1. Comparison of the software-as-a-service vs. software-as-a-license models Key Differentiator Design Approach

Architecture

Upgrade Cycle

ASP Model (Software-as-a-Service Model) Designed for delivery as Internet-based service for a large number of customers. It includes specific HW and SW architectures, and business model. Multitenant service-oriented architecture enables support of thousands of users from different user organizations on a scalable basis. Frequent (3-6 months) upgrades. The same version of the application is running for all users.

Traditional Model (Software-as-a-License Model) Designed for implementation by specialists and for customers to operate and maintain. Architecture suitable for deployment by individual company on a dedicated IT infrastructure.

Infrequent upgrades (12-24 months). Individual clients using different versions of the software. High costs of version management. Short feedback cycle. Procedures enable almost immediate Problem solving is often indirect via intermediaries (VARs, SIs, Problem and etc.). Patches and upgrades are implemented at individual feedback. Support staff can directly identify and fix Change customer sites. Costly and unreliable, as customers often delay problems. Fixing a problem for one customer fixes it for Management installation of patches and upgrades. everyone, which reduces support costs. Procedures Start-Up Short start-up implementation cycle. Long start-up implementation cycle. Typically involves complex Implementation implementation of hardware and software resources and knowledge transfer. Scalability T he volume of the service (i.e., number of users, number of Configuration needs to support peak requirements and cannot be transactions) can be scaled on demand. scaled down. Customization Typically limited. Extensive customization possible, but expensive. Functionality Often limited functionality. Application typically designed Can provide extensive functionality. Often only small part of the for narrow vertical market. available functions is used. Required Only limited client resources are needed. Most of the Extensive internal resources used for IT support. Resources company resources are dedicated to core business. Resource IT resources (hardware, software, IT specialists, etc.) are IT resources are dedicated to a single organization. Utilization shared across all clients. Provider has advantages of economies of scale. Cost Predictable ongoing operating costs. Typically no initial Both investments and operating costs involved. The costs investments required. Costs correlate with the volume of generally do not correlate with the volume of service. services. Service Agreement SLAs are widely used. SLAs used occasionally. Required Expertise Only minimal IT expertise needed. Wide spectrum of IT knowledge and expertise needed.

932

Enterprise Application Service Model

the MAIn FeAtures oF the soFtwAre-As-A-servIce Model The software-as-a-service model has recently evolved into a sophisticated model for the delivery of enterprise applications that substantially differs from the traditional approach (Feuerlicht & Vorisek, 2003; Levy, 2004; McCabe, 2004; Vorisek, Pavelka, & Vít, 2003; Wainewright, 2004). Table 1 summarizes the key differentiators between the software-as-a-service and softwareas-a-license models, identifying the features of the software-as-a-service model that benefit organizations in addressing today’s IS and IT issues. The comparison table includes a number of compelling arguments that are likely to make the software-as-a-service model a preferred solution for enterprise application delivery in the future. Many of the benefits listed are results of recent technological advances combined with the increasing sophistication of service providers and the ability to configure suitable architectures for the delivery of enterprise application services. There is little doubt that standardized applications such as CRM can be delivered more effectively using the software-as-a-service model than by using the traditional approach. While such applications are good candidates for delivery as services, it is doubtful that the benefits extend to all application types and scenarios, necessitating the careful evaluation of candidate applications. For example, the software-as-a-service model may not be suitable for the following. •

•

Mission-critical core business applications: These types of applications are typically not available from external providers, and the critical nature of these applications dictates in-house implementation and control. Highly customized and specialized applications: Providers cannot achieve economies of scale as the number of clients using such applications is relatively small.

•

Applications with extensive integration requirements: Such applications have close dependencies on other enterprise applications and cannot be effectively managed externally.

Future trends The ASP model emerged toward the end of the 1990s with often-exaggerated claims of advantages for client organizations, in particular for SMEs. Notwithstanding many perceived advantages, the ASP approach did not gain wide acceptance as the new model for the delivery of enterprise applications. Many of the early ASP providers have not been able to establish a viable business model and have discontinued ASP services or went out of business altogether. Perhaps the most important factor contributing to the demise of early ASP providers was the lack of a suitable technological infrastructure for hosting a large number of complex enterprise applications in a scalable and secure manner. Customization capabilities and support for integration with other enterprise applications were also lacking. As a result of these shortcomings, early ASP providers failed to deliver cost savings to their customers, resulting in poor acceptance of the ASP model by the marketplace. Recently, however, a number of important IT vendors have reconfirmed their commitment to the ASP model in the context of the new utilitycomputing approach, and have made significant investments in infrastructure for the delivery of application services (Dubie, 2004). The main idea of utility computing is that IT services are supplied on demand (i.e., as required by the enduser organization) via a grid of interconnected, dynamically configurable, highly reliable and scalable computing resources (i.e., servers, data storage, and application resources). Enterprise computing grids are widely regarded as providing

933

Enterprise Application Service Model

a suitable architecture for application services with the ability to host a large number of enterprise applications in a scalable and reliable manner. Resource sharing, resulting in improved utilization of hardware and software associated with grid-computing architectures, provides a more cost-effective solution for hosting enterprise applications than a set of independent servers each dedicated to a specific application. The availability of low-cost commodity components such as storage devices and CPUs enable the construction of large clusters of servers, storage arrays, and other resources, and create virtual resources on demand as required by enterprise applications. A number of infrastructure-technology vendors (IBM, HP, Oracle) are in the process of building large data centers with the view of moving toward the utilitycomputing model (Eriksen, 2003). Investment in infrastructure on this scale clearly demonstrates a strategic commitment to utility computing and more specifically to the software-as-a-service model as the new outsourcing model for enterprise applications. Another key trend favoring the software-asa-service model over the traditional softwarelicensing model is the emergence of service computing. In addition to supporting business processes within a given organization, most enterprise applications today have a requirement to interoperate across enterprise boundaries to support electronic business (e-business). Serviceoriented computing and more specifically Webservices standards and technologies are playing a key role in the implementation of e-business applications and are likely to become the dominant enterprise computing approach in the future. There is a close relationship between the ASP model and service-oriented computing. The wide adoption of Web-services standards across various computing environments (i.e., .Net, J2EE) makes Web services an ideal solution for application integration, and for externalizing business functions of complex enterprise applications. Web services can be regarded as the enabling technology for

934

the integration of ASP applications, and for the delivery of low-granularity application services (Ferguson, 2004). The emergence of the software-as-a-service model as the new paradigm for the delivery of enterprise applications will have a major impact on the IT landscape, creating new opportunities and challenges for both the providers and client organizations. The reduction in the size of the traditional software-license market, reduced demand for on-site implementation, and the corresponding increase in demand for application services will lead to further rationalization of the IT vendor market (Cohen, 2004). The shift toward the software-as-a-service model is likely to take several years to be fully realized, but the impact on the IT industry as a whole, and the software vendors and third-party consulting organizations in particular, is likely to be dramatic, leading to the restructuring and realignment of the major industry players that will favor large software vendors that already have significant penetration in the ASP market and proven track records in successfully delivering application services to end-user organizations. Consulting organizations whose main activity is implementing ERP systems and similar applications for client organizations will need to refocus their business activities as there are not likely to be very many large-scale implementation projects of this type in the future. The software-as-a-service model will be associated with new business and pricing models that are likely to dramatically reduce the cost of ownership of enterprise applications. The reduction of demand for in-house IT specialists will lead to the restructuring of the IT labor market, and will demand important changes from user organizations that will need to implement a suitable management structure and an IT architecture that enable effective participation in the world of service-oriented computing. Adoption of the software-as-a-service model will also demand a change in the culture of client organizations, including the redistribution of responsibilities

Enterprise Application Service Model

for IT costs and benefits to ensure the successful introduction of this new model of enterprise computing.

Eriksen, L. (2003). Will the real utility computing model please stand up. Retrieved from http://www. utilitycomputing.com/news/342.asp

conclusIon

Ferguson, R. B. (2004, October 5). SAP sets its sights on SOAP. Retrieved May 5, 2004, from http://www.eweek.com/print_ article/0,1761,a=126512,00.asp

The business and technological factors discussed in this article have created a situation in which the delivery of enterprise applications in the form of services becomes both technically possible and economically desirable. The software-asa-service model provides a viable alternative to software licensing for many application types today, and it is likely to become the dominant method for the delivery of enterprise applications in the future. This will have a major impact on enterprise computing over the next 5 years, finally tipping the balance from licensed software toward software delivered as a service.

reFerences Abbas, A. (2003). A new wave of utility computing acquisitions. Retrieved April 22, 2004, from http:// www.utilitycomputing.com/news/450.asp Carr, N. G. (2003). IT doesn’t matter. Harvard Business Review, 81(5), 14-41. Cohen, P. (2004). Twelve technical and business trends shaping the year ahead. Retrieved from http://www.babsoninsight.com/contentmgr/showdetails.php/id/687 Cooke, D., Gelman, L., & Peterson, W. (2001). ERP trends. Conference Board Inc. Retrieved from http://www.conferenceboard.ca/documents. asp?rnext=869 Dubie, D. (2004, December 3). Vendors make the utility computing grade. Network World Fusion. Retrieved May 5, 2004, from http://www.nwfusion.com/news/2004/0322 dellsummit.html

Feuerlicht, G., & VoYíšek, J. (2003). Key success factors for delivering application services. Proceedings of “Systems Integration 2003” Conference (pp. 274-282). Haber, L. (2004, January 30). ASPs still alive and kicking. Retrieved May 5, 2004, from http://www. aspnews.com /trends/article.php/3306221 Karpecki, L. (2002). Analýza koncového trhu: Aktuální stav a trendy 1999-2001. INSIDE, 2 pp. 22-32. Levy, A. (2004, February). What do enterprises want from ASPs? Retrieved May 5, 2004, from http://www.aspnews. com/analysis/analyst_cols/ article.php/2217411 McCabe, L. (2004). A winning combination: Software-as-services plus business consulting and process services (Summit Strategies market strategy report). Retrieved from http://www.summitstrat.com/store/3ss07detail Nevens, M. (2002, March). The real source of the productivity boom. Harvard Business Review, 80(2), 23-24. Oracle. (2003). Oracle financial reports. Retrieved from http://www.oracle.com/corporate/investor_relations/analysts/ SAP. (2003). SAP financial reports. Retrieved from http://www.sap.com/company/investor/reports/ Vorisek, J., Pavelka, J., & Vít, M. (2003). Aplikaní sluzby IS/IT formou ASP: Pro a jak pronajímat informatické sluzby. Praha, Czech Republic: Grada Publishing.

935

Enterprise Application Service Model

Wainewright, P. (2004, February). Secret weapons of ASPs. Retrieved May 5, 2004, from http:// www.aspnews.com/analysis/analyst_cols/article. php/3090441

Grid Computing: Grid (network) of computing resources designed to provide computing and storage to applications in a scalable and reliable manner, ensuring high levels of utilization.

Key terMs

Outsourcing: IT resources are managed by an external provider who delivers IT services to the end-user organization.

ASP (Application Service Provider): A provider of application services over the Internet or an intranet. CRM (Customer Relationship Management): Application system that allows a company to manage its relationship with a customer, including sales, marketing, customer service, and support. ERP (Enterprise Resource Planning): System designed to support and automate business processes for manufacturing, distribution, payroll, and finances for an enterprise.

Utility Computing: Computing services are provided on demand by a provider organization that uses its computers and facilities. Customers access the computers via a private network or over the Internet and are charged according to resource usage. Web Services: Web-based application that uses standard Internet protocols and languages (SOAP, XML [extensible markup language]) to interact with other applications.

This work was previously published in Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, edited by M. Khosrow-Pour, pp. 431-436, copyright 2006 by Information Science Reference (an imprint of IGI Global).

936

937

Chapter 3.10

Role of Wireless Grids in Outsourcing and Offshoring: Approaches, Architectures, and Technical Challenges Ashish Agarwal Carnegie Mellon University, USA Amar Gupta University of Arizona and MIT, USA

AbstrAct The growing incidence of outsourcing and offshoring of professional applications is motivating increasing interest in the use of grid computing and grid topologies for meeting the infrastructure requirements. A Wireless Grid facilitates the exchange of information and the interaction between heterogeneous wireless and wired devices. Depending on the nature of the interactions among the constituencies served by the wireless grid, various layouts can be envisaged to provide ubiquitous services. A wireless grid is similar to the wired grid in terms of its distributed nature, the requirement for standards and protocols, and the need for adequate Quality of Service. In addition, a Wireless Grid has to deal with the complexities of the limited power of the mobile devices, the limited bandwidth, and the increased dynamic nature of the interactions involved. The ability of the grid models to address outsourcing

needs is contingent upon the efficient resolution of multiple technical challenges.

IntroductIon Many of the outsourcing and offshoring initiatives require ubiquitous access to computing resources (Gupta, 2008; Crk, Sorenson, & Mitra, 2008; Mitra & Gupta, 2008). Vendors providing these services have to deliver on promised service level agreements. However, they may face cost constraints and may not have the initial capability to provide the desired level of services. Vendors face a similar challenge while introducing a new service that may have inadequate initial customer base to justify investment in costly infrastructure. These challenges are compounded when the customers demand 24x7 access to applications and support. In order to achieve this requirement, one needs a globally distributed work environment in which members of the global team work on a project

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Role of Wireless Grids in Outsourcing and Offshoring

around the clock, possibly by establishing multiple collaborating centers at strategic locations around the globe (Gupta & Seshasai, 2007; Seshasai & Gupta, 2007; Denny, Mani, Sheshu, Swaminathan, & Samdal, 2008; Denny, Crk, & Sheshu, 2008). Further this setup should be responsive to the dynamic business environment in order to facilitate agility and innovation (Mitra & Gupta, 2007; Mitra & Gupta, 2005). Two important drivers of decisions related to outsourcing are: improving the quality of information technology; and gaining access to new and proprietary technology. However, these drivers also introduce technical risk for the concerned outsourcing initiatives (Ross & Westerman, 2004). One way to mitigate some of these challenges is to pool resources across different initiatives and multiple vendors. In this environment, grid computing is becoming popular among service providers (Network World, 2006). Based on these developments, we explore the growing role of using a Wireless Grid for outsourcing initiatives that require ubiquitous access to computing services. Foster (2002) offers a checklist for recognizing a “grid”. A grid allows: • • •

Coordination of resources that are not subject to centralized control; Use of standard, open, general-purpose protocols and interfaces; and Delivery of non-trivial qualities of service.

In order to be classified as a grid, all three criteria must be met. The Wireless Grid meets all these criteria and is fueled by technological advances in grid computing and wireless technology. The ultimate vision of the grid is that of an adaptive network that offers secure, inexpensive, and coordinated real-time access to dynamic, heterogeneous resources, potentially traversing geographic boundaries but still able to maintain the desirable characteristics of a simple distributed system, such as stability, transparency, scalability

938

and flexibility. The technologies originally developed for use in a wired environment are now being augmented to operate in wireless situations. The development of the wireless technologies such as 802.11, GPRS and 3G has extended the reach of wireless services to more individuals. With the ubiquity and indispensability of wireless technologies established, these technologies are now making inroads into grids. In the following sections, we describe the drivers of the wireless grid technology, the grid architecture and topology, and finally the challenges that need to be addressed in order for these wireless grids to be extensively deployed in offshoring applications. For the remainder of this paper, a grid implies a Wireless Grid (unless expressly denoted otherwise).

Key chArActerIstIcs driving Forces The development of the wireless grid technologies is governed by three driving forces: •

•

•

New User Interaction Modalities and Form Factors: Traditional applications that can exist on the Wired Grid need to expand their scope by extending the interactions to mobile devices through adapting the user interface to small screens, small keyboards, and other I/O modalities such as speech. The mobile access interface needs to address the issue of connectivity of mobile devices. Limited Computing Resources: Wireless applications need to share the resources and provide access to additional computational resources to mitigate the constraints imposed by limited storage, computational capability, and power of mobile devices. Additional New Supporting Infrastructure Elements: New applications, especially ones involving dynamic and unforeseen

Role of Wireless Grids in Outsourcing and Offshoring

events, need to be addressed through the rapid provisioning of major amounts of computational and communications bandwidths. For example, the occurrence of an urban catastrophe could trigger a dynamic adaptive grid network to allow disaster recovery.

grid resources A Wireless Grid must provide a virtual pool of computational and communications resources to consumers at attractive prices. Various grid resources are described below: •

•

•

•

Computing Power: Wireless devices possess limited computation power. Wireless grids can overcome this limitation by distributing the computational tasks across multiple power-constrained devices. But this raises the need for establishing appropriate collaborative processes between these geographically distributed tasks. Storage Capacity: Wireless devices possess limited storage capability. Grids can overcome this limitation by distributing the data storage over multiple devices. Data can be recombined into a single entity and then made available to the users. However, this creates the need to enable data access and update to occur simultaneously and to avoid contention through the application of advanced synchronization techniques. Communications Bandwidth: Wireless grids can harness the power of wireless technology to allow remote access. At the same time, the grid infrastructure should be robust enough to ensure high Quality of Service (QoS). Multiplicity of Applications: Wireless Grids should allow the users ubiquitous access to a wide variety of applications. However, one needs to overcome the need to

install these applications on separate mobile devices.

grId lAyout Drawing upon the paradigm of wired grids (Gentzsch, 2001; Ong, 2003; Tiang, 2003), various layouts of wireless grids are possible. The classification schemes can be based on the architecture or on the function of the grids1.

Classification by Architecture One way to characterize the architecture of the wireless grid is by the degree of heterogeneity of the actual devices and the level of control exercised over each device from an administering perspective (Figure 1). It can vary from a simple network of homogeneous devices bound by a single set of policies and rules to a complex network of heterogeneous devices spread across multiple organizational, political and geographical boundaries, as categorized below: •

Local Cluster or Homogeneous Wireless Grid: This simplest form involves a local collection of identical or similar wireless devices that share the same hardware architecture and the same operating systems. Because of the homogeneity of the end systems, the integration of these devices into the wireless grid and the consequent sharing of resources become much easier. Today, this type of organization is more likely to occur when managing computing requirements in a single division of an organization where one single administrative body exercises control over all the devices. An example is a network of mobile handheld devices for coordinating personnel in an organization such as medical staff in a hospital or field service representatives of a telecommunication service provider.

939

Role of Wireless Grids in Outsourcing and Offshoring

Figure 1. A simplified depiction of the 3-tier wireless grid architecture (adapted from Ong, 2003) Local Clusters

Intra-Grid

Inter-Grid

Warehouse Company A

Warehouse

Distribution Network Mobile Sales Network

Mobile Sales Network

Distribution

Company C

Network Company B

Company A

Company A

Local wireless cluster deployed Merging Cluster Grids into an Intra-Grid Merging Intra-Grids of many comon a departmental/divisional basis that is within a company panies into an Inter-Grid that spans within a company. multiple organizations

•

•

940

Wireless Intra-Grids: An intra-grid encompasses devices that are used by multiple divisions or communities within an actual organization (AO). The divisions may be located in different geographies and maybe governed by a separate set of policies, but there exists a level of trust and oversight so that “ground truth” may be known with respect to identity and characteristics. An AO is the point where resolution can occur between the virtual presence of a wireless entity and its actual name and location. AOs tend to be persistent in time, and become the point of composition among other AOs. An example of an intra-grid would be a wireless grid that simultaneously supports the mobile sales force of a company and the networks of wireless sensors used by the manufacturing division for tracking inventory. One can expect detailed interactions among the constituents of an intra-grid due to tighter interaction in the business processes. Inter-Grid: An inter-grid encompasses multiple AOs and transcends greater amounts of geographical, organizational, and other types of differences, such as ones related

to intellectual property rights and national laws. Multiple AOs may come together to form Virtual Organizations (VOs) where they can share resources and manage their costs in a better way. The relationship can be long-term or short-term (Ong, 2003). Resource management and policy integration issues (security, authentication, and data management tasks) attain greater complexity due to the scalability requirements. To move beyond mere ad hoc composition of AOs, a (potentially) universally accepted method for the composition of declarative policies must be proposed and accepted. Additionally, there must be commonly accepted semantics for the expression of policy. This could be rendered through on-line—available references to expressions and ontologies that would be used by policy—composition and enforcement processes. Without such semantic agreements and without mechanisms of composition, arbitrary membership in a protected (and trusted) inter-grid set of relations would be impossible. An example of an inter-grid interaction would be a scenario involving an

Role of Wireless Grids in Outsourcing and Offshoring

American tourist visiting Japan and trying to conduct a local e-commerce transaction using his or her cell phone. The transaction involves a handshake between the traveler’s cell phone service provider, traveler’s credit card company, the Japanese wireless service provider, and the e-commerce vendor. The scope of such interactions would be limited due to the loose connections between the constituents of the inter-grid.

Classification by Usage Pattern Wireless grids can be classified by usage patterns as summarized in Table 1. •

•

Computational Grid: In a computational grid, the need for creating the wireless grid is driven primarily by the need to borrow computational resources from others. This arises, in part, from the power constraints on mobile devices, which in turn limits their computational capability. The computational grid may be cooperative or parasitic (Barabasi et. al, 2001). One example is a wireless sensor network used to monitor conditions for predicting natural calamities like earthquakes or volcanoes. Data Grid: In this case, the need for creating the wireless grid is dictated primarily by the need to provide shared and secure access to distributed data. Since data can be presented in various contexts on various systems, reconciling the underlying semantics continues to challenge evolving technology.

•

One example involves an urgent search for donors with a rare blood type. A hospital would issue a query to the medical history databases in the region through its mobile network. The mobile service providers will notify potential donors through the alert messages transmitted to their respective mobile devices, and the resulting responses would be processed and reconciled. Utility Grid: Here the motivation for the wireless grid is derived from the need to provide ubiquitous access to specialized pieces of software and hardware. Users can request resources when needed (on-demand) and only be charged for the amount being used. This model can subsume both Computational Grids and Data Grids. For example, users might tap Wireless Utility grids for information such as the traffic conditions and routing, and for making instantaneous transactions related to commercial products and services.

grId toPology A number of researchers have evaluated the topology and configuration of mobile networks (Nesargi & Prakash, 2002; Vaidya, 2002; Mohsin & Prakash, 2002; Weniger & Zitterbart, 2004). However, these ad hoc systems are standalone in nature. We believe that commercial wireless grids will possess some access to the wired Internet infrastructure and thereby follow a hybrid model (Figure 2). It will consist of Mobile Ad-hoc Net-

Table 1. Wireless grid usage patterns Grid Type

Possible Architecture

Mainly Provides

Computational

Cluster, Intra, Inter

Computational Power

Data

Cluster, Intra, Inter

Data Access and Storage

Utility

Intra, Inter

On-demand Access to All Kinds of Resources

941

Role of Wireless Grids in Outsourcing and Offshoring

Figure 2. A hybrid wireless network

works2 (MANET) type systems with multiple-hop paths between mobile nodes and access points to the wired network. An application of this hybrid setup has been the Mesh Networks (Bruno et al. 2005). At a high level, one needs to support the critical role of the management and composition of subnets and arbitrary collections of wireless members. There must be a Root Station (RS) present in some form as well as a Base Station (BS). The RS maintains cognizance over a set of wireless devices, and serves as the final mapping agent of logical to physical devices. The BS manages and enforces policy within and among groups. A grid layout can include a root station for a community or an actual organization (AO) of wireless nodes (Figure 3). A RS will maintain up-to-date information about its own network and the associated nodes as well as serve as the gateway to the wired network. Multiple organizations may come together to form a virtual organization (VO). Note that an AO can belong to multiple VOs. A base station (BS) can be envisaged for a VO. A base station will maintain information about networks for various organizations and the associated root stations. For a homogeneous grid, the same server can perform both the RS and BS functions. In case of an inter-grid that can span multiple virtual organizations, several BSs are needed to coordinate to maintain the inter-grid information. Redundancy can be maintained by

942

having secondary servers to perform the RS and BS functions. Both RS and BS should not be resource-constrained devices. Instead, the RS and the BS could each be a simple PC, a workstation, or a server equipped with an appropriate interface to communicate with the edge nodes such as sensor nodes and other mobile nodes.

technIcAl chAllenges Among the spectrum of challenges related to wireless grids, one needs to first overcome the following set of initial technical challenges: •

•

Dynamic Configurability: Wireless grids are characterized by changing topology due to the mobile nature of the grid components. Grids should provide self-configuring and self-administering capability to allow these dynamic changes for all possible grid layouts. This includes configuring the addresses, providing name to address resolution for the grid components, and maintaining the state information. Grids should address the issues related to weak transmission signals, message losses, and crashing of the power constrained nodes. Routing Plasticity: Efficient routing protocols are required to address the power limitation of the end devices along with the

Role of Wireless Grids in Outsourcing and Offshoring

Figure 3. A wireless grid spanning multiple virtual organizations VO3 VO1 AOA

VO2

AO C

RS

RS

AOE

RS

BS BS

AO D

BS

AO B

RS

RS

•

consideration for stable wireless connectivity, route optimization and efficient use of the limited bandwidth. Data will need to flow across the grid using a combination of Mobile IP (Perkins, 2002), Mobile IPv63, and ad-hoc routing protocols such as Dynamic Source Routing Protocol (DSR) (Hu, Perrig & Johnson, 2005) and Ad hoc On-Demand Distance Vector Routing (AODV) (Perkins and Royer, 1999; Papadimitratos & Haas, 2005). Discovery Semantics and Protocols: Service description protocols are needed to describe the services provided by various components of the wireless grid. Once the services are published, a discovery protocol is needed to map the mobile resources to the services. The notion of grid service (Foster et. al 2001) can be extended to the wireless grids. Work has been performed towards providing the naming service for MANET systems (Adjie-Winoto et. al, 1999, Zhu et al, 2003, Sharmin et al., 2006). The mobile nature of the wireless grid components makes it challenging to provide for discovery mechanisms across virtual organizations.

•

•

The grid owners have to come together to define the common set of protocols and meta definition of the services to aid discovery of the available services. Security: Because of the inherent nature of the wireless connection, the diversity of the link quality, the potential unreliability of the end-devices, the power constraints of the mobile device, and the enforcement of security and privacy policies are all factors that present major challenges in the wireless grid environment. Effective security requires adequate computational power to execute the security algorithms in acceptable times. In addition, sufficient radio power is required to achieve an effective signal-tonoise ratio (in the face of encrypted signaling streams) and to close the link. This suggests a careful husbanding of access points and the hand-over process in order to ensure that the minimum possible power is required from each of the wireless devices. Policy Management: Since the end-devices or nodes can be power constrained, one cannot assume that the devices are capable of running complex protocols such as Light-

943

Role of Wireless Grids in Outsourcing and Offshoring

weight Directory Access Protocol (LDAP) or Common Open Policy Service (COPS). Grid architecture designers need to address policies that govern the usage, privileges, access to resources, sharing level agreements, quality of service, and the composability and the automated resolution of contradictory policies among organizations; this is in addition to the other technical issues mentioned above.

The degree of availability of these functions will dictate the ultimate ability of the wireless grids to meet the requirements at the enterprise, partner, and service levels for various types of outsourcing and offshoring configurations and also enable the 24-Hour Knowledge Factory concept to be utilized for tasks of growing complexity over time (Gupta, 2008; Gupta, Seshasai, Mukherji, & Ganguly, 2007).

AcKnowledgMent conclusIon Based on their ability to provide seamless wireless extensions to the wired grid and to enable individuals to perform work from virtually anywhere in the world, wireless grids are poised to play a pivotal role in improving the quality of outsourcing and offshoring services that require ubiquitous access. Possible layouts include homogenous grid, intra-grid, and inter-grid. These can be deployed to provide data, computing, and utility services in geographically distributed environments, such as ones involving the use of the 24-Hour Knowledge Factory paradigm. These layouts can be handled using a grid topology that includes a combination of nodes, Root Stations and Base Stations. The topology and the architecture should address relevant technical challenges including those related to configuration, routing, discovery, security, and policy management. These capabilities are needed to meet the full array of requirements for a globally distributed work environment. The establishment of mobile nodes in a wireless grid can help in the endeavor to provide ubiquitous low-cost access to a broad array of outsourcing and offshoring services. The dynamic configuration of these nodes and the dynamic discovery of the grid services can provide the agility needed to foster innovation. Further, a robust security and policy infrastructure can ensure that high quality standards are maintained in delivering the services.

944

The authors thank Hongfei Tiang, Szei Hwei Ong, and Madhav Srimadh for their valuable assistance.

reFerences Adjie-Winoto, W., Schwartz, E., Balakrishnan, H., and Lilley, J. (1999). The Design and Implementation of an Intentional Naming System. Proc. 17th ACM SOSP, Kiawah Island, SC, Dec. Barabasi, A-L., Freeh, V. W., Jeong, H., and Brockman, J. B. (2001). Parasitic Computing. Nature, Vol. 412, 30 August. Bort, J. (2006). Advanced Managed Services. Network World, 23(25), p 63. Bruno, R. Conti, M. and Gregori, E. (2005). Mesh Networks: Commodity Multihop Ad Hoc Networks. IEEE Communications Magazine, 43(3), 123-131. Crk, I., Sorenson, D., and Mitra, A. (2008). Leveraging Knowledge Reuse and System Agility in the Outsourcing Era. Journal of Information Technology Research, April-June. Denny, N., Mani, S., Sheshu, R., Swaminathan, M. and Samdal, J. (2008) Hybrid Offshoring: Composite Personae and Evolving Collaboration

Role of Wireless Grids in Outsourcing and Offshoring

Technologies. Journal of Information Technology Research, January-March.

Military Communications Conference (MILCOM 2002), 2(10), 856-861.

Denny, N., Crk, I., and Sheshu, R. (2008). Agile Software Processes for the 24-Hour Knowledge Factory Environment. Information Resources Management Journal, January-March.

Mitra, A., and Gupta, A. (2005). Agile Systems with Reusable Patterns of Business Knowledge: A Component Based Approach. Artech House Press, Massachusetts.

Foster, I. (2004). What is the Grid? A Three Point Checklist. Argonne National Laboratory, http:// www-fp.mcs.anl.gov/~foster/Articles/WhatIsTheGrid.pdf.

Mitra. A., and Gupta, A. (2007). Creating Agile Business Systems with Reusable Knowledge. Cambridge University Press.

Foster, I., Kesselman, C., and Tuecke, S. (2001) “The Anatomy of the Grid: Enabling Scalable Virtual Organizations, International J. Supercomputer Applications, 15(3). Gentzsch, W. (2001). Grid Computing: A New Technology for the Advanced Web. White Paper, Sun Microsystems, Inc., Palo Alto, CA. Gupta, A. (2008). Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy. Information Science Reference, Hershey, Pennsylvania. Gupta, A., and Seshasai, S., (2007). 24-Hour Knowledge Factory: Using Internet Technology to Leverage Spatial and Temporal separations. ACM Transactions on Internet Technology, Vol. 7 (3), August, pp 1-22. Gupta, A., Seshasai, S., Mukherji, S., and Ganguly, A. (2007). Offshoring: The Transition from Economic Drivers toward Strategic Global Partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, Vol. 5 (2), April-June, pp 1-23. Hu, Y. C., Perrig, A., and Johnson, D. B. (2005). Ariadne: A Secure On-Demand Routing Protocol for Ad Hoc Networks. Wireless Networks, 11(1), p.21 Mohsin, M., and Prakash, R. (2002). IP Address Assignment in a Mobile Ad Hoc Network. IEEE

Mitra, A., and Gupta, A., (2008) Knowledge Reuse and Agile Processes: Catalysts for Innovation. IGI Global, Hershey, Pennsylvania. Nesargi, S., and Prakash, R. (2002). MANETconf: Configuration of Hosts in a Mobile Ad Hoc Network. Proceedings of INFOCOM’02, 1059-1068. Ong, S. H. (2003). Grid Computing: Business Policy and Implications. Master’s Thesis, MIT, Cambridge, MA. Papadimitratos, P., and Haas, Z. J. (2005). Secure Routing for Mobile Ad Hoc Networks. Advances in Wired and Wireless Communication, IEEE/ Sarnoff Symposium, 168-171. Perkins, C. E. (2002). Mobile IP. Communications Magazine, IEEE, 40(5), 66-82. Perkins, C., and Royer, E. (1999). Ad Hoc OnDemand Distance Vector Routing. i2nd IEEE Workshop on Selected Areas in Communication, 2, 90–100. Ross, J.W., and Westerman, G. (2004). Preparing for utility computing: The role of IT architecture and relationship management. IBM Systems Journal, 43(1), 5-19. Seshasai, S. and Gupta, A. (2007). The Role of Information Resources in Enabling the 24-Hour Knowledge Factory. Information Resources Management Journal, Vol. 20 (4), October-December, pp 105-127.

945

Role of Wireless Grids in Outsourcing and Offshoring

Sharmin, M., Ahmed, S., and Ahamed, S. I. (2006), Proceedings of the Fourth Annual IEEE International Conference on Pervasive Computing and Communications, March, pp 6. Tiang, H. (2003). Grid Computing as an Integrating Force in Virtual Enterprises. Master’s Thesis, MIT, Cambridge, MA. Vaidya, N. H. (2002). Weak Duplicate Address Detection in Mobile Ad Hoc Networks. MIBIHOC2002.

endnotes 1

The illustrative examples explain the application of different architectures or functions. The infrastructure in all these situations can be managed by a set of service providers.

2

http://www.ietf.org/html.charters/manet-charter. html

3

http://www.ietf.org/rfc/rfc3775.txt

Weniger, K, and Zitterbart, M. (2004). Mobile ad hoc networks – current approaches and future directions. Network, IEEE, 18(4), 6-11. Zhu, F., Mutka, M., and Mi, L. (2003). Splendor: A secure, private, and location-aware service discovery protocol supporting mobile services. Pervasive Computing and Communications, March, 235–242.

This work was previously published in Journal of Information Technology Research, Vol. 2, Issue 2, edited by M. Khosrow-Pour, pp. 1-10, copyright 2010 by IGI Publishing (an imprint of IGI Global).

946

947

Chapter 3.11

Web-Based Data Collection in China Robert M. Davison City University of Hong Kong, Hong Kong Yuan Li University of Southern California, USA Carol S. P. Kam Yahoo! Holding (HK) Ltd, Hong Kong

AbstrAct In the last few years, Web-based surveys have received increased attention given their potential to cut the costs and time associated with paper-based surveys. In this exploratory study, we consider the feasibility of using the Web as a data collection medium in China, which has a current Internet population of 103 million. Following a review of the literature regarding the design, implementation, and application of Web surveys, and the current state of data collection in developing countries in general and China in particular, we describe how we developed a Web-based survey instrument focusing on the ethical values of IT professionals. We e-mailed 5,000 IT professionals in China, inviting them to participate in the survey. Thirty-seven percent of those contacted visited the Web site and 5.8% submitted the survey. The survey data, both qualitative and quantitative, is analysed and discussed with a view to drawing up instructive guidance for researchers interested to use the Web

as a data collection tool in China, as well as developing countries more generally. The Web-based survey has great potential in these contexts, if sensitively designed and implemented. We consider the implications of this research and identify areas where future research is necessary.

IntroductIon Empirical research in China has traditionally applied a variety of research methods. Key amongst these have been surveys of various sectors of the population. Some of these surveys have relied on secondary data (e.g., from government sources) but the paper-based questionnaire has also been frequently deployed. The toolbox of survey techniques has recently been extended with the development of Web-based surveys — surveys that reside on Internet Web sites and are completed online. In this exploratory study, we report on an ongoing project that involves the collection of survey data in China

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Web-Based Data Collection in China

with a Web-based survey instrument and provide initial answers to the question “Is it feasible to use the Web to collect survey data in China?” In order to engage in research that would be valuable from both content and methodological perspectives, we decided to investigate the ethical reasoning of IT professionals in China. Through this investigation, we aimed both to develop our knowledge about Web-based surveys in China, and specifically with respect to a professional target population, many of whom can be expected to have access to the Internet, and to develop our knowledge about the ethical reasoning of an important set of participants in the national economy. Much concern has been raised about ethical values in general around the world in the wake of various corporate scandals. There are parallel concerns in China in academia (Ding, 2002) as well as in the business sector (Huang & Snell, 2003; Steidlmeier, 1999; Su, 2001). This concern extends to the IT sector, given the extent to which our society depends on effective and efficient IT. Nevertheless, the sensitivity of this topic clearly creates challenges for any kind of data collection procedure. However, we believed that a sensitively designed Web-based survey would provide potential respondents with a high level of confidentiality when they submitted their responses, a confidentiality that would be hard to replicate with face-to-face or paper-based survey techniques. The main thrust of this article is a methodological one, given our research question. However, we do make reference to ethical issues on occasion as they relate to the instrument that we used to collect data. Following this introduction, we concisely review a number of literatures germane to this study, viz.: Web-based surveys, data collection in developing countries in general, as well as in China in particular; and the Chinese experience with Web-based surveys. We then explain the precise methodological approach used in this study, with a detailed description of the way we operationalised the research instrument on the Web, and the procedures associated with ensuring the rigor of the

948

research design. The survey results follow, with a particular emphasis on the methodological issues, which are then discussed before we conclude with key findings and directions for future research. We do not report on or discuss the ethical reasoning employed by IT professionals in China, since this is not the focus of this article.

lIterAture revIew In order to review the literature on Web-based surveys in a systematic fashion, we followed the following protocol. Firstly, we reviewed the literature on Web-based surveys in general (i.e., without any restriction to China or other developing countries), in order to identify current practices as well as the broadly recognised advantages and disadvantages of this adaptation of the paper-based survey method. Secondly, we looked at current data collection methods in developing countries: we considered paper-, e-mail- and Web-based surveys. These two areas of literature were not restricted to the information systems or information management domains. Next, we focused our literature search on the specific case of data collection in China, and the use of Web-surveys in that context. At this stage of the search process, while we searched the English language databases, we also looked at Chinese language databases, which cover publications in Chinese that are published inside China. Finally, we summarise the relevant literature findings in a short section.

web-based surveys In the early years of the Web (i.e., the mid-1990s), most Web sites were relatively static entities that only provided a one-way information dissemination channel. However, as Thompson, Surface, Martin, and Sanders (2003) observe, it was quickly realised that Web sites had a great potential to receive and process information, which would significantly enhance their value. This view is supported by Dill-

Web-Based Data Collection in China

man (2000, p. 400) who observes that Web-surveys are poised to be the next significant development in the survey methodological tradition (after random sampling in the 1940s and telephone interviews in the 1970s) as “no other method of collecting data offers so much potential for so little cost.” Given this potential, Web programming techniques were developed to enable such online data entry (see Dennis & Gambhir, 2000, for a general overview of the technology). While there is a considerable comparative literature on the relative efficacy of paper vs. fax vs. e-mail surveys (Cobanoglu, Warde, & Moreo, 2001), until recently there has been a dearth of published academic research assessing the reactions of respondents (or potential respondents) to Web-surveys (Thompson et al., 2003; Tingling, Parent, & Wade, 2003). Web-based surveys offer significant advantages over traditional paper-based surveys, not least in terms of cost and time: once an instrument has been developed, it can be located on a databaselinked Web site and completed by respondents with essentially no additional resource implications beyond the cost of hosting the survey on the Web site and the subsequent analysis of data (Lazar & Preece, 1999). Furthermore, as data is entered in digital form, neither is there a need to transcribe data from paper forms, nor should there be a need for data cleaning (Lazar & Preece, 1999). Webbased surveys can include a variety of interaction opportunities, ranging from check boxes and rank order mechanisms to text boxes and drop-down lists. Respondents can access Web-based surveys by clicking on a link in an e-mail message and submitting their response immediately — there is no postal delay. Notwithstanding these opportunities to create a more varied interaction experience, some scholars caution that Web pages should be simple, consistent, and easy to use, since fancy or complex pages can cause a significant reduction in response rates (Dillman & Bowker, 2001). It is thus best not to assume that potential respondents have access to more than the most primitive and

unsophisticated browsing and downloading environment (Bowker & Dillman, 2000). Where response rates are concerned, the expectation that Web-based surveys should generate higher rates has not been consistently substantiated, with some reports indicating higher rates than other forms of surveys and others lower or equal (Dillman, 2002; Thompson et al., 2003). Indeed, it is hard to measure response rates on the Web unless you know in advance the precise size of the population you are sampling. When a link to a Web-based survey is placed on one or more Web sites (Ngini, Furnell, & Ghita, 2002), it is impossible to be sure how many people saw the link. Some studies use a mix of Web- and paper-based surveys, but don’t always distinguish the sources of data in the results (Mbarika, Meso, & Musa, 2004). One way to be sure of the population size sampled is to contact each potential respondent by e-mail. However, concerns may still exist about the way in which the individual potential respondents are identified. Pimchangthong, Plaisent, and Bernard (2003) indicate a 64% response rate, but they carefully selected and then personally invited people to participate — this was not a random sample of the population. The availability of Web-based surveys has propelled new growth for market research as well as commercial, government and academic research (Birnbaum, 2000; Buchanan & Smith, 1999). However, the potential efficiency of conducting Web-based surveys causes some authors to raise concerns about the scientific underpinnings of quality research. Large numbers of responses do not exclude the possibility of sampling or coverage errors (Dillman, 2002; Dillman & Bowker, 2001; Granello & Wheaton, 2004). Furthermore, there are a number of weaknesses associated with Webbased surveys (Cobanoglu et al., 2001; Couper, 2000; Thompson et al., 2003), including: issues of respondent access to the Internet; the difficulty of providing effective online financial incentives (such as vouchers, lotteries or charitable donations)

949

Web-Based Data Collection in China

(Deutskens, De Ruyterm, Wetzels, & Oosterveld, 2004); computer/Internet literacy; the possibility that individual respondents may make multiple submissions (Tingling et al., 2003); the extent to which (potential) respondents are prepared to trust the Web as a medium for the submission of personal information; the extent to which respondents perceive that their anonymity can be guaranteed and their privacy protected; and the risk that e-mails inviting participation in the survey are never actually read, either because potential survey participants didn’t see the invitation, or treated it as junk e-mail (Saxon, Garratt, Gilroy, & Cairns, 2003), or even because it was incorrectly screened out by spam detection/removal systems. Recent research shows that up to 20% of e-mail may be false-positively identified as spam and autodeleted by e-mail servers without the recipient being aware of the fact (Morrissey, 2003). Chinese Internet users, for instance, report that they receive, on average, 7.9 spam e-mail messages per week, compared to 4.4 non-spam messages received (CNNIC, 2005).

data collection in developing countries Research into Information Systems in Developing Countries represents a fairly new trend, with most mainstream IS journals publishing only a handful of papers over the last two decades. The emergence of journals, such as the Journal of Global Information Management, and more recently the Electronic Journal of Information Systems in Developing Countries, has increased the number of papers published substantially. In order to gain an understanding of the methods (both Web-based and paper-based) used to collect data in developing countries in general, we searched the ProQuest and Emerald Insight online databases, as well as scholar.google.com, using keywords such as: Webbased, online, data collection, developing countries/ country. We also searched scholar.google.com for “Web-based survey + (Developing Country Name)”1 for a selection of 50 “sample” developing

950

countries around the world, in order to identify studies about specific countries that did not use the term “developing country” as a keyword. We also specifically targeted three journals for this search: the Journal of Global Information Management, the Journal of Global Information Technology Management, and the Electronic Journal of Information Systems in Developing Countries. Through this process, we identified 20 items of potential relevance to this study. From this search, we noted that while there is an increasing tendency to use case studies (Khalfan & Gough, 2002 [Kuwait]; Mosse & Nielsen, 2004 [Mozambique]), many articles rely on survey data. However, the vast majority of these involve paper-based surveys (Brown & Licker, 2003 [South Africa]; Grandon & Pearson, 2003 [Chile]; Lertwongsatien & Wongpinunwatana, 2003 [Thailand]), with only a handful using e-mail surveys (Ahmed, 2002 [Bahrain, Saudi Arabia, Kuwait, Oman, UAE, Qatar]; Wresch, 2003 [Nicaragua, Pakistan, Senegal, Ghana, Kenya, Nepal, Tanzania, Sudan, Mozambique]), or Web-based surveys (Gandsas et al., 2001 [Global]; Ngini et al., 2002 [Global]; Pimchangthong et al., 2003 [Thailand]). A variation to the online data collection method was explored by Al-Saggaf (2004 [Saudi Arabia]) who conducted interviews through a Web-based virtual community.

data collection Issues in china Research essays on and scholarly critiques of data collection in China generally concur that it is inappropriate to engage in the mere transfer of Western research practice to China without any form of adaptation to the local context, which is perceived to be a unique phenomenon (Manion, 1994; Roy, Walters, & Luk, 2001). Not all scholars agree about the uniqueness of the research context in China, but nevertheless there is agreement that the contextually and culturally sensitive application of research methods is essential if those methods are to have any explanatory power (Shenkar & Von

Web-Based Data Collection in China

Glinow, 1994). With specific reference to the collection of data, Roy et al. (2001) document a number of concerns including the ability of researchers to gain the official permissions needed for data sampling, the use and value of secondary data, the tendency of local research contacts to engage in self-censorship, the design and implementation of survey instruments and the analysis and interpretation of data. A further concern relates to the designation of some possibly innocuous information as “secret” or “classified.” This kind of situation was exemplified by the case of a Hong Kong-based economics researcher who, as a result of his data gathering activities, was accused by the PRC of spying for Taiwan (Cheung, 2002).

the Potential for web-based surveys in china: Practical and demographic Issues There is growing attention to the usage of the Web as a medium to collect survey data in China. In order to obtain an overview of how the Web-based survey has been researched among Chinese scholars, in addition to the literature search described earlier, we conducted a search in the Chineselanguage China Journal Fulltext Database. To our surprise, we found more than twenty journal articles that are specifically related to the examination of Web-based surveys. The topics of these articles cover a wide array of issues ranging from detailed presentations of the software that can be used to implement Web-based surveys, discussions of technical issues in designing, monitoring, and controlling the survey process (Mi, 2001; Yu, Zheng, & Zhang, 2000) and careful delineations of different ways of using the Internet to collect survey data (Ke, 2001a, 2001b), to analyses of the advantages and constraints of using the Web as a medium to administer surveys (Kang, 2001; Tang, 2002; Wang & Zhang, 2001), questions related to instrument design and the conduct of statistical analyses (Zhang, 2003), and issues related to the establishment of policies and rules associated with

the regulation of Web-based surveys in China (Lin & Yin, 2001; Su, 2000). We consider that at least three factors contribute to the rising enthusiasm for Web-based surveys in China. First, the population of Internet users has grown rapidly during the past few years. According to the China Internet Network Information Centre (CNNIC), a non-profit organization associated with the Ministry of Information Industry that conducts semi-annual surveys on the development of the Internet in China, the number of Chinese Internet users (not including those in Taiwan, Hong Kong and Macau) has grown from 62,000 in 1997 to 103,000,000 in July 2005 (CNNIC, 2005), approximately 7.9% of the total population of 1.3 billion. More detailed statistical data about China’s Internet population is presented in Tables 1-6. For comparison with other countries, see Appendix 1. The rapid expansion in the number of Internet users has important implications for Web-based survey research, since there is the indication that the online population is becoming more representative of the urban population as a whole, as well as specific sub-populations such as college and high school students, people educated to high school level, and certain occupations such as government officers, engineers, management personnel and teachers. Second, commercial market research and consulting firms are becoming more involved in conducting Web-based surveys. In October 1999, Beijing Horizon Research and Sohu created the first independent company specializing in Webbased surveys (Gao, 2002). Subsequently, many other research and consulting firms have developed Web-based survey systems. Third, research institutions are increasingly interested in exploring the possibility of utilizing the Web to undertake surveys in China. Traditionally, the survey has been the most popular technique utilized in social science research in China (Deng & Feng, 2000; Li, 2000). As the population of Internet users increases, the Web-based survey can be considered as a viable alternative to traditional survey media such as paper-based questionnaires

951

Web-Based Data Collection in China

and telephone interviews. Several conferences on Web-based research methods have been organised, which is an indication of the growing interest in this new medium. In 2000, the Chinese Academy of Social Sciences held a conference titled “Methodological and Application Issues Associated with Using the Internet to Conduct Survey Research,” while the Chinese Information Association held a conference titled “Research Methods and Practice of IT Marketing” (Ke, 2001a, 2001b). The most frequently discussed issues among Chinese scholars concern the potential advantages of using the Web to collect survey data as compared to traditional methods, the reliability and objectivity of this method, and the constraints involved in terms of the technical infrastructure and target populations. While most scholars notice the advantages in efficiency and low cost on the part of the researcher, they also note some factors that constrain the development of Web-based surveys in China. First, the technical infrastructure is still relatively underdeveloped outside the larger cities. Second, the cost of using the Internet is still nontrivial (while 31.2% of Internet users spend less than 50 RMB/month on Internet access, a further 62.7% spend between 50 and 200 RMB/month (CNNIC, 2005). Income levels vary considerably, with 28% of Internet users earning less than 500 RMB/ month and 46.4% earning between 500 and 2000 RMB/month (CNNIC, 2005). Internet access costs are thus likely to represent a significant fraction of net incomes. As a result, Internet users cluster around a particular population of which young and educated urban professionals and college students constitute the majority. Issues of reaching out to potential respondents, providing online incentives, and preventing multiple submissions have also gained attention. Less attention has been paid to the investigation of individuals’ privacy concerns and the trust relationship between the respondents and the Web medium. Zhang, Wang, and Chen (2001), in a comparison of the willingness of Chinese and U.S. online consumers to participate in Web-based surveys, observed that Chinese consumers tend

952

to be more willing than their U.S. counterparts to provide personal information. However, within the Chinese population, female respondents were less willing than their male counterparts to provide information. Moreover, while working professionals were more likely to provide information online simply out of goodwill, students needed to be lured with incentives. Despite the constraints facing Web-based survey research in China, it has become an important alternative to traditional survey methods. The most salient advantages it has over traditional survey methods may be the anonymity it provides to respondents and the confidentiality it inspires, as well as the control that it enables researchers to exert during the survey administration process. Some scholars point out that the Web-based survey is particularly suited to research into sensitive issues such as social problems and private behaviour (Sun & Cai, 2000; Xiang, 2001, 2002). They argue that because surveys on the Internet provide better guarantees for the protection of individual identities, people are more likely to express their true opinions on sensitive issues. Related to this, the responses should be more reliable since researchers have more control over the collection of data. For paper-based surveys, there is always the risk that the return of the questionnaire to the researchers may be disrupted, whether by postal delays or questionnaire loss by respondents. Using the Web to collect data enables the researcher to obtain the data directly from respondents, thus eliminating potential threats to the reliability of the responses, though it must be admitted that the technology itself is unlikely to be foolproof, given the potential for server crashes.

literature review summary While surveys are undeniably a popular research methodology, the vast majority of surveys conducted today are traditional, in the sense that they are paper based. In recent years, there has been a trend first to develop e-mail-based surveys,

Web-Based Data Collection in China

and more recently to use Web-based surveys. The potential that Web-based surveys offer the researcher is considerable, in terms of cost, time, and accuracy of data. However, there are concerns about the ability of potential respondents to access Web sites, and indeed about the complexity of those Web sites from a browser perspective. While some respondents users may prefer a more fancy and graphically attractive Web-based survey, that uses a variety of interaction methods such as drop down boxes, radio buttons, rank order responses, etc., other respondents may not have browsers or indeed connections capable of processing these Web-pages effectively. Incentives (vouchers, cash, etc.) are sometimes provided to survey respondents to motivate their participation, but this is much less easy to operationalise in the online world, raising concerns about how to motivate people to participate in Web-based surveys, particularly once the novelty effect has worn off. In the developing country context, Web-based surveys are fairly rare at the time of writing and there is no clear evidence of their universal applicability. This is not entirely surprising since until recently, very few people in developing countries have had sufficiently reliable Internet access to make Web-surveys a sensible proposition. However, this situation is changing slowly, particularly in professional groups of employees such as Doctors, Managers, Students, Teachers, Engineers, etc. This is certainly the case in China, where some 7.9% of the total population (103 million people) now have Internet access, including well over one million in the IT industry. The Web-based survey is the subject of considerable interest in China, with national conferences being devoted to it, as well as start-up companies being formed in response to an anticipated demand for online surveying. China is not without significant hurdles to the use of the Internet for research purposes, including notably the cost of access, and questions about the representativeness of any sample.

InstruMent develoPMent And reseArch oPerAtIonAlIsAtIon In order to assess the feasibility of conducting Web-based surveys in China, in this study we implemented a Web-based survey of the ethical values of IT professionals in China. Concerns have been raised about the extent to which potential survey respondents can access Internet based resources (Saxon, Garratt, Gilroy, & Cairns 2003). In China, this is certainly a valid concern, yet as we are interested in the ethical values of IT professionals, including engineers and managers, it does not seem unreasonable to expect that they, of all people, should have access to the Internet. The survey instrument was initially developed in English. It includes 20 substantive items (each is a different kind of ethical dilemma designed to be relevant to the IT profession), as well as eight demographic items and four open-ended text items designed to collect data about respondents’ attitudes towards Web-based surveys in general. Each of the twenty substantive items consists of the first half of a sentence and is associated with seven possible actions, each of which can complete the sentence. For example, item 18 and its associated actions reads as follows: “I believe that as an IT Professional, I should…(1) do whatever I like irrespective of other people; (2) cut corners in order to get a job done in a way that maximises my personal benefit; (3) do my best, but not worry if my work is imperfect; (4) fulfil the minimum requirements of a job; (5) promote good practice and high standards in my work; (6) help to develop new standards for professional work; (7) constructively challenge the fundamental values that the IT profession holds as important.” The original English version of the instrument was first translated into traditional Chinese2 (by two translators located in Hong Kong and Taiwan respectively) and then back-translated into English by a third translator in Hong Kong who was not otherwise associated with the project. All the

953

Web-Based Data Collection in China

translators engaged on this project were native Chinese, who regularly use both English and Chinese at work. The back-translation was compared with the original English version. Inconsistencies between the versions were discussed at length by the researchers and translators and the traditional Chinese version was modified in order to address ambiguities, such as the differences in the traditional Chinese used in Taiwan and Hong Kong. When agreement on the traditional Chinese version was achieved, it was translated into simplified Chinese by a fourth translator, a native of the PRC, who was familiar with both traditional and simplified Chinese, as well as English. This translator preferred to create the simplified Chinese version from the traditional Chinese version, while also referring back to the original English version so as to ensure consistency of meaning. The wording of the simplified Chinese version differs from the traditional Chinese version in a few minor respects (e.g., where the characters used in Hong Kong and Taiwan to represent certain English words are different from those used in the PRC). For example, the word computer is written with two characters (電腦) in traditional Chinese but with three characters (计算机) in simplified Chinese. The three language versions of the instrument were then implemented on a Web site located at the Department of Information Systems, City University of Hong Kong. Each version was preceded by a sample question, which illustrated how to complete the survey. Potential respondents who accessed the Web site were invited to read a short introduction to the project (in each of the three language versions) and then to select a language version to complete. Buttons were used to enact this choice, with the language clearly specified on the button. When the survey was submitted by a respondent, the data was captured in a database for subsequent analysis. As recommended by Duffy (2002), counters were used to track (a) the number

954

of introductory page hits, (b) the number of survey page hits, and (c) the number of surveys submitted. In addition, the date and time of each submission were recorded in the database. In order to identify an appropriate population of IT professionals who would have access to the Internet and thus the survey instrument, we employed the services of the China Centre for Information Industry Development (CCID). We paid CCID RMB0.20 (approx. US$0.025) per e-mail to contact 5,000 randomly selected IT professionals from the 1.2 million in their membership database. A comparison between the CCNIC (2005) statistics on general Internet user characteristics and the CCID (2004) members is made in Tables 1-6. This comparison clearly indicates that CCID members are better paid (Table 1) and educated (Table 2) than the population at large, though this is hardly surprising as they are predominantly professionals. For the same reason, there are fewer students in the CCID sample than the CNNIC survey (Table 3). The industries where CCID members work are broadly comparable with those represented in the broader population (Table 4). CCID indicate that approximately 90% of their members work directly in the IT field, with the remainder having a personal interest in the area. CCID members are typically older than the typical Internet user, with 51.7% of CNNIC survey respondents under 25 compared to 27.9% in the CCID database (Table 5). Finally, the CCID membership is much more male dominated than the overall Internet user population in China, but it should be remembered that IT jobs in China have traditionally been a male preserve (Table 6). This contact e-mail was sent directly from CCID (not from the researchers) and was written in Simplified Chinese. The text of the e-mail explained the nature of our study, the identity of the researchers, and indicated the URL where the survey instrument is located. Both the e-mail and the Web page indicated our willingness to provide feedback to any respondents who requested it.

Web-Based Data Collection in China

Table 1. Personal income of Internet users (%)

CNNIC (2005)

CCID (2004)

< 2000

80.6

40.4

2000-2999

10.7

3000-4999

5.8

5000>

2.9

Table 2. Educational profile of Internet users (%) CNNIC (2005)

CCID (2004)

College or below

39.3

27.1

27.7

Undergraduate

27.6

58.7

15.4

Masters Degree

2.7

12.1

16.5

Doctoral Degree or above

0.4

2.1

Table 3. Job title/position of Internet users (%)

CNNIC (2005)

CCID (2004)

Gov’t Officer

7.4

Senior Manager

4.8

Enterprise Manager

9.3

Dept Manager

10.3

Engineer

12.6

Project Manager

6.9

Teacher

7.0

Professional/Technician

32.8

Business/Service Worker

9.4

General Staff

16.2

Student

32.4

Student

18.0

Table 4. Industry where Internet users work (%)

Education & Scientific Research

CNNIC (2005)

CCID (2004)

13.9

14.8

Government Bodies & Public administration

11.9

11.0

Finance & Insurance

4.5

4.6

Manufacturing

14.6

12.9

IT / Computer / Internet / Telecoms

16.4

21.9

Consulting

1.2

1.7

Energy & Resources

4.9

5.6

Commerce & Trade

6.7

3.0

Others

25.9

23.5

Table 5. Age of Internet users (%)

CNNIC (2005)

CCID (2004)

60

1.1

2.8

955

Web-Based Data Collection in China

Table 6. Gender of Internet users (%)

CNNIC (2005)

CCID (2004)

Male

60.4

81.8

Female

39.6

18.2

results demographic data Of the 5,000 individuals to whom we e-mailed an invitation to participate, 1,717 visited the Web page where the instrument was located within 10 days and a further 152 did so during the following 12 days, a rate of 37.4%. Of these 1,869 visitors, 1,617 (87%) proceeded to one of the language versions of the instrument, 1,611 (99%) of these choosing a Simplified Chinese version. However, of these 1,617, only 337 (20.8%) actually submitted the survey. Of these 337 submissions, 15 were entirely empty of data (i.e., the submit button was clicked without any data being entered), 5 were duplicate submissions and a further 27 were incomplete. This left 290 valid responses, an overall response rate

of 5.8%. Figure 1 indicates how many submissions were received over the course of the six days following the distribution of the e-mail invitation on September 25th, 2003. Of the 290 responses, 155 (53%) were submitted on September 26th. In the first two weeks of October, five or fewer responses were submitted per day. Demographically, the data indicates that the majority of respondents are young males (Table 7), with less than 10 years of working experience (Table 8) and at least a Bachelor’s Degree (Table 9), the majority of whom work in Computing and IT Services (45%) or Communications and Media (17%) (Table 10). These statistics are consistent with the profile of CCID’s members (CCID, 2004). A total of 37 people who submitted the survey (12.8%) requested feedback from the researchers by providing their e-mail addresses. Where the job titles of the respondents are concerned, a huge variety is evident. Some 88 job titles are identified by respondents from the more technical programmers and network managers through sales and marketing personnel, clerical staff and presidents of organisations. Indeed, 97 (33%) of our respondents identify themselves as being of managerial level or above (including IT and technical managers), while 42 (14%) are Engineers and a further

Figure 1. Response rates during the first six days 180 160 140 120 100 80 60 40 20 0 25/09/2003

956

26/09/2003

27/09/2003

28/09/2003

29/09/2003

30/09/2003

Web-Based Data Collection in China

59 (20%) occupy other positions that are often associated with the IT profession (e.g., analysts, programmers, network, and security specialists). Table 11 indicates the number of responses for the most commonly indicated job types.

Qualitative data In addition to the demographic characteristics of the respondents presented earlier, we also asked the respondents for their thoughts on the viability of using the Web to collect data. The specific questions we asked were:

• • • •

What motivated you to participate in this Web-based survey? How do you feel about participating in this Web-based survey? Would you encourage your friends or colleagues to participate in a Web-based survey in the future? Why or why not? How could we make this survey more attractive to potential respondents such as yourself?

Answers to these questions varied considerably and defy easy categorisation. Virtually all of the answers were submitted in simplified Chinese. We have translated or paraphrased the responses here. Where motivation is concerned, the most frequently identified reasons include “interest,” “curiosity,” “a desire to know the result,” and “a sense of professional IT responsibility to participate.” Other responses include “seeking to learn more about my own work values,” “the opportunity to offer an opinion,” and also “I feel like it” or “I want to help.” The vast majority of responses here are positive, some touchingly so, for example “I have an affection and trust for CCIDnet” and “I care for, love and pay attention to the development of this industry. I am even more concerned about the psychological condition of people.”

Where the feelings of respondents about participating in this survey are concerned, a similar variety of responses is evident, though here there is a greater contrast of positive and negative comments. Thus, some respondents feel that there are too many questions, others too few, others that the number is just right. Some commented that the design is nice and clear, others suggest that the design is poor with questions that are strange or obscure. A few respondents noted that the survey includes questions that are not only realistic but that also challenge one’s understanding and practice of work-related values. Others consider the survey to be either troublesome or a complete waste of time. The third qualitative question asks whether respondents would encourage their friends or colleagues to participate in a Web-based survey in the future. This question serves as an independent measure of the respondents’ attitude towards Webbased surveys in general. Of the 207 people who answered this question, 122 (59%) of responses are positive, indicating that they would encourage their friends/colleagues to participate, 49 (24%) are negative and 36 (17%) are undecided. Although there is a self-selection bias at play in answering this question — those who voluntarily participated in this survey are more likely to support survey research as respondents — we are still pleased to see that over half of the respondents may encourage their friends or colleagues to participate in a Web-based survey in the future. For those who responded positively to this question, many used the words “meaningful,” “valuable,” or “inspiring” in their answers. Specifically, we note some factors that may be of importance to our understanding of the IT professionals. First, the need for mutual understanding and communication is salient in the answers. One respondent emphasized the importance of communication: “Nowadays, communications between person and person, corporation and corporation, industry and industry, and country and country are far

957

Web-Based Data Collection in China

Table 7. Age and gender of respondents (N)

Table 8. Years of working experience of respondents (N)

Below 30 years

197

Male

230

0 – 10 years

249

30-50 years

82

Female

60

11 – 20 years

32

Over 50 years

11

21+ years

9

Table 9. Education level of respondents (N)

Table 10. Industry sector where respondents

work Secondary School / High School

29

Diploma

3

Bachelor’s Degree

197

Master’s Degree

46

PhD

9

Other

6

Communications and Media

50

Health Care

4

Computing and IT Services

130

Logistics

2

Consumer Sector

6

Manufacturing

23

Education

15

Telecommunications

14

Engineering

15

Travel / Transportation

5

Financial Services / Insurance

7

Utilities (Electricity, Gas, Water)

2

Government

9

Other

8

Table 11. Most frequently indicated job titles of respondents CEO/President

7

CIO/CTO/Vice-President

18

Managers and Directors

72

Engineers

42

Technician & Programmer

11

Other IT related staff

59

more important than productivity improvement.” An enthusiasm towards participation is also very explicit in some responses. Through participating in surveys, it is hoped that proper standards can be established for the IT industry, better solutions for social problems can be identified, and social progress may be attained. In sum, we note a personal attachment to the IT profession and a sense of belonging to the IT community. For those who responded negatively to this question, we found that in most cases, this refusal was not targeted at the questionnaire itself, but was rather an expression of an emphasis on individual free will: for instance, “I would do whatever I like, I don’t want to influence others.” There was also the

958

indication that it took too much time to complete the questionnaire. Those who are indifferent or unsure about whether they would encourage others to participate in surveys mentioned that it depends on whether the survey is relevant to their profession or whether the topic is interesting. Respondents also provide useful suggestions to our last question. We coded the answers and classified them based on content, style, format, and action. More than 50 respondents suggested that interesting, meaningful topics can attract people to participate in the survey. They said that they welcome questionnaires that have rich, deep, and meaningful content which can make them think deeply. They also emphasized that the content

Web-Based Data Collection in China

should more closely reflect the real life. A few respondents raised questions about the style of the questionnaire, pointing out that the questions should be simpler, more direct, and concrete. A similar number of respondents suggested revisions to the format of the questionnaire and the design of the Web page. A beautiful, visually impressive, and easy-to-operate Web page may attract more people to respond. As expected, a number of respondents suggested that some kind of incentive (whether monetary or “in kind”) may help improve the response rate. Among these actions, offering gifts, cooperating with the media to increase publicity, and providing the results to respondents were regarded as crucial.

dIscussIon This objective of this research project involved assessing the feasibility of using the Web to collect data in China. We were heartened to see that over 37% of the 5,000 people to whom invitational e-mails were sent were sufficiently motivated at least to click on the link in the e-mail message and visit the Web page where the survey instrument was introduced. We are unable to assess how many of the 5000 initial e-mail addresses were invalid as the invitation e-mail was sent by CCID, who did not report on e-mailed that bounced back as undeliverable. Nevertheless, CCID informed us that if an account could not receive an e-mail on three consecutive occasions, it would be removed from their database. Of these 1,869 people, the vast majority (87%) appear to have been further motivated to click on a button taking them to the survey instrument itself. However, a much smaller number, only 337, actually submitted the survey and when empty, duplicate or incomplete responses are eliminated, only 290 usable responses remain — an overall response rate of 5.8% of the original 5,000 invited participants. Similar drop-out rates were experienced by Tingling et al. (2003), with more than 60% of those who started a Web-based

survey failing to complete it. The data cleaning that proved necessary as we analysed the dataset was not entirely unexpected, despite the suggestion that it might be unnecessary with digitally entered data (Lazar & Price, 1999). Nevertheless, it proved relatively easy to accomplish since the data can be sorted in a spreadsheet on any field and so missing or duplicate responses were quickly identified. The demographic data indicates a predominantly young, male and well educated population, most of whom work in the IT industry. This appears to confirm the validity of our selection of CCID as a suitable intermediary for contacting our target population — people who either work in the IT industry or can otherwise be considered to be IT professionals. Clearly, such people do have ready access to the Internet and therefore are able to access survey instruments such as the one discussed in this article. The qualitative comments received from over 75% of respondents on their perceptions towards the survey are of great interest because they provide a good indication as to how we could make surveys such as this one more attractive in the future. Where motivational issues are concerned, many respondents indicated either a personal or a professional interest in the survey and in the questions that it asked them. Several indicated that they found it meaningful to participate as it helped them to reflect on their own work practices. It also appears that respect either for IT researchers or for CCID played a significant motivational role: in this sense, we are borrowing respect from CCID and attempting to use it so as to persuade potential respondents to participate in the survey. In the main, this seems to have been a successful strategy, if only because 37% of those invited actually visited the survey’s introductory Web page. Nevertheless, it is necessary to distinguish between a survey of a relatively homogeneous population, such as IT professionals, and a general survey of consumers, for instance, who may be far more heterogeneous in character. We suggest that identifying a motivational focus that can be used

959

Web-Based Data Collection in China

to leverage participation in a survey may be critical to achieving a high response rate. The discrepancy between the number of introductory page visitors, the number of survey page visitors and the number of survey submitters is perplexing. There is a very strong correlation between the first two of these: 1,689 people visited the main instrument page and 1,617 of them visited a survey instrument. This suggests that these 1,617 were sufficiently motivated by both the e-mail invitation and the short introductory text on the introductory page at least to attempt to reach a survey. However, just over 20% of these motivated individuals actually submitted the survey. Several possible reasons can be identified, all of which can be tested in future research. Firstly, as many respondents noted, the survey may well be too long, with 20 substantive items and 12 additional demographic or textual items. Associated with the issue of physical length is the issue of file size: the Simplified Chinese version of the instrument is approximately 300kb. This is a large file to download, especially for respondents with limited bandwidth. It may well be that many potential respondents either were unable to download the entire survey or gave up waiting for it to download. Apart from the amount of time needed either to download or to complete the survey, potential respondents may have experienced difficulties understanding the questions. The instrument was developed in English and was then translated into Chinese (both Traditional and Simplified). We took considerable care with the translation process, ensuring that native speakers/writers of Traditional Chinese were engaged on the Traditional Chinese version and similarly that a native speaker/writer of Simplified Chinese was engaged in producing the Simplified Chinese version. All translators were instructed to assess their translations for readability bearing in mind the audience for whom the instrument was being developed. A Traditional Chinese version was developed both so as to offer choice to respondents in the PRC and because we are separately collecting data in Hong

960

Kong and Taiwan with the same instrument. The translators also compared their Chinese versions with the English version and engaged in extensive discussions with the author of the English version of the instrument. Pilot testing of the Traditional Chinese and English versions of the instrument was undertaken before the survey reported in this study was conducted. This pilot test did not reveal any significant problems of comprehension. Indeed, in the spirit of the work of Michael Bond and his associates (Chinese Culture Connection, 1987), the separate development of an instrument by Chinese scholars based on Chinese values and concepts would constitute an effective line of inquiry. This is supported by the words of one respondent who commented: “Different people from different places have different values. Your survey uses a view point from Hong Kong to look at the IT professionals. It relates more to the moral standard, but the mainland IT professionals are not necessarily the same. They have other concerns.” We asked respondents if they would encourage their friends/colleagues to participate in online surveys in the future. A little over half of all responses were in the affirmative, but many of the negative responses involved a dislike for causing trouble or disturbance to others. This is an interesting finding that deserves further attention, perhaps in the context of research into individual personal privacy. Many of the positive responses were very enthusiastic, respondents apparently gleaning substantial enjoyment from their participation. Finally, we asked how the survey could be made more attractive. Some of the responses here focused on the physical appearance of the survey, with suggestions that it be made more attractive or easy to read, while others focused on issues more closely associated with incentives: one respondent for instance suggested that we offer a free notebook computer! It appears that the issue of topic complexity is also important, though responses here are bipolar, with some preferring a simpler style of question, others preferring more complex questions that need deep thinking.

Web-Based Data Collection in China

Future reseArch, lIMItAtIons, And conclusIon In this study, we have explored how a Web-based survey instrument can be used to collect data in China. A high initial response rate (37%) was achieved, though only 5.8% of respondents followed through to submit the survey. We suggest that reasons associated with survey length, question complexity and comprehensibility, and file size may be associated with this low submission rate, fruitful domains for future research. Nevertheless, in this study we have demonstrated that cooperation with a professional society in a developing country such as China can be a viable method of identifying potential respondents and so gathering data. We expect that a similar approach could be used to contact professionals in other developing countries, on the assumption that professional societies exist and are willing to participate in this kind of research. It also appears that professionals in China are willing at least to contemplate completing a survey online, especially if they feel that the survey questions are relevant to their life and work, meaningful, interesting and thought provoking, though there are also suggestions that the questions need to be simple and easy to understand. This willingness is significant in the light of earlier studies suggesting that people in China are risk averse and distrustful of non-kin members (Cheung & Chow, 1999; Fuller & Peterson, 1992; Hofstede, 1980). There are several avenues for future research that have been opened up by this study. Firstly, we suggest that it may be valuable to compare survey length and complexity. This can be done by assessing responses to survey instruments of varying lengths and degrees of complexity. Findings from such research would be valuable to survey research designers, though our own inclination is to provide respondents with a choice, given the fact that some will prefer to provide an immediate reaction to a simple question and others will prefer to think more carefully about their response to a more complex

question. Where the “invitation to participate” process is concerned, we suggest that while the efficacy of paying a professional organisation to contact its members directly through e-mail can be tested further, other methods for inviting participation in Web-based surveys should be considered, such as the use of banner or pop-up advertisements on Web pages (Ngini et al., 2002), bearing in mind the implications that such methods have for accurately calculating the response rate. The population surveyed in this study was intentionally restricted to IT professionals in China. This limits the generalisability of any of the findings to other populations in other countries, though from a motivational perspective, we anticipate that similar response rates could be achieved from other professional groups in China assuming that they have a similar level of Internet access, and indeed from professional groups in other developing countries, if the same assumption holds true. For instance, Gandsas et al. (2001) received responses to their Web-survey from general surgeons located in a number of developing countries including Brazil, Egypt, India, Saudi Arabia, Thailand and Venezuela. Given that the number of people in China who have Internet access is increasing rapidly, so the population of potential respondents for future Web-based survey research is also growing. In summary, and by way of instructive guidance, we suggest that researchers interested in applying the Web-based survey method in developing countries, including China, should consider the following issues: • Identify a motivational focus which can both encourage participants to trust the intentions of the researchers and leverage consequent participation in the survey. • This can be more easily achieved on the Web if the motivational focus can be in some way related to the specific nature of the target population, the manner in which participation is invited or the incentives that can be offered.

961

Web-Based Data Collection in China

•

• • • •

• •

•

• •

Information on the researchers can be offered (e.g., a link to their Web sites and their e-mail address(es)). Ensure that the amount of time needed to download the instrument (over a low bandwidth line), complete and submit it is reasonable. Provide the survey in as many language versions as needed. Pay careful attention to issues of translation and comprehension. Provide instructions on how to complete the survey. A worked example is useful, particularly on the Web where survey respondents may not be familiar with the medium. Offer incentives that are appropriate to the population — and ensure that you deliver! Incentives may involve gifts, prizes, vouchers, lotteries, donations to charities, links to resources that respondents might find useful, the offer of feedback on the survey results. Count how many people participate in the different stages of the data collection process. Include a time/date stamp on each submission. This is easy to automate on the Web and provides information that can be used to address questions of non- (or late) response bias. Ensure that data is submitted to a database controlled by the researchers. Expect that some data cleaning will be necessary due to invalid submissions.

Overall, we recommend the Web-based survey research method to researchers interested to explore new avenues of data collection in China, as well as in other developing countries. We believe that this research method has the potential to revolutionise the way we undertake surveys in China: target populations can be identified and contacted with ease; participants can choose a language version dynamically; data can be collected quickly; data cleaning is necessary, but simple to undertake; feedback can easily be provided to participants.

962

AcKnowledgMent The work described in this article was partially supported by a grant from City University of Hong Kong (Project No. SRG7001266).

reFerences Ahmed, S. S. (2002). Managing change to enhance Web-based services in the Arabian Gulf libraries. Online Information Review, 26(4), 265-270. Al-Saggaf, Y. (2004). The effect of online community on offline community in Saudi Arabia. Electronic Journal of Information Systems in Developing Countries, 16(2), 1-16. Birnbaum, M. (2000). Psychological experiments on the Internet. New York: Academic Press. Bowker, D. K., & Dillman, D. A. (2000). An experimental evaluation of left and right oriented screens for Web questionnaires. Paper presented at the Annual Meeting of the American Association for Public Opinion Research, Portland, OR, 977-982. Retrieved from http://www.amstat.org/sections/ srms/Proceedings/papers/2000_167.pdf Brown, I., & Licker, P. (2003). Exploring differences in Internet adoption and usage between historically advantaged and disadvantaged groups in South Africa. Journal of Global Information Technology Management, 6(4), 6-26. Buchanan, T., & Smith, J. (1999). Using the Internet for psychological research: Personality testing on the world wide Web. British Journal of Psychology, 90(1), 125-144. CCID. (2003). Significant data of CCIDnet’s email account users in 2003. Beijing: CCID. Cheung, G. (2002, June 28). Spycase scholar fires parting shot. South China Morning Post, p. 2.

Web-Based Data Collection in China

Cheung, G. W., & Chow, I. H. S. (1999). Subcultures in greater China: A comparison of managerial values in the People’s Republic of China, Hong Kong, and Taiwan. Asia Pacific Journal of Management, 16(3), 369-387. Chinese Culture Connection. (1987). Chinese values and the search for culture-free dimensions of culture. Journal of Cross-Cultural Psychology, 18(2), 143-164. CNNIC. (2005). 16th statistical survey report on the Internet development in China. Retrieved from http://www.cnnic.net.cn/download/2005/2005072601.pdf Cobanoglu, C., Warde, B., & Moreo, P. J. (2001). A comparison of mail, fax, and Web-based survey methods. International Journal of Market Research, 43(4), 441-452. Couper, M. P. (2000). Web surveys: A review of issues and approaches. Public Opinion Quarterly, 64(4), 464-494. Deng, S., & Feng, X. T. (2000). Questionnaire survey research: Development and analysis in the second ten years. Journal of Hua Zhong University of Science and Technology, 14(3), 49-54. Dennis, R. A., & Gambhir, S. S. (2000). InternetQuestion and Answer (iQ&A): A Web-based survey technology. IEEE Transactions on Information Technology in Biomedicine, 4(2), 116-125. Deutskens, E., De Ruyterm, K., Wetzels, M., & Oosterveld, P. (2004). Response rate and response quality of Internet-based surveys: An experimental study. Marketing Letters, 15(1), 21-36. Dillman, D. A. (2000). Mail and Internet surveys: The tailored design method. New York: Wiley. Dillman, D. A. (2002). Navigating the rapids of change: Some observations on survey methodology in the early 21st century. Public Opinion Quarterly, 66(3), 473-494.

Dillman, D. A., & Bowker, D. K. (2001). The Web questionnaire challenge to survey methodologists. In U. D. Reips, & M. Bosnjak (Eds.), Dimensions of Internet science (pp. 159-177). Lengerich, Germany: Pabst Science Publishers. Retrieved from http://survey.sesrc.wsu.edu/dillman/zuma_paper_dillman_bowker.pdf Ding, Y. M. (2002). Beijing U issues first ever rules. Science, 296(5567), 448-449. Duffy, M. E. (2002). Methodological issues in Web-based research. Journal of Nursing Scholarship, 34(1), 83-88. Fuller, E., & Peterson, R. B. (1992). China and Taiwan: Common culture but divergent economic success. In S. B. Prasad, & R. N. Peterson (Eds.), Advances in international comparative management, Volume 7 (pp. 185-201). Greenwich, CT: JAI Press. Gandsas, A., Draper, K., Chekan, E., GarciaOria, M., McMahon, R. L., Clary, E. M., Monnig, R., & Eubanks, S. (2001). Laparoscopy and the Internet: A surgeon survey. Surgical Endoscopy, 15(9), 1044-1048. Gao, Z. M. (2002). Web-based surveys — A new way of conducting surveys. Jiang Su Statistics, Institutions, Methods, Practices, 5, 31-32. Grandon, E., & Pearson, J. M. (2003). Strategic value and adoption of electronic commerce: An empirical study of Chilean small and medium businesses. Journal of Global Information Technology Management, 6(3), 22-43. Granello, D. H., & Wheaton, J. E. (2004). Online data collection: Strategies for research. Journal of Counselling and Development, 82(4), 387-393. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage.

963

Web-Based Data Collection in China

Huang, B. Y. (2001). The application of Internet surveys in marketing. Statistical Education, (1), 10-11.

Lin, H., & Yin, E. S. (2001). Study of the online survey technique and methodologies based on the Internet. Statistical Research, (8), 58-61.

Huang, L. F. J., & Snell, R. S. (2003). Turnaround, corruption, and mediocrity: Leadership and governance in three state owned enterprises in Mainland China. Journal of Business Ethics, 43(1), 111-124.

Manion, M. (1994). Survey research in the study of contemporary China: Learning from local samples. China Quarterly, 139(3), 741-765.

Jiang, T. T., & Ding, N. (2003). Internet survey in its ascendant. Information Science, 21(4), 438440, 448. Kang, T. X. (2001). Analysis of the feasibility of Web-based surveys. Statistics Education, (5), 27-28. Ke, H. X. (2001a). A review of research methods in Web-based surveys (I). Modern Communication Journal of Beijing Broadcasting Institute, (4), 80-84. Ke, H. X. (2001b). A review of research methods in Web-based surveys (II). Modern Communication Journal of Beijing Broadcasting Institute, (5), 107-116. Khalfan, A., & Gough, T. G. (2002). Comparative analysis between the public and private sectors on the IS/IT outsourcing practices in a developing country: A field study. Logistics Information Management, 15(3), 212-222. Lazar, J., & Preece, J. (1999). Designing and implementing Web-based surveys. The Journal of Computer Information Systems, 39(4), 63-67. Lertwongsatien, C., & Wongpinunwatana, N. (2003). E-commerce adoption in Thailand: An empirical study of small and medium enterprises (SMEs). Journal of Global Information Technology Management, 6(3), 67-83. Li, L. M. (2000). On some basic principles in designing surveys in marketing research. Statistics and Information Tribune, 15(38), 45-47, 59.

964

Mbarika, V. W., Meso, P. N., & Musa, P. F. (2004). A disconnect in stakeholders’ perceptions from emerging realities of teledensity growth in Africa’s least developed countries. Journal of Global Information Management, 12(3), 1-20. Mi, Z. C. (2001). On the production of Internet survey questionnaires and data feedback. Journal of Shanxi Finance and Economics University, 23(1), 99-100. Morrissey, B. (2003). ISPs block 17 percent of legit e-mail. Retrieved from http://cyberatlas.internet.com/markets/advertising/article/0,,5941_2248501,00.html Mosse, E., & Nielsen, P. (2004). Communication practices as functions, rituals, and symbols: Challenges for computerization of paper-based information systems. Electronic Journal of Information Systems in Developing Countries, 18(3), 1-17. Ngini, C. U., Furnell, S. M., & Ghita, B. V. (2002). Assessing the global accessibility of the Internet. Internet Research, 12(4), 329-338. Pimchangthong, D., Plaisent, M., & Bernard, P. (2003). Key issues in information systems management: A comparative study of academics and practitioners in Thailand. Journal of Global Information Technology Management, 6(4), 27-44. Roy, A., Walters, P. G. P., & Luk, S. T. K. (2001). Chinese puzzles and paradoxes: Conducting business research in China. Journal of Business Research, 52(2), 203-210.

Web-Based Data Collection in China

Saxon, D., Garratt, D., Gilroy, P., & Cairns, C. (2003). Collecting data in the information age: Exploring Web-based survey methods in educational research. Research in Education, 69, 51-66. Shenkar, O., & Von Glinow, M. A. (1994). Paradoxes of organizational theory and research: Using the case of China to illustrate national contingency. Management Science, 40(1), 56-71. Steidlmeier, P. (1999). Gift giving, bribery, and corruption: Ethical management of business relationships in China. Journal of Business Ethics, 20(2), 121-132. Su, C. T. (2001). Entering guanxi: A business ethical dilemma in Mainland China. Journal of Business Ethics, 33(3), 199-210. Su, Y. Z. (2000). The strategies of statistics in an era of Internet economics. Statistics Education, (6), 30-31. Sun, L., & Cai, L. (2000). New methods for conducting surveys on sensitive issues — The Web-based survey. Statistics and Information Tribune, 15(2), 43-44. Tang, Y. (2002). The advantages and disadvantages of undertaking Web-based surveys and the solutions. Information Magazine, 3, 29-31. Thompson, L. F., Surface, E. A., Martin, D. L., & Sanders, M. G. (2003). From paper to pixels: Moving personnel surveys to the Web. Personnel Psychology, 56(1), 197-227.

Wresch, W. (2003). Initial e-commerce efforts in nine least developed countries: A review of national infrastructure, business approaches, and product selection. Journal of Global Information Management, 11(2), 67-78. Xiang, R. M. (2001). Some tentative thoughts on the Web-based survey research. Statistical Education, (6), 14-15. Xiang, R. M. (2002). The revolution and comparison of survey methods. Statistics and Information Tribune, 17(1), 37-38, 45. Yu, Q. S., Zheng, J., & Zhang, Y. R. (2000). Research and development of the survey questionnaire system based on intranet/Internet. Microcomputer Applications, 16(12), 14, 15-17. Zhang, H. X. (2003). The analysis of the quality of information obtained from Web surveys. Shan Xi Forecasting and Television Journal, 34(1), 32-33. Zhang, Y., Wang, C. L., & Chen, J. Q. (2001). Chinese online consumers’ responses to Webbased data collection efforts: A comparison with American online consumers. Journal of Database Marketing, 8(4), 360-369.

endnotes 1

Tingling, P., Parent, M., & Wade, M. (2003). Extending the capabilities of Internet-based Research: Lessons from the field. Internet Research, 13(3), 223-235. Wang, J., & Zhang, Y. Y. (2001). Characteristics, problems, and solutions of Internet research in China. Journal of Ji Nan University, (2), 49-52.

2

3

The countries include: South Africa, Namibia, Zambia, Zimbabwe, Uganda, Ethiopia, Eritrea, Togo, Benin, Nigeria, Ghana, The Gambia, Cameroon, Tanzania, Kenya, Egypt, Algeria, Morocco, Libya, Mauritania, Argentina, Brazil, Chile, Paraguay, Venezuela, Colombia, Panama, Nicaragua, Ecuador, Peru, India, China, Nepal, Malaysia, The Philippines, Thailand, Indonesia, Bangladesh, Pakistan, etc. Traditional Chinese is used as the written language in Hong Kong and Taiwan, whereas Simplified Chinese is used in China. Source: http://www.internetworld stats.com

This work was previously published in Journal of Global Information Management, Vol. 14, Issue 3, edited by F. Tan, pp. 3958, copyright 2006 by IGI Publishing (an imprint of IGI Global).

965

Section IV

Utilization and Application

This section introduces and discusses the ways in which outsourcing has been used to revolutionize the modern face of business and proposes new ways in which services, goods, and systems can be outsourced. These particular selections highlight, among other topics, sourcing decisions in small companies, outsourcing in the healthcare industry, and virtual environments. Contributions included in this section provide excellent coverage of today’s global environment and insight into how the study and implementation of outsourcing projects impacts the fabric of our present-day global village.

967

Chapter 4.1

Real-Life Case Studies of Offshore Outsourced IS Projects: Analysis of Issues and Socio-Economic Paradigms Subrata Chakrabarty Texas A&M University, USA

AbstrAct The primary purpose of this chapter is to present descriptive real-life case studies of different offshore-outsourced custom software development projects (that the author has actually worked for). The first case study discusses the practical issues in two fixed-term/fixed-price custom software development projects that were offshoreoutsourced. The second case study discusses the practical issues in the offshore-outsourcing of a time and materials custom software development project to multiple vendors, which involved simultaneous insourcing, onshore-outsourcing and offshore-outsourcing. Furthermore, the observations and issues from these case studies are analyzed by comparing them with the paradigms of socio-economic theories that have been adopted extensively in the academic IS outsourcing literature (namely the agency theory, transaction

cost theory, innovation diffusion theory, social exchange theory, and power-politics theory).

IntroductIon Companies worldwide are under increasing pressure to cut costs. The price of associated software is often the deciding factor on whether to upgrade to newer and better alternatives. Every company wants to use the best software — not just to beat the competition, but sometimes to remain in the competition. The lure of low costs and the desire for high software quality has forced companies in advanced economies to look across the horizon. Case study-1 discusses the issues in two fixedterm/fixed-price custom software development projects that were offshore-outsourced. Case study-2 discusses the issues in the offshore-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Real-Life Case Studies of Offshore Outsourced IS Projects

outsourcing of a time and materials custom software development project to multiple vendors, which involved simultaneous insourcing, onshore-outsourcing and offshore-outsourcing. The two case studies explain two very different approaches to offshore outsourcing of custom software development, and attempt to be of practical significance to managers and software professionals by analyzing the issues involved. The case studies provide insights into the practical and real life strategies adopted by managers to solve issues and problems in offshore-outsourcing and hence will be of value for the readers. The observations and issues from these case studies are further analyzed by adequately comparing them with the paradigms of socio-economic theories that have been adopted extensively in the literature to study IS outsourcing. To achieve this objective, extensive literature review has been provided both in the introductory sections of this chapter and also in the later sections where the case-studies are related to the theories and paradigms. Hence, an earnest attempt has been made by the author to relate the practical real-life experiences of working in offshore-outsourced projects to the paradigms in the academic literature. This chapter can also be used for instructional purposes for teaching cases in offshore-outsourcing of custom software development projects. It is assumed that the reader has sufficient knowledge about the fundamental concepts of insourcing, outsourcing and offshoring, and hence before we review the literature for socio economic theories and before we analyze the case studies, we proceed to only briefly describe the reasons behind the growth in offshoring of IS work, and also the primary factors that influence the choice of whether to insource or outsource.

Our assessment is that growth will continue in sourcing IT work offshore for a number of years to come. While the growth rate slowed somewhat in 2001-2002, corporate pressures to reduce costs remained strong. However, putting a figure on the global offshore picture is difficult. Adventis, a research firm, estimates that U.S. firms will spend some $7 billion on third-party offshore IT work in 2002. Narrower figures give more guidance: Forrester, a U.S. research firm, found that 44 percent of U.S. firms with more than $1 billion in revenues performed IT activities offshore in 2001, and Forrester estimates that percentage will grow to 67 percent by 2003 (for comparison purposes, a Fortune 1000 firm has $1.2 billion in revenue). Note, though, that these estimates do not include offshore sourcing to wholly owned facilities. Furthermore, offshore sourcing is but a small slice of the global market in IT outsourcing (both domestic and offshore), which is estimated to be more than $100 billion (and again, this figure does not include insourcing).

discovering new lands: the Move to offshore

1.

Overall there is a bright outlook for offshore sourcing of IS functions. Carmel and Agarwal (2002, p. 73), note the following: 968

In the same vein, Dibbern, Goles, Hirschheim and Jayatilaka (2004, p. 90) note the following: Even the popular press (Business Week, 2003; USA Today, 2003) have reported on this issue noting that as much as 50% of IT jobs will be offshored to India and other off- and near-shore destinations in the next 10 years. Such change it is argued is nothing more than the natural progression of first moving blue-collar work (manufacturing, textile production, etc.) overseas followed by white-collar work. Offshore sourcing of IS will continue to grow for the following reasons: Modular design of certain IS tasks: Modular design of certain IS tasks (e.g., software production) aid the offshore sourcing phenomena due to reduced transactions costs (cost of coordinating work activities

Real-Life Case Studies of Offshore Outsourced IS Projects

2.

3.

4.

5.

6.

between two or more parties) and because synchronization, communication, travel, supervision, feedback, and enforcing of contracts are easier (Carmel & Agarwal, 2002, p. 66). Modern technologies: The latest technologies allow management and coordination of work across geographic distances (Carmel & Agarwal, 2002, p. 66). The Internet has greatly helped the phenomenon of IS sourcing, by allowing interested parties to easily share information. Communication technologies such as emailing, teleconferencing, videoconferencing and instant-messaging allows better coordination in spite of the geographic distances. Technical, managerial and quality capabilities: The technical and managerial capabilities of both offshore vendors and offshore subsidiaries of onshore firms have improved (Carmel & Agarwal, 2002, p. 66). For example, India is reported to have over 150 software development and maintenance firms that have attained the Software Engineering Institute’s ‘Capability Maturity Model’ (SEI CMM) level 4 or level 5 (Dibbern et al., 2004, p. 90). High cost savings: Lower cost of offshore outsourcing in comparison to domestic outsourcing (primarily due to lower salary levels of offshore personnel) is a big driver behind offshore outsourcing (Carmel & Agarwal, 2002; Sobol & Apte, 1995; Apte & Mason, 1995, p. 1252). Skilled labor pool: There is sizable supply of qualified labor in many offshore destinations like India (Carmel & Agarwal, 2002; Apte & Mason, 1995, p. 1252). Scalability: The sizable supply of qualified low-cost personnel allows offshore vendors to have a certain number of personnel in the “waiting mode”, that is, waiting to be assigned to projects, and are used to quickly ramp-up projects when the need arises. Hav-

7.

8.

ing a number of personnel in the “waiting mode” for being assigned to projects is also known as “bench strength,” and allows the vendor to respond to client requirements in a very short cycle. Fastest time to market by working round the clock: Potentially all 24 hours of the day can be devoted to any task, by globally distributing the work across multiple time zones. This for example can lead to a faster cycle time for software production (Apte & Mason, 1995, p. 1252), allow continuous monitoring of critical IS functions and infrastructure, and allow 24x7 operations (needed for customer service, etc.). Entry to large markets with high growth potential: Many of the favorite locations for offshore sourcing like China and India are also large and growing markets. It might be strategically important to establish an early presence in such developing countries which have a higher growth potential than the relatively mature developed countries (Apte & Mason, 1995, p. 1252).

However there are some concerns about offshore sourcing which include problems of communication and coordination, cultural differences, lack of trust, difficulties in arranging visas/work-permits, offshore-unit’s lack of domain knowledge, lack of control over quality and schedule, possible violation of intellectual property rights, unclear government attitude towards cross border data flow and trade-in services, inadequate infrastructure in the vendor’s home country, and possibility of an unstable economic, political, or social environment (Carmel & Agarwal, 2002, p. 68; Sobol & Apte, 1995, p. 271; Apte & Mason, 1995, pp. 1252-1253).

the choice between Insourcing and outsourcing Costs (as indicated by relative efficiency in carrying out IS activities) and strategic importance 969

Real-Life Case Studies of Offshore Outsourced IS Projects

have been the primary drivers behind the decision on whether to insource from an internal IS department or to outsource to a vendor. The strategic importance and the relative efficiency in carrying out an IS activity in-house determines the choice between insourcing and outsourcing (Apte & Mason, 1995, p. 1258; Dibbern et. al., 2004, p. 33):

•

•

•

•

Insourcing is the best option when both the strategic importance and the relative efficiency in carrying out the IS activity in-house are high. Outsourcing should be preferred when both the strategic importance and the relative efficiency in carrying out the IS activity in-house are low. The option would be to either build a strategic partnership or to invest in acquiring the necessary capabilities, when the strategic importance is high but the relative efficiency is low. The establishment of a profit center (subsidiary) to offer IS functions in the marketplace should be considered when there is high relative internal efficiency.

Figure 1. Agency theory: Principal agent relationship

970

the socio-economic theories Since this book deals with the socio-economic perspective, the economic theories and social/ organizational theories and the relevant literature will be later used to analyze the case studies. We briefly describe the economic theories such as agency theory and transaction cost theory and also the social/organizational theories like innovation diffusion theory, exchange theory, and power-politics theory that have been applied in IS outsourcing literature (Dibbern et al., 2004, pp. 99-102). The adoption of these theories in the relevant IS outsourcing literature, and their linkage with the case studies to be presented, will be adequately dealt with in a later section that comparatively analyzes the practical case-studies with the academic paradigms in literature.

Agency Theory The agency theory or the theory of ownership structure considers the firm to be a complex process in which the divergent interests of individuals are brought into equilibrium within a legal framework of contractual relations (Jensen & Meckling, 1976, p. 311). This is illustrated in Figure 1.

Real-Life Case Studies of Offshore Outsourced IS Projects

Jensen and Meckling (1976, p. 308) define an agency relationship as: “a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent,” and have further introduced agency costs as the sum of monitoring costs, bonding costs and residual loss costs incurred by the principal. It is assumed that there is always divergence and conflict of interests between the principal and the agent, which can be limited by the principal by establishing appropriate incentives and by incurring costs. In the IS outsourcing scenario, the principal may be assumed to be the client, while the agent may be assumed to be the vendor. Monitoring costs are incurred by the principal to restrict he aberrant behavior of the agent, and

includes efforts to measure, observe, and control the behavior the agent. Bonding costs are incurred by the principal to guarantee that the agent will not act in a disadvantageous or harmful way, and in the case that the agent does take such aberrant actions the principal will be compensated. Residual loss costs is the monetary equivalent of the reduction in welfare experienced by the principal due to divergence between the agent’s decisions and those decisions that could have ideally maximized the welfare of the principal (Jensen & Meckling, 1976).

Transaction Cost Theory When goods or services are transferred across a technologically separable interface such that one activity phase terminates and another begins, a

Figure 2. Transaction cost theory: Analogy

971

Real-Life Case Studies of Offshore Outsourced IS Projects

“transaction” is said to have occurred (Williamson, 1981, p. 552). Hence, a transaction involves transfers or exchanges between parties (for example, clients and vendors in an outsourcing relationship) across an interface. A transaction occurs smoothly if the interfacing between the involved parties is trouble free. However, if the parties operate in a non harmonious manner, with misunderstandings, disputes, disruptions, failures and delays, it results in a “transaction cost” to manage the disharmony between the interfacing parties. The transaction cost is the expense borne out of accommodating, monitoring and supervising the transaction between parties, and is proportional to the difficulty of mediating the interfacing parties. Williamson (1981, p. 552) gives the analogy of meshing of gears, which certainly helps in the understanding of costs due to “frictions” (see Figure 2) between clients and vendors in an IS outsourcing relationship: In mechanical systems we look for frictions: do the gears mesh, are the parts lubricated, is a there needless slippage or other loss of energy? The economic counterpart of friction is transaction cost: do the parties to the exchange operate harmoniously, or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions?

Innovation Diffusion Theory Organizations, countries and various social systems have to often incorporate innovative new technologies or processes. The IS outsourcing process has been considered to be an innovation, which needs to be adopted, and diffused (Loh & Venkatraman, 1992b; Hu, Saunders, & Gebelt, 1997). Adoption of innovations involves the conscious decision to accept and use such new technologies and processes, and diffusion involves the process of spreading them into the social system (Daft, 1978, pp. 195-197; Rogers,

972

1983, as cited in Dibbern et al., 2004, p. 19). This is illustrated in Figure 3.

Social Exchange Theory Blau (1964, as cited in Dibbern et al., 2004, p. 19) defined social exchange as the “voluntary actions of individuals that are motivated by the returns they are expected to bring and typically do in fact bring from others” (see Figure 4). The IS outsourcing relationship can be considered to be a social exchange between clients and vendors. Emerson (1972, as cited in Dibbern et al., 2004, p. 19) noted the following social exchange attributes, which are highly applicable to the outsourcing scenario where the clients and vendors are the parties involved in the social exchange:

• • •

Reciprocity: A mutual exchange as a result of the need to reciprocate the benefits received. Balance: There is an equilibrium or equality in distribution due to mutual dependence between each of the actors in an exchange. Cohesion: When one or both actors in the exchange run into a conflict involving the exchange.

Figure 3. Innovation diffusion theory

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 4. Exchange theory

•

Power: The amount of monetary influence one can exercise on the other.

Power Politics Theory Markus (1983, pp. 442) states the following about power and politics: Intraorganizational power is an attribute of individuals or subgroups, such as departments, within the organization; it can be defined as the ability to get one’s way in the face of opposition or resistance to those desires. There are a number of ways by which an individual or subgroup can come to have power in an organization, including personal characteristics, such as being an expert or being charismatic, but position in the formal structure of the organization often provides greater access to specific power resources and the legitimacy required to use them. Organizations have people that wield power, that is, they posses a controlling influence and the qualities needed to get things done as per their

wishes. The presence of entities with differential power in social relations results in politics. Exercising power often involves maneuvering social relations to gain control and politics is the process of exercising power in human decision-making. Not surprisingly, power and politics play a big role in IS outsourcing relationships.

cAse study-1: oFFshore outsourcIng oF FIxed-terM, FIxed-PrIce custoM soFtwAre develoPMent ProJects This real-life case study gives descriptive accounts of the business scenario, personnel distribution and project life-cycle for two custom software development projects that were offshore-outsourced by a client. (Though this is a real life case, the actual names of the firms and projects have been replaced with fictitious names.)

973

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 5. Case study-1: Offshore outsourcing - Business scenario

business scenario, relationship Issues and strategies

tions company based in both UK and U.S.A. that acquired ‘Old-Client’.

The Stakeholders

The Information Systems to be Custom Developed

‘Vendor’ is a large India based CMM level-5 software service provider. ‘Old-Client’ was a small UK based telecommunications company. ‘New-Client’ is a relatively larger telecommunica-

‘Vendor,’ had developed a “sales and commission management” software system for ‘Old-Client’ in Year-1, which was very well received by

974

Real-Life Case Studies of Offshore Outsourced IS Projects

‘Old-Client’ and an excellent relationship was established between the two. ‘New-Client’ later acquired ‘Old-Client’ and other companies, and had therefore ended up with diverse software systems from different companies (see Figure 5). ‘New-Client’ decided to consolidate its various customer care related IS applications. Parts of the initiative were two projects - (1) CRMEurope: a new Customer Relationship Management (CRM) software system needed for their Europe operations and (2) CRM-NA: a new CRM software system needed for their North America (NA) operations. Each of the CRM systems were designed to replace the current legacy systems and to provide a Web-based front-end for call centers having customers in Europe and North America respectively. For each continent, the respective CRM system would be used to maintain customer data, track all customer interactions and provide a standard look and feel. The guiding principles were data consolidation and application consolidation. To provide users with rapid access to better quality data, efforts were made to consolidate multiple data sources into one database. Interfaces were developed for the few other databases that had to remain independent and could not be consolidated (for example, it was decided to keep the billing database independent of the consolidation program). The CRM software would call these interfaces to read/write data from/to these few remaining independent databases. Similarly, to give users access a reliable one-stop application, the multiple legacy applications would be replaced the CRM application software. Each of the new CRM systems were deployed in a three-tier architecture where data was stored on the database server, the application containing business logic was stored and run on the application server, and access to information was provided from an user-interface (Internet browser) that runs on desktop machine.

The Contractual Negotiations and Relationship Building Issues After going through a bidding process, ‘Vendor signed a contract with New-Client to develop the new CRM-Europe software system. The fact that ‘Vendor had done a good job for ‘Old-Client’ was one of the positive factors that helped Vendor bag the deal. This new relationship between ‘Vendor’ and ‘New-Client’ was not always comfortable primarily due to the very strict deadline for project completion, and the client’s inexperience with offshore-outsourcing. The project was however delivered within budget and in time by cutting down on a few difficult but relatively unimportant functionalities (reducing scope of the project), and went live into production during the early part of Year-3 (see Figure 5). For the contract for CRM-NA, there were extensive negotiations between ‘New-Client’ and ‘Vendor’. The ‘New-Client’ contended that the new CRM-NA system should be cheaper since the ‘Vendor’ could re-use much of the code already developed for the CRM-Europe system that had similar business functionality, and similar look and feel. However, the ‘Vendor’ contended that though the overall look and feel of the user interface was similar, the database schema was drastically different and larger, the number of validations and error checks were much higher, the number of interfaces were greater, and the business functionality was much more complicated for the proposed CRM-NA project. ‘Vendor’ further added that though a lot of helpful domain knowledge was gained from the Europe scenario, there is no valid case for re-use of code due to the mentioned factors. The deal was finally signed at price higher than that of CRM-Europe, but it was much lower than what the vendor had estimated for CRM-NA. On a mutually positive note, ‘NewClient’ offered a more realistic deadline for project completion, when compared to the stringent CRM-Europe deadline. This second project executed by ‘Vendor’ for the North American operations of ‘New-Client’, 975

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 6. Case study-1: Offshore outsourcing: Personnel distribution onshore (NEW-CLIENT SITE: EUROPE/NORTH-AMERICA) Client personnel

client Manager (s) Project tracking, business direction, change management , negotiation

Vendor personnel

vendor Manager (1 no.) Onshore coordinator & negotiator

oFFshore (VENDOR SITE) Client personnel

client coordinators (1-3 nos.) Design, management , coordination , assess/guide vendor

Vendor personnel vendor Project Manager (1 no.) Offshore project management vendor Module leaders (2 – 4 nos. ) Module management

client Is team (3 – 6 nos.)

vendor team (1 – 4 nos.)

Requirements , design, development of interfaces

Coordination, understanding & rapid support for design / development issues

vendor Is team (10 – 15 nos.) Detailed design , development , Integration , testing, support

Case study-1: Offshore Outsourcing - Personnel distribution (- Subrata Chakrabarty)

was a more complicated system with a different database schema. Both ‘Vendor’ and ‘New-Client’ had learned their lessons from their experience and this time the mutual relationship was very comfortable. The project was delivered well within budget and in time, with additional innovative functionalities that made ‘New-Client’ very happy with the performance of ‘Vendor’. All the contracts signed by ‘Vendor’ were of the “fixed-term, fixed-price” (Currie, 1996, pp. 232-234) kind, where the deadlines were set, and the price for the entire project was fixed. However if there was a change in the scope of the project (change in design/requirements) then the vendor could charge additionally for it in proportion to the additional effort required. From the client’s point of view, an advantage of “fixed-price, fixed-term” contract is that the 976

cost is known and agreed even before the project starts. However, the disadvantage is that the project can get tied down to the contracted price and any change, for whatever reason, may require a timeconsuming negotiation with the vendor where every change can increase the time & money required to complete the project. All such changes are formalized in a written “Change Order” or “Change Request” document.

Personnel distribution Issues and strategies The personnel distribution for both CRM-Europe and CRM-NA projects were similar. The total number of personnel required for CRM-NA was only slightly higher than that for CRM-Europe, and we consider both these projects in unison (see Figure 6).

Real-Life Case Studies of Offshore Outsourced IS Projects

Personnel Distribution at Client Site At the client site (onshore), vendor personnel are present to coordinate effectively with the client personnel. The client managers track projects, give direction to future business strategies, negotiate, and handle both technological and organizational change management. In the context of the CRM projects, the client’s IS Team, that is, the client’s internal IS department gather and structure requirements, design systems, and develop interfaces. The onshore vendor manager is the principal coordinator and negotiator. The onshore vendor team takes pains to understand the client needs, communicates the client needs to offshore, and provides rapid support for design & development issues.

Personnel Distribution at Vendor Site At the offshore vendor site, the project manager has module leaders reporting to him. The offshored project is broken down into smaller manageable modules and each module is managed by a module leader. The vendor’s IS team is similarly distributed within each of these modules, where they take care of tasks like low-level (detailed) design, development, integration, testing and post deployment support. The project manager and module leaders coordinate with the client and vendor personnel at onshore and offshore, to make sure that the project is right on track.

Personnel Interaction and Movement Sometimes the client may decide to send its coordinators (who are generally mid-level managers) to the vendor’s offshore site for a few weeks or even months. This is different from the usual client visits to offshore that last only a few days. The client coordinators spend time discussing the high-level design with the vendor personnel, keep track of the project progress, and proactively assess and guide the vendor to ensure smooth project execution. Sending such client coordina-

tors to offshore for weeks and even months are actually rare. However in this scenario, the client coordinators were more than willing to come & stay at offshore, since the offshore country also happened to be their country of birth.

Project life-cycle Issues and strategies Though the project life-cycle for both the CRMEurope and CRM-NA projects were similar, the outcomes were different. The CRM-Europe project was successful in terms of meeting the budget and time, however it was a failure in terms of keeping the client happy and matching their non-budget & non-cost expectations. The CRMNA project was not just successful in terms of cost of time; it also delighted the customers with its smooth execution, value additions to the software and the overall feeling of bonhomie. We will first discuss the similar aspects of the both the project life-cycles and then discuss the intricate differentiating factors between the two projects.

Requirements Analysis and Design ‘New-Client’ always tried to complete the requirement analysis, architecture design, database design and high level application design before engaging ‘Vendor’. If done properly, this an excellent practice since it shows that the client is sure of what it wants. The life-cycles for the projects executed are shown in Figure 7. As soon as the vendor enters the project, it sends its personnel to the client site (onshore) to understand the requirements and design, and if anything is found undoable then they are encouraged to negotiate and offer alternative solutions. Design documents are also sent offshore, where the offshore vendor personnel study them in depth, and ask for clarifications to the vendor personnel at onshore, who in turn discuss the same with the client personnel if needed. Once the offshore vendor team has significant comprehension of the requirements, architecture, 977

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 7. Case study 1: Offshore outsourcing - Project life-cycle

database design, and high level application design, it starts to work on the low-level (detailed) design documents that delve deep into the design and sometimes even go to the extent of specifying the programming logic to be adopted.

978

Meanwhile, the client’s IS team works on the interfaces that will be used by the application to be developed by the vendor, and this involves the design, development, testing and documentation of the interfaces. These interfaces will be used

Real-Life Case Studies of Offshore Outsourced IS Projects

by the CRM software to read from and write into various other databases used by the client’s multiple systems, and also to send commands to various network devices. Around this time, client coordinators may go to the offshore vendor site, to discuss the design, assess and guide the offshore vendor personnel.

Programming, Integration, Testing and Delivery After the low-level design has been completed, the vendor starts the process of programming, integrating and testing. The vendor delivers the system to client in an iterative fashion that comprises of intermediate phased deliveries or iterations; that is the system is segmented into “builds” and each build is delivered in a phased iterative manner (see

Figure 8). This way the client can continually test and give feedback on the system being developed, and also keep track of the project progress. This also allows the client’s IS team that was developing interfaces for the CRM system to test the effectiveness of their interfaces. Delivering important system functionalities in early iterations is an effective risk management strategy by the vendor. Hence, instead of having just one final delivery of completed code, the delivery of tested code is made iteratively to the client. Each such iterative delivery of code activates some significant aspect of the software being developed, which can now be tested by the client. Once the vendor finishes coding and testing the entire application, it is delivered to the client for user acceptance testing (UAT), where the prospective users of the system test it and report

Figure 8. Case study-1: Offshore outsourcing - iterative delivery

979

Real-Life Case Studies of Offshore Outsourced IS Projects

defects and desired changes. Once the vendor addresses all the issues reported during UAT, the application is ready to go live into production. After the deployment of the system, vendor teams at both onshore and offshore, work on the real time problems being reported by the users.

successful vs. very successful: A comparative Analysis of Issues As we know, the CRM-NA project was more successful CRM-Europe in terms of the extent to which it pleased the customers with its smooth execution, value additions to the software and the overall feeling of bonhomie. The reasons for these are intricate, and are not apparent on the surface of these two projects.

Maturity of Relationship Over Time The CRM-Europe project started off with the client’s considerable mistrust & apprehensions about offshore-outsourcing, primarily borne out of their inexperience in handling such scenarios. ‘New Client’ was motivated to go for offshore outsourcing primarily because of its sudden need for high quality skills to develop the system at a low cost, and was inspired by the good experience of ‘Old-Client’; however, the mistrust & apprehensions existed. After the CRM-Europe project achieved its budgeted cost and time goals, the client became more comfortable with the process of offshore-outsourcing, which in turn had a positive affect on the execution of CRM-NA.

Defining the Project Scope and Requirements The scope of CRM-Europe project was not well defined. The requirements could be interpreted many ways. Often, a seemly innocuous requirement had more hidden requirements within. The client’s interpretation of the desired need was often a flashy complicated one, while that of the vendor

980

was a simple easy-to-code one. The client found it difficult to state what it exactly wanted, and the vendor in its efforts keep the client happy often accepted such vague requests without protest. However, when matters reached a stage where the vendor could no longer accommodate such requests without incurring substantial extra costs, resultant negotiations got messy. The client would negotiate based on its flashy (costly) interpretation of a requirement, while the vendor would negotiate based on its easy-to-code interpretation of a requirement. Another problem was that the seed data provided by the client to test the system being developed were of a different format in comparison to the actual confidential data used by the client. This led to the system functioning erratically in a real time testing environment. Comparatively, the scope of CRM-NA project was well defined with fewer hidden requirements. For the CRM-NA project, the vendor insisted for a more formal and documented protocol to negotiate change requests and possible multiple interpretations of requirements, and also requested the client for prototypes, extensive data models, and quality seed data at the earliest possible stage of the life-cycle.

Verification of Requirements and Design In CRM-Europe, the vendor would blindly assume the client’s requirements and design to be perfect and carry on with the development only to discover flaws at a much later stage. But in CRM-NA the vendor would spend considerable time early on (before coding) to find possible flaws the client’s requirements and design. This approach of searching for flaws in the client’s design at an early stage, led to a relatively risk free execution of the project.

lessons learned and trends Both the offshore-outsourced projects were successful, and the degree of delight associated with

Real-Life Case Studies of Offshore Outsourced IS Projects

the success increased with greater experience, maturity and better management from both the client and the vendor. In “fixed-term, fixed-price” projects, where the deadlines, the price and the scope for the entire project is fixed, it is important to use maximum rigor in defining and verifying the requirements and design. All procedures and processes need to well planned and executed with the cooperation of all stakeholders. The “fixed-term, fixed-price” offshore-outsourcing of projects is a preferred option when the client is very sure of its costs estimates, schedule estimates, and project requirements and can effectively document the same in its contract and project requirement/design documents. As the software project cost and schedule estimation methodologies and tools improve, and as software architects gain more experience with confidently defining and documenting project requirements, the usage of “fixed-term, fixed-price” contracts for offshore outsourcing may increase.

cAse study-2: oFFshore outsourcIng oF custoM soFtwAre develoPMent to MultIPle vendors under tIMe And MAterIAls contrAct This real-life case study gives a descriptive account of the business scenario, personnel distribution and project life-cycle of a custom software development project that involved simultaneous insourcing, onshore-outsourcing and offshoreoutsourcing. (Though this is a real life case, the actual names of the firms and projects have been replaced with fictitious names.)

business scenario, relationship Issues And strategies The Stakeholders ‘Client’ is one of Europe’s leading providers of telecommunications services. Its principal ac-

tivities include local, national and international telecommunications services, broadband and Internet products and services. Vendor-1 is a very large offshore (India) based CMM level-5 service provider. As stated earlier, it started off with an onshore role & now also has a very significant offshore role. Vendor-2 is an onshore (Europe) based service provider and also a product seller. In fact, all the vendors use Vendor-2’s network management software tools/ products. Vendor-3 is a small onshore (Europe) based service provider. Vendor-4 is a joint venture between the ‘Client’ (in Europe) and an offshore partner (in India); however, their role in this project is purely onshore. All teams work both cooperatively and competitively for the project as one large unit.

Relationship Building Between ‘Client’ and ‘Vendor-1’, and the IS Projects The business scenario is illustrated in Figure 9. ‘Client’ started its engagement with Vendor-1 with two projects: NMS (Network Management software System) and VVT (Verification, Validation and Testing). NMS was an ongoing evolutionary project where Vendor-1 was the new entrant, while the three other vendors (Vendor-2, Vendor-3 and Vendor-4) were already working for the same project. The NMS project had started and the first version had gone live into production around three years before Vendor-1 entered the project at onshore. ‘VVT’ was a new project with Vendor-1 as the sole vendor, and it involved the verification, validation and testing of the various software technologies & applications being developed by the client. The first project to be offshored by the client to Vendor-1 was VVT, and expectations were high as future business deals were at stake. Despite tough times, the VVT project led the way in enhancing the “offshoring” image of Vendor-1, and gave the client the confidence to try Vendor-1’s offshore capabilities even further. For NMS, Vendor-1 initially started the engagement by sending six

981

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 9. Case study-2: Offshore outsourcing - Business scenario

of its software professionals to the onshore clientsite, and soon the client’s positive experience in offshoring VVT project gave it the confidence to try offshoring of NMS project, too. Vendor-1 was the only team in the NMS project that grew, and also increased its work portfolio to include various levels of development, design and testing. In a matter of nine months the total number of offshore Vendor-1 personnel for NMS increased from 0 to 25, while the total number of onshore vendor personnel (inclusive of all vendors) remained stagnant. For the NMS project, the total number of offshore personnel was now greater than the total number onshore personnel. Encouraged by the offshoring experience with Vendor-1, the client then decided to try offshoreoutsourcing of some of its product development work too. PRM, a Product for Resource Management that was conceptualized by the client was offshore-outsourced. Vendor-1 will carry out development work at offshore over the next

982

three years to productize PRM for the client. The client will give the necessary domain knowledge, requirements and design to the vendor. The client will then sell it to the market, by capitalizing on its own esteemed standing in the telecom industry. Vendor-1 has created an enhanced visual experience of the PRM prototype and also worked on redesigning the PRM database. In this case study we will concentrate on NMS project, which is an interesting case of simultaneous insourcing, onshore-outsourcing and offshore-outsourcing.

Contractual Specifications All the contracts signed by the client for the NMS project were of the “time and materials” (Currie, 1996, pp. 232-234) kind, where the project is seen as a continuum and is open to change, with the payments being made at pre-specified time intervals on the basis of the amount of vendor

Real-Life Case Studies of Offshore Outsourced IS Projects

resources being used by the client. For example, the vendor bills the client for each of its software professionals on the project on an hourly basis, irrespective of the scope of the project work. From the client’s point of view, an advantage of a “time and materials” contract is that the task details can be worked out as the project progresses, and unforeseen changes are an expected part of the process. However, since the final costs are proportional to the utilization of vendor resources by the client, there is very little opportunity for the client to negotiate a bargain or a package deal.

Personnel distribution Issues and strategies Reporting Structure at Onshore and Offshore As shown in Figure 10, the vendor teams at onshore report directly to the client manager.

Also, Vendor-1’s offshore project manager leads the team at offshore and directly reports to the onshore client manager(s).

Cooperation and Communication Issues within Vendors There is a significant challenge here for Vendor-1, who is a new entrant in the NMS project. The Vendor-1 personnel have to work with other established competitors like Vendor-2, Vendor-3 and Vendor-4; all fighting for the same piece of cake, and all working together in a team! Vendor-2 & Vendor-4 personnel are onshore based vendors and consider the offshoring trend to be a serious threat to their own growth. As discussed earlier, Vendor1’s offshore team was the only team in the NMS project that grew, while all the other vendor team sizes remained stagnant. There is also a concern that at some point the vendor team sizes at onshore may actually be reduced, and

Figure 10. Case study-2: Offshore outsourcing - Personnel distribution

983

Real-Life Case Studies of Offshore Outsourced IS Projects

both existing & new work may be sent offshore to take advantage of the availability of low-costhigh-quality skills. Hence consciously or unconsciously other vendors are often non-cooperative towards Vendor-1.

Issues with the Client’s Multiple-Vendor Sourcing Strategy — Introducing Competitiveness In fact, the client induces such competitive spirit among the vendors as a shrewd tactic. By inducing such competition among vendors, the client manages to derive maximum effort and dedication out of the vendors, who all want to prove themselves as the best to get more business from the client. Also, this strategy of having multiple vendors working together for a project prevents the client from being overly dependent on any one vendor. However such competition can also have negative consequences. The competitive atmosphere among vendors motivates them to sometimes be selfish and non-cooperative. The vendor personnel may not always act with the best interests of the project in mind. There is often a desire to show the other vendors in bad light, while trying to gain maximum self credit for at every conceivable opportunity. This causes serious teamwork issues within the NMS project unit, and client management often steps in to douse the fire, and tries to make the competition among the vendors more positive than negative, for example, the client appraises a vendor’s performance on its cooperative attitude and teamwork skills. Vendor-1 on the other hand, is trying to gain maximum cooperation from other vendors by simply being highly polite, highly cooperative and professional, and has been quite successful at it.

Project life-cycle Issues and strategies Issues with the NMS Project Large systems like NMS have a long lifetime. The telecom industry is changing fast with newer technologies being adopted at a rapid pace. The NMS system must evolve continually to meet the changing requirements. The NMS system has been changing dramatically during its lifetime in response to the rapidly changing telecom environment, and hence the latest evolution of the NMS system has little resemblance to its first version.

The Evolutionary Approach to Custom Software Development As shown in Figure 11, the market and user needs are first evaluated, and the possible “increments” that need to be added to the software are estimated. The requirements for the increments/ enhancements are analyzed, engineered, validated and then structured into small modules or work packages. Each such module or work package can be considered as small a mini-project that needs to be designed, have its design verified, developed, tested and finally integrated into the NMS. The NMS with the latest module integrated is now verified, validated, and tested, and defects (if any) are reported. Each reported defect is tracked, and the latest NMS system is installed only after the defects have been fixed. The users can operate the NMS system with the new features (i.e., the modules), and report any problem back to the testing team, or request further enhancements.

lessons learned and trends Companies sometimes form relationships with multiple vendors as a risk mitigation measure

984

Real-Life Case Studies of Offshore Outsourced IS Projects

Figure 11. Case study-2: Offshore outsourcing - Project life-cycle

(Chaudhury et al., 1995; Cross, 1995). The client has taken up the challenge outsourcing to multiple vendors, inducing competition among the vendors, encouraging cooperation amongst competing vendors, and not being too dependent on any particular vendor. They have been successful at it. Also, as a new entrant, Vendor-1 convinced the client of the possible low-cost-high-quality advantages of offshoring by its good performances and hence managed to turn the tide in its favor. The “time and materials” contracts combined with the incremental-evolutionary model of offshore-outsourcing custom software develop-

ment projects is a preferred option when the client is not very sure of its costs estimates, schedule estimates, or project requirements. The client has the liberty to change the requirements, cost estimates, schedule estimates as and when the market or the users demand a change, and implement them in the evolving software system as modularized increments. In a volatile business and technology environment where market, customer and end-user needs are unstable and can changeable, the time and materials contracts combined with incremental-evolutionary model of software development are a feasible offshoreoutsourcing option.

985

Real-Life Case Studies of Offshore Outsourced IS Projects

coMPArAtIve AnAlysIs oF Issues In cAse studIes wIth socIo-econoMIc PArAdIgMs In lIterAture offshore-outsourcing is a Feasible Alternative As explained in the earlier section “discovering new lands — the move to offshore,” offshore outsourcing does have many advantages despite the many hurdles it faces. The real life case studies (the CRM-Europe/NA and NMS projects) highlighted that despite various difficulties, offshore outsourcing does work. In both the cases, various problems had to be overcome by the vendor:

• • •

Communication, coordination and cultural issues were sorted out, and these improved over time Degree of mutual trust increased over time, especially since the vendor was able to prove its worth to the client Though the vendor was initially a bit weak in client specific business knowledge, with the support of the client the vendor was able to quickly to grasp and gather new knowledge

The client also took various initiatives and derived various advantages from offshore-outsourcing in each of the cases:

•

•

986

By breaking up the bigger tasks into modular chunks, the client was able to distribute and allocate work better. The client also had the flexibility to scale up or scale down the project personnel size depending on the demands of the project, since the vendor could provide manpower on demand. Coordination and cooperation were aided by better use of modern communication technologies. It was also accepted that even the best communication technologies cannot beat the effectiveness of direct face-to-face communication, and hence executives from either the client of vendor firms traveled to their respective counterpart’s sites when needed.

•

The client got access to a highly skilled workforce at low cost.

Let us now compare the issues and observations from each of the case studies with those in the literature. Combinations of both economic and social/organizational theories have been used in IS outsourcing literature (Dibbern et al., 2004, pp. 99-102). Gallivan and Oh (1999) had analyzed the economic, strategic, and organizational issues involved in IT outsourcing for four classes of outsourcing relationships: (1) simple outsourcing relationships (one client, one vendor), (2) multivendor relationships (one client, many vendors), (3) co-sourcing relationships (many-clients, onevendor), and (4) complex relationships (many clients, many vendors). The first case study in this chapter that studied the CRM-NA and CRMEurope projects dealt with simple outsourcing relationships (one client, one vendor), while the second case study that studied the NMS project involved the a multi-vendor relationship (one client, many vendors). As highlighted by these case studies, each of the offshore outsourcing arrangements were very contextual in nature and the nature of implementation varied to a great degree depending on the context. Hence, both client and vendor managers should delve deep into their own individual contexts and carry out extensive planning and preparation before taking up offshore-outsourcing initiatives (Gallivan & Oh, 1999). Hancox and Hackney (1999) employed four conceptual frameworks of: (1) core competencies, (2) agency theory, (3) transaction cost economics and (4) partnerships, to assess IT outsourcing arrangements in the public and private sectors, and suggested that high transaction costs were a dampener on outsourcing initiatives, and that private firms were more open to outsourcing than public organizations. The case studies in this chapter of course focused on private firms, who were more open to outsourcing risks and were effective in

Real-Life Case Studies of Offshore Outsourced IS Projects

risk management. In the CRM-Europe/NA and NMS projects presented in this chapter, the private enterprises prevented potential conflicts by negotiating resolutions, were committed to derive the beneficial fruits of offshore-outsourcing, and were mutually accountable and responsible. However, the transaction costs and agency costs are dampeners on most outsourcing relationships (Hancox & Hackney, 1999), and this held true for the CRM-Europe/NA and NMS projects too, though the benefits seemed to have overshadowed the numerous difficulties and issues faced. It would be beneficial to analyze the IS outsourcing literature which have adopted the economic theories such as the agency theory and the transaction cost theory, and the social/organizational theories like the innovation diffusion theory, exchange theory, and the power-politics theory (Dibbern et al., 2004, pp. 99-102), and compare and contrast them with the issues highlighted in the case-studies presented in this chapter.

Agency theory The Agency Theory and the Case Studies When viewed from the perspective of the agency theory, and as highlighted in the case studies, the outsourcing relationship may be considered to be a complex process in which the divergent interests of the clients and vendors are brought into equilibrium within the framework of contractual relations (Jensen & Meckling, 1976, p. 311). CRM-Europe/ NA projects involved “fixed-term, fixed-price” (Currie, 1996, pp. 232-234) contracts, while the NMS project involved the “time and materials” (Currie, 1996, pp. 232-234) contract. These contracts suited the individual contextual scenarios of each of the projects. In the NMS project the task details had to be worked out as the project progressed, and changes and evolution in the system being developed was a necessity. Whereas, in the CRM-Europe/NA projects, major

changes in the scope (that is changes in design/ requirements) were not expected, the deadlines were set, and the price for the entire project was fixed. The client-vendor relationships in the CRMEurope/NA and NMS projects behave like agency relationships, where the client can be assumed to be the principal that engages the vendor (assumed to be the agent) to perform some service, and where the agency costs (which is a summation of the monitoring costs, bonding costs and residual loss costs) is incurred by the client (Jensen & Meckling, 1976, pp. 308-310).

Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The agency theory has been successfully adopted to understand IS outsourcing (Dibbern et al., 2004, pp. 99-102). In a conceptual paper, Sharma (1997) presented a framework outlining four types of restraints on potential opportunistic behavior of professional agents: (1) self-control, (2) community control, (3) bureaucratic control, and (4) client control, and suggested that the vendors at times are the more powerful ones in the relationship with clients. In the NMS project, the client certainly had upper hand by cleverly manipulating the competitiveness within multiple vendors. In the CRM-Europe/NA too, the client had an upper hand on account of it being the buyer of the vendor’s services and its promises of future business contracts. The vendors in both cases were smart and experienced enough to deal with clients; however, they were never the more powerful ones in the relationship. Hence, though Sharma (1997) believes that vendors at times are the more powerful ones in the relationship, in the case studies in this chapter the clients remain the most powerful. Sridhar and Balachandran (1997) in a mathematical paper, distinguished an internal employee from an outside vendor on four different

987

Real-Life Case Studies of Offshore Outsourced IS Projects

informational dimensions: (1) an outside vendor is assumed to be informed of the task environment less often than an internal employee, (2) the principal observes the information set of the internal employee more frequently than that of the outside vendor, (3) the principal is able to control the flow of certain production related information to an internal employee better than to an outside vendor, and (4) the principal may share the details of the outside vendor’s contract with the internal employee but not vice-versa. It was further noted that the agency costs and intensity of information required for project execution had a negative impact on the client’s willingness to outsource. All the four informational dimensions and the observations of Sridhar and Balachandran (1997) hold true for the CRM-Europe/NA and NMS projects. Wang, Barron and Seidmann (1997) analyzed the nature of custom software development agreements that can be reached between the user and developers, compared the valued of using internal and external developers, and suggested the inability to measure or predict costs can hamper outsourcing initiatives. In the CRM-Europe/NA projects the costs could be predicted and measured, and hence the “fixed-term, fixed-price” contract was successfully adopted. However, as opposed to the analysis of Wang et al. (1997), the inability to accurately measure or predict costs did not hamper the outsourcing initiatives for the NMS project. The client simply adopted the “time and materials” contract for the NMS project which allowed the project task and cost details to be worked out as the project progressed. Chalos and Sung (1998) presented an agency model in which outsourcing dominates insourcing, where it was argued that a firm outsources to improve managerial incentives resulting from anticipated reduction in overall costs, and to reduce the number of tasks that an overloaded manager executes; however, this approach often ignored the possibility of increase in communication and coordination overheads after outsourcing. The

988

analysis of Chalos and Sung (1998) hold true for the CRM-Europe/NA and NMS projects, where though the big responsibility of executing the large projects were transferred from the client managers to the vendor managers, the client had to still spend time and effort coordinating and communicating with the respective vendor.

transaction cost theory The Transaction Cost Theory and the Case Studies Adopting a transaction cost theory to an outsourcing relationship, involves the realization that clients and vendors “interface” with each other. It is across this assumed interface that services are delivered by the vendor to the client in the projects CRM-Europe/NA and NMS. In other words, “transactions,” exchanges or transfers between the clients and vendors occur across this interface. As highlighted by the case studies, the interfacing between the clients and vendors needs to be well planned and executed in order to harmonious. Otherwise, the frictions (misunderstandings, disputes, disruptions, failures and delays) may result in dampening the outsourcing relationship, which would lead to a “transaction cost” needed to accommodate, monitor and supervise the transactions (Williamson, 1981).

Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The transaction cost theory has been applied to IS outsourcing by various researchers (Dibbern et al., 2004, pp. 99-102). Jurison (1995) developed a model derived from the two streams of transaction cost theory and modern financial theory, and aimed to assist in the insourcing versus outsourcing decisions (for a particular IS function and in the comparison of competing vendor proposals).

Real-Life Case Studies of Offshore Outsourced IS Projects

They suggested that outsourcing is a “risk” that may lead to a client’s loss of control over its resources and also difficulties in monitoring the vendor. Loh and Venkatraman (1995) performed an empirical study to show that technical/business benefits from outsourcing favor outsourcing initiatives, while risks due to loss of control over outsourced work, opportunism, and inability to control vendors negatively affect outsourcing initiatives. Aubert, Rivard and Patry (1996) used the transaction cost approach to investigate the influence of asset specificity and measurement problems on the choice of outsourced activities, and on the terms/management of the contract. Heisekanen, Newman and Similä (1996) used a process model approach to observe contract negotiations and to explain the forms and evolution of relations between the involved parties; they suggested that the vendor’s capability to understand the client’s business needs would help in making the relationship more productive. Ang and Straub (1998) simultaneously examined the constructs of production cost, transaction cost, and financial slack to understand what influences the outsourcing decision and concluded a client’s large asset size and high transaction costs in an outsourcing relationship can hamper outsourcing initiatives. Duncan (1998) adopted a resourcebased view to examine outsourcing contracts and risk, and believed that a loss of control and access over resources, and the threat of knowledge loss hampered possibilities of outsourcing. Loh (1994) constructed and tested an integrated governance model of IT outsourcing in the cost domains of bargaining costs, influence costs, management costs, and decision information costs and concluded that while possible financial benefits and need for access to skills encouraged outsourcing, there were risks of poor vendor behavior/control and difficulties in resolving contracts. Cheon, Grover, and Teng (1995) synthesized four theoretical models (resource based theory, resource dependence theory, transaction cost theory and agency theory) to develop a contingency model,

and indicated that agency and transaction costs hampered outsourcing while a client’s need for access to greater IS skills and resources encouraged outsourcing. Poppo and Zenger (1998) suggested the integration of transaction cost, knowledge-based, and measurement reasoning for make-or-buy decisions in information services and believed that the need for IS skills encouraged outsourcing, though highly client specific assets/knowledge/resources, uncertainty over technologies, and problems in measurability discouraged outsourcing. The observations from the CRM-Europe/NA and NMS project case studies presented in this chapter seem to be agreeable to the above theories about what promotes outsourcing and what doesn’t. Nelson, Richmond and Seidmann (1996) used field data to support the contention that the two dimensions of software acquisition, that is, custom versus package and insource versus outsource are interrelated at several levels. The CRM-Europe/NA and NMS projects highlight that when project tasks can be modularized, common custom-software development can certainly be outsourced to offshore-based vendors. Nam, Rajagopalan, Rao, and Chaudhury (1996) explored the impact of organizational, environmental and economic factors on two dimensions of outsourcing decisions: (1) initial outsourcing decision, and (2) intention to continue the relationships, and concluded that the vendor’s need for client specific knowledge and resources hampered outsourcing, while the heterogeneity of IS functions and the strategic importance encouraged outsourcing. This is true for the CRM-Europe/NA and NMS projects, where the client modularized the bigger tasks into smaller ones, thereby increasing heterogeneity for more effective outsourcing. Further, the lure of future business contracts was a major motivator for the vendor during both the projects. Also, vendor’s partial lack of client specific knowledge might have hindered the initial CRM-Europe project, however, with increased experience, maturity

989

Real-Life Case Studies of Offshore Outsourced IS Projects

and knowledge the CRM-NA project was more successful.

Innovation diffusion theory The Innovation Diffusion Theory and the Case Studies Growth in offshore outsourcing of IS work is a recent phenomena (Carmel & Agarwal, 2002), and this phenomena may be considered to be an organizational or administrative “innovation” process, that is now being adopted and practiced by various clients and vendors. In both the CRMEurope/NA and NMS projects, the adoption of the offshore-outsourcing innovation involved the conscious decision by the clients and the vendors to accept and use new processes, and diffuse these process their relationship and respective organizations (Daft, 1978, pp. 195-197).

Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The usage of the innovation diffusion theory in IS outsourcing literature led to an interesting clash between the research results of Loh and Venkatraman (1992b) and Hu et al. (1997). Loh and Venkatraman (1992b) treated “IT outsourcing as an administrative innovation,” and explored the sources of influence in the adoption of this innovation. Using diffusion modeling Loh and Venkatraman (1992b) showed that the adoption of IT outsourcing is motivated more by internal influence (such as communication with peers and managers of other organizations) than external influence (such as the media). Hu et al. (1997) in a repeat of the Loh and Venkatraman (1992b) study tested four diffusion models: internal influence, external influence, and two mixed influence models, and found no support for the conclusions of the Loh and Venkatraman (1992b) on the primacy of internal influence. The study

990

by Hu et al. (1997) instead suggested that the mixed combination of both internal and external influence helped in the adoption and diffusion of outsourcing, and rejected the primacy of any one (internal or external) source of influence. After assessing these two research studies, one might be tempted to consider the answer to the problem of “primacy of sources of influence in the adoption of the outsourcing innovation” to be inconclusive. The same holds true for the case studies presented in this chapter.

social exchange theory The Social Exchange Theory and the Case Studies The CRM-Europe/NA and NMS projects involved clients and vendors whose actions were motivated by the returns they expected, and their exchanges were mutually reciprocated and balanced, though power-play was evident (with the client exerting its monetary influence and decision making rights over the vendor). The social exchange theory can hence be aptly used to study offshore-outsourcing relationships.

Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature Klepper (1995) and Kern (1997) adopted the social exchange theory for understanding IS outsourcing (Dibbern et al., 2004, pp. 99-102). Klepper (1995) selected the Dwyer, Schurr and Oh (1987) model of partnership development, and applied it on two case studies of IS partnership development to conclude that vendor characteristics and relationship attributes (such as communications, procedures, expectations, and balance of power) influenced outsourcing. Kern (1997) developed a model that is based on exchange theory and contract law, and that captures both the outsourcing relationship’s contractual, social, and economic characteristics,

Real-Life Case Studies of Offshore Outsourced IS Projects

and additional elements that have relevance in practice. It was concluded that various exchange characteristics (services/ products, information, and financial) and relationship characteristics (vendor behavior and communication) influence the outsourcing process. The observations from the CRM-Europe/NA and NMS project case studies are congenial to the above propositions by Klepper (1995) and Kern (1997).

Power Politics theory The Power Politics Theory and the Case Studies The offshore-outsourcing relationships described in the CRM-Europe/NA and NMS projects had client organizations which wielded considerable power, and they possessed a controlling influence over the project and the vendor and wanted to get things done as per their wishes. At the same time, the vendors in both cases were large CMM level-5 software services firms, the managers of which had considerable experience in dealing with (both cooperative and uncooperative) clients from all around the world. This differential power in the outsourcing relationship resulted in politics, where both the clients and the vendors tried to maneuver and gain control over their respective projects (Markus, 1983).

Comparative Analysis of Issues in Case Studies with Paradigms in IS Outsourcing Literature The power-politics theory was adopted by Willcocks and Kern (1998) to explore IS outsourcing in the context of a case study, three critical dimensions: what is outsourced, the contract, and the relationship dimension. The observations from the CRM-Europe/NA and NMS project case studies are conformable to the conclusions of the Willcocks and Kern (1998) study, which states that various relationship characteristics (services/

products, information, staff, asset and financial exchanges; vendor behavior, communication, trust, cooperation, flexibility and social/personal relations) influence the outsourcing process. Lee and Kim (1999) used both the social exchange theory and the power politics theory, proposed a conceptual theoretical framework for outsourcing partnership based on a social rather than an economic perspective, examined the impact of partnership quality on outsourcing success, and established the importance of relationship characteristics (such as commitment, trust, business understanding, and risk sharing) in outsourcing. The conclusions of the Lee and Kim (1999) study about importance of relationship characteristics are again concordant with the observations from the case studies in this chapter.

Future trends Offshore outsourcing is taking the benefits and risks of outsourcing to its extremes. With offshore outsourcing one can reach out the best skills at the lowest costs. At the same time the intensity of the outsourcing risks like challenges in coordination, communication and control are being tested to the maximum due to the distance and cultural divergences. Many vendor companies in India like TCS (http://www.tcs.com), Infosys (http://www.infosys.com), Wipro (http://www.wipro.com), and Satyam (http://www.satyam.com) seem to have made an art out of providing offshore-outsourcing services, and are hence giving a tough fight to the traditional bigwigs like EDS (http://www. eds.com) and Accenture (http://www.accenture. com). In recognition of the offshoring trend, EDS and Accenture have also set up base in countries like India to take advantage of its low-cost and highly skilled professionals. Successes are being realized not just in offshore-outsourcing, but also offshore-insourcing.

991

Real-Life Case Studies of Offshore Outsourced IS Projects

NewScientist, a premier science and technology magazine did a cover story on India titled “India: The next knowledge superpower”, and one article named “India special: The silicon subcontinent” (Cohen, D., 2005) states the following: Some of the biggest names in IT are heading towards Bangalore once more, and this time round its not cheap labour they are looking for. They are hunting down the brightest, most inventive minds in India to populate a swathe of cutting-edge research facilities. The work being done in these labs rivals any in the U.S. and Europe. The article goes on to list companies like Hewlett-Packard, Texas Instruments, General Electric, Google, Microsoft, and IBM that have set up research labs in India to take advantage of its skilled professionals. They come for the cost, and stay for the quality.

conclusIons “They come for the cost, and stay for the quality” seems to be an apt summary for the offshoring and outsourcing trend that is not only growing but also maturing. Offshoring and outsourcing is truly about delivering software that’s value for money. The case studies provided insights into the practical and real life strategies adopted by managers to solve issues and problems in offshore-outsourcing. This chapter summarized the usage of socio-economic theories to understand outsourcing of IS, and focused on providing and analyzing the issues in the two very different and descriptive real-life case studies that have the common thread of offshore-outsourcing of custom software development . Most of the paradigms in literature resulting from the adoption of socio-economic theories for IS outsourcing research concurred with the observations in the case studies. 992

reFerences Accenture. (n.d.). Services. Retrieved January 27, 2005, from http://www.accenture.com/xd/ xd.asp?it=enweb&xd=services\services_home. xml Ang, S., & Straub, D. W. (1998). Production and transaction economies and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(4), 535-552. Apte, U. M., & Mason, R. O. (1995). Global disaggregation of information-intensive services. Management Science, 41(7), 1250-1262. Aubert, B. A., Dussault, S., Patry, M., & Rivard, S. (1999). Managing the risk of IT outsourcing. Proceedings of the 32nd Annual Hawaii International Conference on System Sciences, 7. Aubert, B. A., Patry, M., & Rivard, S. (1998). Assessing the risk of IT outsourcing. Proceedings of the 31st Annual Hawaii International Conference on System Sciences, 685-691. Aubert, B. A., Rivard, S., & Patry, M. (1996). A transaction cost approach to outsourcing behavior: Some empirical evidence. Information & Management, 30(2), 51-64. Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 1(2), 65-78. Chakrabarty, S. (in press). The journey to new lands: Utilizing the Global IT workforce through offshore-insourcing. In P. Yoong & S. Huff (Eds.), Managing IT professionals in the Internet age. Hershey, PA: Idea Group Publishing. Chalos, P., & Sung, J. (1998). Outsourcing decisions and managerial incentives. Decision Sciences, 29(4), 901-919. Chaudhury, A., Nam, K., & Rao, H. R. (1995). Management of information systems outsourcing:

Real-Life Case Studies of Offshore Outsourced IS Projects

A bidding perspective. Journal of Management Information Systems, 12(2), 131-159.

EDS. (n.d.). Services index. Retrieved January 27, 2005, from http://www.eds.com/services/index/

Cheon, M. J., Grover, V., & Teng, J. T. C. (1995). Theoretical perspectives on the outsourcing of information systems. Journal of Information Technology, 10(4), 209-210.

Gallivan, M. J., & Oh, W. (1999). Analyzing IT outsourcing relationships as alliances among multiple clients and vendors. Proceedings of the 32nd Annual International Conference on System Sciences, Hawaii.

Cohen, D. (2005, February 19). India special: The silicon subcontinent. NewScientist. Retrieved February 20, 2005, from http://www.newscientist. com/special/india/ Currie, W. L. (1996). Outsourcing in the private and public sectors: An unpredictable IT strategy. European Journal of Information Systems, 4(4), 226-236. Currie, W. L. (1998). Using multiple suppliers to mitigate the risk of IT outsourcing at ICI and Wessex Water. Journal of Information Technology, 13(3), 169-180. Currie, W. L., & Willcocks, L. P. (1998). Analyzing four types of IT sourcing decisions in the context of scale, client/supplier interdependency and risk mitigation. Information Systems Journal, 8(2), 119-143. Daft, R. L. (1978). A dual-core model of organizational innovation. Academy of Management Journal, 21(2), 193-210. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. ACM SIGMIS Database, 35(4), 6-102. Duncan, N. B. (1998). Beyond opportunism: A resource-based view of outsourcing risk. Proceedings of the 31st Annual Hawaii International Conference on System Sciences, 675-684. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review, 37(3), 26-32. EDS. (n.d.). Industries index. Retrieved January 27, 2005, from http://www.eds.com/industries/ index/

Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89-116. Halarnkar , S. (2004, December 04). Bangalore crumbling. The Indian Express. Retrieved February 10, 2005, from http://www.indianexpress. com/full_story.php?content_id=60231 Hancox, M., & Hackney, R. (1999). Information technology outsourcing: Conceptualizing practice in the public and private sector. Proceedings of the 32nd Annual Hawaii International Conference on System Sciences. Heiskanen, A., Newman, M., & Similä, J. (1996). Software contracting: A process model approach. Proceedings of the 17th International Conference on Information Systems, 51-62. Hu, Q., Saunders, C., & Gebelt, M. (1997). Research report: Diffusion of information systems outsourcing: A reevaluation of influence sources. Information Systems Research, 8(3), 288-301. Infosys. (n.d.). Industries. Retrieved January 27, 2005, from http://www.infosys.com Infosys. (n.d.). Quick facts. Retrieved February 10, 2005, from http://www.infosys.com/about/ quick_facts.asp Infosys. (n.d.). Services listing. Retrieved January 27, 2005, from http://www.infosys.com/services/ default.asp Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs

993

Real-Life Case Studies of Offshore Outsourced IS Projects

and ownership structure. Journal of Financial Economics, 3(4), 305-360. Jurison, J. (1995). The role of risk and return in information technology outsourcing decisions. Journal of Information Technology, 10, 239247. Kern, T. (1997). The Gestalt of an information technology outsourcing relationship: An exploratory analysis. Proceedings of the 18th International Conference on Information Systems, Atlanta, Georgia. Klepper, R. (1995). The management of partnering development in I/S outsourcing. Journal of Information Technology, 10, 249-258. Lacity, M. C., & Willcocks, L. P. (1995). Interpreting information technology sourcing decisions from a transaction cost perspective: Findings and critique. Accounting, Management and Information Technologies, 5(3/4), 203-244. Lee, J.-N., & Kim, Y.-G. (1999). Effect of partnership quality on IS outsourcing success: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29-61. Loh, L. (1994). An organizational-economic blueprint for information technology outsourcing: Concepts and evidence. Proceedings of the 15th International Conference on Information Systems, Vancouver, Canada, 73-89. Loh, L., & Venkatraman, N. (1992). Diffusion of information technology outsourcing: Influence sources and the Kodak effect. Information Systems Research, 3(4), 334-358. Loh, L., & Venkatraman, N. (1995). An empirical study of information technology outsourcing: Benefits, risks, and performance implications. Proceedings of the 16th International Conference on Information Systems, Amsterdam, The Netherlands, 277-288.

994

Markus, M. L. (1983). Power, politics, and MIS implementation. Communications of the ACM, 26(6), 430-444. Markus, M. L., & Robey, D. (1988). Information technology and organizational change: Causal structure in theory and research. Management Science, 34(5), 583-598. Michell, V., & Fitzgerald, G. (1997). The IT outsourcing market-place: Vendors and their selection. Journal of Information Technology, 12, 223-237. Nam, K., Rajagopalan, S., Rao, H. R., & Chaudhury, A. (1996). A two-level investigation of information systems outsourcing. Communications of the ACM, 39(7), 36-44. Nelson, P., Richmond, W., & Seidmann, A. (1996). Two dimensions of software acquisition. Communications of the ACM, 39(7), 29-35. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64(1), 12-40. Poppo, L., & Zenger, T. (1998). Testing alternative theories of the firm: Transaction cost, knowledgebased, and measurement explanations for makeor-buy decisions in information services. Strategic Management Journal, 19, 853-877. Sharma, A. (1997). Professional as agent: Knowledge asymmetry in agency exchange. Academy of Management Review, 22(3), 758-798. Sobol, M. G., & Apte, U. M. (1995). Domestic and global outsourcing practices of America’s most effective IS users. Journal of Information Technology, 10, 269-280. Sridhar, S. S., & Balachandran, B. V. (1997). Incomplete information, task assignment, and managerial control systems. Management Science, 43(6), 764-778.

Real-Life Case Studies of Offshore Outsourced IS Projects

Wang, E. T. G., Barron, T., & Seidmann, A. (1997). Contracting structures for custom software development: The impacts of informational rents and uncertainty on internal development and outsourcing. Management Science, 43(12), 1726-1744. Willcocks, L., & Lacity, M. (1998). Strategic sourcing of information systems. Chichester: Wiley. Willcocks, L. P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland revenue. European Journal of Information Systems, 7(1), 29-45.

Williamson, O. E. (1981). The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3), 548-577. Wipro. (n.d.). IT services. Retrieved January 27, 2005, from http://wipro.com/itservices/services. htm.

note The author may be contacted at schakrabarty@ tamu.edu or [email protected].

This work was previously published in Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective, edited by H. Kehal, pp. 248-281, copyright 2006 by IGI Publishing (an imprint of IGI Global).

995

996

Chapter 4.2

The Use of Outsourcing as a Business Strategy: A Case Study

Ram B. Misra Montclair State University, USA

AbstrAct

IntroductIon

In this chapter, we discuss how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both the short-term tactical goals as well as the longterm strategic goals. We present a framework consisting of seven factors that should be used by companies using outsourcing as a business strategy. This framework was used to analyze the outsourcing practices used by this company. The framework includes the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. We also present the challenges of making these things happen, what worked well, and the lessons learned.

Today’s global business environment has put companies ever so more under pressure to have competitive advantage over its competitors. The competitive advantage can be manifested in many ways such as reducing the cost, having a unique product, being able to meet changing marketing (customer) needs quickly, and achieving operational excellence. Operational excellence means doing more work with less resources. In this age of lean production (Just-in-time), companies are forced to become lean in keeping their internal resources, both capital as well as human resources. This has forced companies to look outside to get access (often temporary) to resources of other companies. They are looking for outsourcing arrangements, collaborations, and partnerships with other companies. Outsourcing has become a common phenomenon in the IT world. With the power of high-speed telecommunications, it is now possible to access skills for almost everything, from answering the telephone to

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

The Use of Outsourcing as a Business Strategy

developing computer systems, at a fraction of the costs in the USA It should be mentioned that IT outsourcing has been practiced in the USA since the lateeighties. Some of the notable examples are Kodak’s outsourcing its IT functions to IBM and GM outsourcing its IT functions to EDS. This wave of outsourcing was driven more by the strategic goals (outsourcing the functions that were not part of core competency of the client company) and less by the operational goals such as cost savings. The current round (mostly over the last 5 years) of outsourcing has been both strategic and operational (tactical). Such is the case with Telcordia Technologies, a leading supplier of telecommunication network management systems in the USA. It has undergone through an upheaval in the last 4 to 5 years. It is into its fourth CEO and third vice president of software systems division. Simply put, it is fighting for survival. This chapter analyzes how Telcordia Technologies has used outsourcing as a business strategy and how its outsourcing strategy has evolved during this period. In doing so, we not only focus on strategic issues, but also operational issues that are essential to achieving success in outsourcing.

bAcKground InForMAtIon: telcordIA technologIes Telcordia Technologies is a leading global provider of telecommunications software and services for IP, wireline, wireless, and cable networks. The company delivers flexible, standards-based solutions that optimize complex network and business support systems, enabling customers to manage, transform, and grow their businesses. Telcordia is headquartered in Piscataway, N.J., with offices throughout the United States, Canada, Europe, Asia, Central and Latin America. On March 15, 2005, Providence Equity Partners and Warburg Pincus announced completion of their acquisition of Telcordia Technologies from Science Applications International Corporation.

Formed out of Bell Labs, AT&T, and Western Electric as the central service organization (CSO) at the time of the Bell System Divestiture in 1984 to provide research and development support to the seven Regional Bell Operating Companies (“Bell Bells”), it was named the Bell Communications Research (Bellcore) in 1985. Bellcore, consisting of 3,000 employees, was owned by the RBOCs. In 1995, Bellcore’s revenue was $1B out of which $650M was from software sales and $350M was from professional services. Between 1984 and 1995, Bellcore established itself and was renowned for research and development that led to: ADSL, ATM, Frame Relay, SONET, AIN, ISDN, a generic open switch interface (a predecessor of the international V5 interface), and so forth. After the Telephone Reform Act of 1996, when the Baby Bells started competing with each other and the joint ownership of Bellcore was considered not viable, they sold it to SAIC in November 1996. From 1996 to 2000, Telcordia saw a tremendous growth; its revenue grew to close to $2B with over 8,500 employees. Since 2001, with the slowdown in the telecom industry due to overcapacity and competitive pressures from cable and voice-over-IP, Telcordia has been under tremendous pressure and has been fighting for survival. Telcordia’s Web site shows its annual revenues (in 2006) of $800 million USD with 2,900 employees worldwide. Telcordia Technologies has also sought to increase its presence in India. The original model of outsourcing development work to Wipro, an Indian outsourcing company, has evolved to opening its own branch (Telcordia Technologies India) in India. At this time, Telcordia is on record to be following the relational model (Dyer & Singh, 1998) for outsourcing. Its partners are Accenture, Wipro, and Nokia. Telcordia has partnered with Wipro, an Indian IT company, since 2003 for its software development offshore contracts. The partnership with Nokia and Telcordia is designed to help mobile operators support 2G, 2.5G, and 3G mobile services via Telcordia software systems.

997

The Use of Outsourcing as a Business Strategy

PrevIous relAted reseArch A search in the scholarly journals (ABI/INFORM database) on ‘Outsourcing as a Business Strategy” yielded 29 PhD thesis references, but no publications in scholarly journals. A secondary search on business strategy and competitive advantages yielded tons of scholarly papers. However, we are going to focus on only a few scholarly works that are directly relevant to the current discussion. Davidow and Malone (1992) reported a twodimensional matrix comparing a company’s internal capabilities to perform various activities (in relation to its competitors) with their potential competitive value. This matrix was the result of a joint work by a team of academics, corporate executives, and consultants in the context of studying the functioning of a virtual corporation. The team was chartered to recommend steps to be taken by a corporation when deciding whether to develop internally or use outside resources. Insinga and Werle (2000) have refined this methodology and attempted to link it to management theories, thus, making it theoretically sounder. They argue that their methodology is grounded in two management theories, resource driven and relational driven. The resource driven view (Barney, 1991) maintains that a company’s survival depends on achieving competitive advantage by having resources that cannot be imitated. The relational view (Dyer & Singh, 1998) argues that a company can achieve competitive advantage by getting access to outside resources by establishing good relationship with other firms that have those resources. The recognition here is of the fact that the sources of achieving competitive advantage may lie (and often they do) outside a company. In this age of global economy, the challenge for a corporation is how to balance these two views. Another outsourcing phenomenon that has been observed for some industries (McClellan, Marcolin, & Beamish, 1995) is the outsourcing of functions considered to be core for the industry. This was observed for the banking industry. This

998

is contrary to the current outsourcing theories. One explanation is that banks are displaying imitation behavior, the so-called theory of imitation behavior, we must do what our competitors are doing to stay competitive. Various aspects of outsourcing and related issues have been discussed in the leading trade (IT) magazines (Information Week, MIS, etc.), financial sections of leading newspapers (Financial Times, WSJ, NYT, etc.) and IT journals (Optimize, for example). Aron (2003) discusses the importance of right light on sourcing; Goolsby (2003) makes the case for outsourcing to keep business strategy on track; Funk, Sloan, and Zaret (April) warn the users of outsourcing about its dangers; Moran (2003) discusses the promise of savings on distant horizons; Raynor and Littmann (2003) suggest not to outsource core values; and Skapinker (2003) presents a skeptical view of outsourcing, and suggests questioning of the benefits of outsourcing. The framework used in this chapter for analyzing Telcordia’s outsourcing activities is a comprehensive view of the factors discussed by these authors.

MAIn thrust oF the chAPter The first and foremost is the framework (model) that was used to collect the data and perform the analysis.

the Framework The framework used in this chapter to analyze the use of outsourcing by Telcordia Technologies consists of examining (1) the driving forces for outsourcing, tactical vs. strategic, (2) the process used to decide what to outsource, (3) selection of the operational model, interworkings of the in-house staff and outsourced-staff, (4) the process to select vendors, (5) the quality of contract negotiations, thoroughness, risk analysis, and contingency planning, (6) quality of execution

The Use of Outsourcing as a Business Strategy

and program management, team formation, transition, knowledge transfer, work and relationship management, (7) and the quality of results, service level agreements (SLAs) conformance, customer satisfaction, and so forth. 1.

2.

Driving forces: Strategic and/or tactical. There are two types of driving forces that motivate a company to outsource, strategic and operational (tactical). Strategic goals include ability to react to market conditions quickly, ability to bring a product (a Telephony Operations Support System in Telcordia Technologies’ case) in a short interval, ability to compete for new business (IP telephony for example). Operational goals include reduction of costs, increased margins, and control of products while ensuring the quality of work. Often companies who are fighting for survival must focus, in a short term, on operational goals such as lower costs, as well as be strategic. Telcordia Technologies is doing both. Process of deciding what to outsource. Fundamentally, a company ought to outsource what it cannot do well or can get it done cheaper or what will bring new, more profitable business in-house. The first has to do with the lack of core-competency; the second has to do with the inefficiency of in-house operations; and, the third is a byproduct of partnering with the outsourcing vendor. Closely related to this is to determine what work not to outsource. One should almost never outsource processes or functions that involve interactions with customers. If you give the impression that customer issues are not important enough to warrant your attention, customer will sooner or later find someone who does. This is contrary to current practices of outsourcing call centers or product support functions. If one must (for cost savings), companies ought to have an overseas captive center that is an extension

3.

of the company as opposed to an outsourced center. Also, you should not outsource your core competencies. If you do, your core competencies would start eroding and eventually make you less competitive. One ought to examine all the functions of a system development life cycle (SDLC) from two angles, the potential relative (to in-house) value created if outsourced and the relative higher risk that outsourcing brings to the table. The functions that yield most value and present least risk are the candidates for outsourcing. Typically, in the software industry, software coding and testing functions fall in this category. Selection of the operational model. This is one of the most neglected parts of planning for outsourcing, often relegated to the time when for all practical purposes, decision to outsource to a particular company has been made. Current practices can be grouped into three models, autonomous operations, partial autonomous and staff extension model. In the first model, the vendor is doing all or majority of the phases of a project, and there is very little interference from the client company (that outsourced the project). The pros of this model include reduced need for local (in-house) staff and shifting of the risk for project overruns to the vendors. The cons are loss of control and loss of knowhow. In general, this model is suitable for non-strategic final stages of the life-cycle projects. In the second model, some project phases are outsourced while others are being done in-house. This model requires a great deal of cooperation between the two staff as well as a high quality of knowledge transfer. Proper documentation and training are a must for the success of this model. The pros and cons of this model are similar to the first model on a varying scale. This model is suitable for well-defined projects whose components have well-defined interfaces.

999

The Use of Outsourcing as a Business Strategy

Figure 1. Risk, value, and degree of outsourcing Risk of Failure due to outsourcing

High

Value that Outsourcing creates

Risk or Value

Low Low

High Degree of Outsourcing

Figure 2. Staffing operational model

High Staff Extension Model: Suitable for Strategic Projects

Strategic Value

Low

Semi-autonomous Model: Suitable for well defined projects

Autonomous Model: Suitable for routine jobs

In the last model, vendor staff works as an extension of in-house staff. This poses its own challenges in terms of accountability and manageability of work. The pros of this model are that it keeps the knowledge base at home. It is easier to adapt to rapidly changing

1000

4.

requirements and it is less threatening to the local staff. This model is more suitable for strategic projects. Process to select outsourcing vendor(s). Simply stated, the vendor must have a track record of demonstrating core competency in

The Use of Outsourcing as a Business Strategy

5.

the functions you want to outsource. It must have a stable, skilled work force. It must be economically viable, its survival cannot depend on just one or two projects. It must understand the business and customer issues (even though it may not be directly involved with your customer). It must understand the client company’s culture. Its employees must demonstrate the sensitivity to local staff’s feelings (which can be often hostile, as some of them might be losing their jobs. The vendor must be from a region that is politically stable, has an ample supply of highly trained workers. It is a good practice to issue an RFI (Request for Information) that seeks this kind of information about a potential vendor. Caution here is not just for the lowest cost vendor, but to look at the total picture with a special eye for identifying the risk (of not getting things done, of company going into bankruptcy, of company not being able to hold on to its skilled staff, etc.) Quality of contract negotiation. Literature is abundant on this topic. In addition to a well-defined statement of work (SOW) that should include the normal governance (management) process, one must put contingency (handling of the unexpected) clauses and risk mitigation clauses. The contingency clauses ought to include an immediate upper management (from both companies) review, right to obtain outside expert assistance, and step-in rights that include potential termination of outsourced work and taking over by the in-house staff. It is a good idea to talk about termination rights in the beginning while both parties are in a spirit of cooperation. If work needs to be terminated before completion, for whatever reasons, the client company must ensure that the works gets completed without putting the company in a financial jeopardy. Under risk mitigation, the contract must address no compete

6.

7.

clause, intellectual property protection, data integrity, security, and employee turnover issues. Quality of execution and program management. All wonderful planning and contract negotiations go to waste if they are not executed properly by both parties. Key requirements for successful execution are putting a top-notch management team on both sides (program/project managers, technical managers, and technical leads), selecting the people with the right skills, transition activities that kick-off the outsourced work, insuring that knowledge transfer is taking place, and finally, making sure that things are happening, or finding out quickly when they are not (happening). A common mistake companies make that team members are selected based on their organizations rather than their skills. The overall program manager has to be from the client company. He or she must have visibility in the outsourcing company so that the right people are selected in the teams. Also, the team members must be trained in cultural sensitivities, more so to be able to communicate effectively. Quality of results. The challenge here is how to see quality (or the lack of it) from a distance. As part of quality planning (quality by design), the program manager must insure that the outsourced company follows quality processes such as those based on ISO9001 or CMM5. Do not just depend on the fact that the company has these certifications. Ask for a quick audit. Also, define service level agreements (SLAs) for each stage of the project (initiation, interim, and final), defect density, response time, and defect fix time thresholds. Monitor the intermediate milestones and above all, have periodic operational reviews.

1001

The Use of Outsourcing as a Business Strategy

data collection The data was collected mainly through informal unstructured and semistructured interviews. Interview participants were two technical mangers and one business manager. One manager made his material available to us that he used during outsourcing. The second technical manager was the author of this case. The interview with the business manager was oral, but an e-mail exchange was made on the summary. The time period covered in this case is from 1998 to 2003.

data Analysis Approaches as outlined by Creswell (1988) and Yin (1994) were used in conducting this qualitative study in which data analysis was integrated with data collection. The analysis focused on classifying data (information about outsourcing) into appropriate framework dimensions and relating the findings to existing strategy literature. This process of data collection and analysis allowed us to organize new insights into the practice of outsourcing.

dAtA collectIon And AnAlysIs Time period 1998-2000. At the peak of dotcom frenzy and unparalleled projected high growth of broadband services, Telcordia Technologies faced, like many other software companies, the shortage of high quality domestic software developers. Its customers, the network and service providers, were planning to deploy newer network elements and the new generation network management systems. There was a general shortage of people and the expertise needed. The Y2K projects had sucked all the development (programming) resources not only within the company, but also within the U.S. software industry. Telcordia Technologies managers were encouraged to think out of the box to find solutions. Cost savings was not the issue, but meeting the customer needs was.

1002

A Telcordia Technologies manager, a RussianAmerican, paid a visit to his homeland to explore offshore outsourcing. He signed a contract with a small Russian company to develop the software. This was the first time Telcordia Technologies had outsourced any work. The company did not have any outsourcing strategy. It was just a local effort. The main criteria used in selecting this Russian company were the technical expertise and the infrastructure (secure and reliable high speed lines used for downloading the software from Russia). No other criteria mentioned in the framework in the previous section were used. According to the outsourcing contract, the Russian company was going to develop software based on the requirements provided by Telcordia Technologies. The Russian company will test the software to ensure that there are no bugs and that it meets the requirements. Integration testing will be done at Telcordia Technologies by its staff. Any quality issues discovered during the integration phase related to the Russian company developed software will be fixed by them within the time specified in the contract. The management structure for managing and controlling the outsourced work consisted of one manager from each company communicating with each other on as needed basis. This was a learning experience for the company. The language issue became paramount. Engineers of the two sides could not communicate with each other. Russian engineers, though superb in programming, could not hold conversation in English. Miscommunication could result into misinterpretation of the requirements and that could affect the quality of the software. Soon, some cultural issues were identified. These programmers were taking “artistic liberty” in interpreting the written requirements supplied by Telcordia Technologies. If a programmer thought of a “cuter” way (a better way in their opinion) of showing some information on a screen or on a report they would do so, and in doing so, they would ignore the requirements. They did not

The Use of Outsourcing as a Business Strategy

treat the requirement document as a baselined frozen document that cannot be changed without going through the change control procedure that was in place (and was part of the contract.) The management structure had to be changed. It was decided that a lead Russian engineer who knows English (write, read, and speak) be located at the premises of Telcordia Technologies. This person would report to the Telcordia Technologies development manager. This change fixed some of the issues, but increased the cost of the project. Also, the turnover in the Russian company was becoming a problem. People once trained were finding more lucrative jobs elsewhere in other Russian companies. Time period 2001-2003. The dotcom balloon has busted. The Telecom industry is in big trouble; barely breathing. The Client Companies of Telcordia Technologies have cut down the spending. Cost savings is a big issue. Telcordia Technologies’ cost structure is on the high end of the industry. The company must reduce its cost to be competitive to get new business. It has just hired a new vice president of Software Systems Division who is big on outsourcing. The company is beginning to develop a company-wide outsourcing strategy. A senior manager has been appointed to look at outsourcing, possibly to some Indian companies. An analysis has been done to determine what to outsource. A contract is signed with a leading Indian IT outsourcing company to perform some limited functions for a legacy network management system. Telcordia Technologies client companies, its main revenue base, are not very happy to learn that Telcordia Technologies might outsource some of their work. There are two concerns, the quality of products, and quality of support. Also, if Telcordia Technologies is going to get work done cheaper overseas, they (the Client Companies) should not have to pay Telcordia Technologies at the old rates. They are now demanding Telcordia Technologies to reduce the maintenance cost of the legacy (network management) systems widely

deployed in their networks. The turmoil within Telcordia Technologies is still going on. Downsizing is continuing. The work that was outsourced to the Indian company is not going well. Telcordia Technologies is now reexamining its outsourcing strategy. There is a new senior manager, an IndianAmerican, in charge of this task. The previous manager has left the company. In a post analysis, it was discovered that there were gaps in communications here too, but they were of different nature. This had to do with the culture than the language. “Politeness” of Indian staff was often (mis)understood by their American counterparts in Telcordia Technologies as consent. However, Telcordia Technologies faced two problems that were more significant. One was technical and the other was political. From its own value analysis and the pressure to reduce the maintenance costs (of mostly legacy systems that were written in the languages of the eighties that were not obsolete), Telcordia Technologies wanted to outsource the legacy system maintenance work. But, that expertise was nowhere to be found in the fresh computer science graduates either in the USA or in India. Training became a big issue and it took longer to train. The second problem was political. Its client companies wanted to pay less for maintenance, which means lower profitability, something that was not acceptable to its parent company. In the absence of new business, Telcordia Technologies had only one choice, to downsize at a faster rate, even to the point of losing the legacy expertise that was needed to train the Indian company staff. To make the matter worse, the company was very tight-lipped about the specifics of what work would be outsourced, and so forth. Even though the Indian company was given the outsourcing work, there were no announcements about this. Morale of people was low. Even though back in 1998, Telcordia Technologies outsourced development (coding) of a new system to a Russian company more for strategic reasons, its later outsourcing was driven by

1003

The Use of Outsourcing as a Business Strategy

Table 1. Analysis of Telcordia’s outsourcing practice against the framework Framework Dimension

Period 1998-2000

Driving Force: Strategic and/or Tactical

Strategic: looking for the technical competencies outside (in-house resources not available) to shorten the time to introduce a new product in the market

Tactical: looking to outsource the work to reduce the cost; it can be called a strategic move also as the company is fighting for its survival.

Process Used to decide what to outsource

Value-based process; All SDLC phases outsourced except for requirements formulation and integration testing.

Process used to identify higher savings and lower work: mainly maintenance and testing functions outsourced:

Selection of Operational Model

The Staff Extension Model

The Semi to Fully Autonomous Model

Process Used to Select Outsourcing Vendors

Combination of Competency Needed and The Personal Contact: The technical manager was Russian who knew this Russian Company.

Strategic Long-Term Relationship; SAIC, the owner of Telcordia, had signed a partnership relationship with an Indian Company.

Quality of Contract Negotiations

Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW). However, since the company was a small company, not enough contingency safeguards were put in the contract.

Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW).

Quality of Execution and Program Management

Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.

Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.

Quality of Results

Some surprises; developer’s creativity, “ We thought this would be nice.”

Quality issues were raised by the customers.

cost reduction, which, in a way is also strategic because Telcordia Technologies must reduce its costs to continue doing business with its client companies. Telcordia Technologies has decided to outsource to an Indian company the majority of testing and development functions for a legacy system, while keeping the functions of program/ project management, systems engineering, installation, deployment, and customer service center. In doing so, Telcordia Technologies has learnt from its previous outsourcing experiences, and is prepared to put the right kind of program management team, along with the Service Level Agreements that will insure the success of the outsourcing effort and above all, to meet the needs of its customers. Telcordia Technologies hopes to convert this partnership with the Indian company into a strategic alliance that will result into the growth of Telcordia Technologies’ business in the future.

1004

Period 2001-2003

MAnAgeMent oF outsourced worK by telcordIA technologIes It should be pointed out that Telcordia Technologies was originally formed to provide professional services and develop application software systems (operations support systems) to a group of telephone network/service providers (the client companies). Telcordia Technologies was also owned by these Client Companies. Telcordia Technologies was like an outsourced development center (ODC) for these client companies. Not surprisingly, many of the issues encountered in outsourcing are similar to those faced by Telcordia Technologies and the client companies in their interworkings. Telcordia Technologies has used various metrics to manage its outsourced work. As part of using outsourcing to achieve its business goals, Telcordia Technologies outsources only selective pieces.

The Use of Outsourcing as a Business Strategy

This is very similar to what Lacity and Willcocks (1998) identified in their work as the first best practice, that is, selective outsourcing decisions had higher success rates than total outsourcing or total insourcing decisions. As part of service contracts with Telcordia Technologies for the maintenance of the software systems, client companies have defined service level agreements (SLAs) for Telcordia Technologies to meet. As part of these SLAs, Telcordia Technologies is required to have a customer service center open 24 hours a day and 7 days a week. The reason for this SLA is the mission critical operations support systems (service assurance systems) that run around the clock. The customer service center has a 24-hour hot line where a live person must answer the phone call from the RBOC personnel who are managing these systems in the field (spread all over the USA). The client companies can either call Telcordia Technologies or enter the trouble report directly into the trouble record system (a software system dedicated just to this function). Other SLAs that have been defined are related to the turnaround time taken to resolve a customer trouble report (TR). Depending on the nature of the trouble (crash causing, service affecting, or just a nuisance), the turnaround time varies. In order to execute these SLAs, there is a process in place to classify the trouble reports into severity 1

(most serious), severity 2 (next most serious), and severity 3 (least serious but needed to be done). The specific criteria for each of these severities have been defined and agreed upon with the client companies. The first SLA regarding the trouble reports that Telcordia Technologies has to meet is the response time (the time taken to acknowledge the submitted trouble report). The range for this SLA is from the average of 15 minutes (for Severity 1 TR) to 3 hours (for Severity 2 TR). Another SLA is for problem identification. The average time for identifying the problem (root cause) is 12 hours. Another SLA has to do with the system restoration time. If a system is down, it has to be bought back in operation within 24 hours. If a problem requires a software release, that must be done within 15 days. These are just a few examples of many SLAs that Telcordia Technologies has to meet for client companies. The other types of metrics (Table 2) that Telcordia Technologies uses have to do with the quality of the software that either it develops inhouse or outsources. There is a direct impact of these metrics on the trouble reports in the field. Telcordia Technologies is an ISO 9001 and CMM5 company. It has some very rigorous quality metrics and process checks in place throughout the software development life cycle phases: planning, requirements formulation, design, development, product testing, deployment, and maintenance.

Table 2. Examples of metrics for a software development project Phases

Metrics

Planning

The proposal win rate, Over-price margin

Requirements Formulation

The number of changed milestones, the number of change controls, and the number of defects in the requirements.

Design

The number of issues in design reviews

Development

Unit testing results (# test executed), Multi-unit testing (# test executed)

System (Product) Testing

# test executed and passed, # test passed first time, Defect tracking charts (graphs), Defects being fixed, defect fixed, defects in test

Deployment, and Maintenance

Cutover time, surprises, # severity 1, #severity 2

Overall Performance/Productivity

The number of new lines of code The number of changed lines of code

1005

The Use of Outsourcing as a Business Strategy

Telcordia Technologies requires the outsourcing companies to meet the same metrics and SLAs that it meets for its clients. Its SLAs and metrics are keyed to its business goals. Recently, when the Client Companies wanted Telcordia Technologies to lower the maintenance cost, Telcordia Technologies negotiated a new set of SLAs that were relaxed compared to the old ones and can be achieved at lower costs. Thus the SLAs can be important to remain competitive.

conclusIon This chapter discussed how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both short-term tactical goals as well as the long-term strategic goals. Next, we discussed the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. Finally, the chapter presented the challenges of making these things happen, what worked well, and the lessons learned.

Future reseArch dIrectIons For the future directions of this research, we will watch if Telcordia Technologies stays with their current outsourcing strategy. It just (January 2007) got yet another CEO, and the vice president incharge of outsourcing (and setting up a branch in India) is gone. If Telcordia Technologies stays with its current strategy, discussed in this chapter, and implements it, we will keep track of its success and whether indeed it helps the company

1006

become competitive, and hence, survive and grow. As fellow researchers look at other companies that faced similar opportunities and challenges, we will gain the ability to make in-depth cross comparisons.

reFerences Aron, R. (2003). Sourcing in the right light. Optimize, June. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Jounal of Management, 39, 32-36. Creswell, J. W. (1998). Qualitative inquiry and research design: Choosing among five traditions. London: Sage Publications. Davidow, W. H., & Malone, M. S. (1992). The virtual corporation. New York: Harper Business. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23, 660-679. Funk, J., Sloan, D., & Zaret, S. (2003). Beware the dangers of outsourcing, Optimize, April. Gardner, W. D. (2003). Outsourcing’s benefits too much to ignore. TechWeb News, October 31, 2003. Goolsby, K. (2003). Outsourcing bears the freight of keeping business strategies on track. Outsourcing Journal, June. Insinga, R. C., & Werle, M. J. (2000). Linking outsourcing to business strategy. Academy of Management Executive. Lacity, M. C., & Willcocks, L. P. (1998). An emperical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3).

The Use of Outsourcing as a Business Strategy

McClellan, K., Marcolin, B. L., & Beamish, P. W. (1995). Financial and strategic motivations behind outsourcing. Journal of Information Technology, 10, 299-321. Moran, N. (2003). Looking for savings on distant horizons. Global Outsourcing Overview, FT. Special Report on Outsourcing, July 2. Raynor, M. E., & Littmann, D. (2003). Outsource IT, not core value. Optimize, February. Skapinker, M. (2003). Much to question on outsourcing. FT Special Report on Management, June 30, 2003. Yin, R. K. (1994). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.

AddItIonAl reAdIngs The reader is advised to the following references for further information related to the success of outsourcing engagements:

Goth, G. (1999). The ins and outs of IT outsourcing. IT Professional (IEEE), 1, 11-14. Heeks, R., Krishna, S., Nicholson, B., & Sahay S. (2001). Synching or sinking: Global software outsourcing relationships. IEEE Software, 18(2). Karabulut, Y., Kerschbaum, F., Massacci, F., Robinson, P., & Yautsiukhin, A. (2007). Security and trust in IT business outsourcing: A manifesto. Electronic Notes in Theoretical Computer Science (ENTCS), 179, 47-58. Lindskog, H. (2005). SOTIP as a model for outsourcing of telecom services for the public sector. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences, 3(6), 261-261. Verhoef, C. (2005). Quantitative aspects of outsourcing deals. Science of Computer Programming, 56(3), 275-313. Wentges, P., Brandes, H., Lilliecreutz, J., & Brege, S. (1997), Outsourcing—Success or failure? Findings from five case studies. European Journal of Purchasing and Supply, 3(2), 63-75.

This work was previously published in Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy, edited by A. Gupta, pp. 167-178, copyright 2008 by Information Science Reference (an imprint of IGI Global).

1007

1008

Chapter 4.3

Global Integrated Supply Chain Implementation:

The Challenges of E-Procurement Margaret L. Sheng Hamline University, USA

AbstrAct

IntroductIon

Supply chain functions must operate in an integrated manner in order to optimize performance. However, the dynamics of the organization and the market make this challenging. In particular, the procurement function is a crucial link between the sources of supply and the organization. With most organizations spending at least one-third of their overall budget to purchase goods and services, procurement holds significant business value. Emerging technologies, especially e-procurement, are promising to change the picture of traditional procurement processes. However, the implementation of e-procurement is facing significant reengineering and change management challenges. This study identifies four main challenges in e-procurement implementation: business process integration, technological issues, value creation, and change management. The major challenge among them is change management. Critically, leadership is one of the primary requirements to make the change successfully.

The supply chain is a network of suppliers, factories, warehouses, distribution centers, and retailers through which raw materials are acquired, transformed, and delivered to the customers. Supply chain management is the strategic, tactical, and operational level decision making that optimizes supply chain performance. The strategic level defines the supply chain network (i.e., selection of suppliers, transportation routes, manufacturing facilities, production levels, warehouses, etc.). The tactical level plans and schedules the supply chain to meet actual demand. The operational level executes plans. Tactical and operational level decision-making functions are distributed across the supply chain. In order to optimize performance, supply chain functions must operate in an integrated manner. However, the dynamics of the organization and the market make this challenging; materials do not arrive on time, production facilities fail, workers are ill, customers change or cancel orders, and

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Global Integrated Supply Chain Implementation

so forth, causing deviations from the plan. In particular, the procurement function is a crucial link between the sources of supply and the organization. With most organizations spending at least one-third of their overall budget to purchase goods and services, procurement holds significant business value (Killen & Kamauff, 1995; Zenz & Thompson, 1994). Emerging technologies, especially Internet-based procurement, are bringing the promises to change the picture of costly, time-consuming, and inefficient procurement processes by enabling major improvements in terms of lower administrative overhead, better service quality, timely location and receiving of products, and increased flexibility. Meanwhile, growing pressures from increasingly competitive markets all around the world reinforce the need to reorganize and streamline inefficient procurement procedures. The corporate procurement traditionally has been separated along two dimensions: the direct or production-oriented procurement and the indirect or non-production-oriented procurement. Direct procurement generally refers to the purchasing of items that immediately enter a manufacturing process, such as the parts that are assembled into a car or computer. Indirect procurement includes everything that is not covered by direct procurement; for instance, maintenance, repair, and operations (MRO) supplies that are consumed in the production process and required to keep up the manufacturing process. Indirect procurement also includes items as diverse as office supplies, computer equipment, promotional material, travel, and other services (Segev, Gebauer & Farber, 2000). Other researchers also include items in the indirect category such as training materials, accessories, temporary staff, public relationships, entertainment (Croom, 2000), and contract workers and consultants (Moozakis, 2001). The direct procurement has been emphasized and treated differently than indirect procurement.

Compared to direct procurement, indirect procurement covers a wider range of products and services that typically are involved with a larger number of buyers (possibly every employee) and is much less predictable with respect to buying volume and frequency. It often is not regarded as strategic relevance but rather as a clerical function. Thus, it comes at no surprise that businesses processes typically are not well standardized, most paper-based, and, as a result, inefficient and non-transparent (Gebauer & Segev, 2001). Incidentally, the difference between direct and indirect procurement also shows in organizational charts; direct procurement often reports to a vice president of supply chain operations (or similar), while indirect procurement might fall into the responsibility of the finance function. The line of management for both areas only meets at the level of the chief executive officer. In the literature, the indirect products and services have received little attention, as by far the dominant focus of the purchasing literature has been the management of production item procurement. However, a multinational company may spend millions of dollars of expenditure on indirect goods and services. Much of them may be carried out locally or divisionally, bypassing central guidelines. For example, a large manufacturer bought office supplies from as many as 300 suppliers regularly, more or less. Nobody was in control of the overall process, and each business unit had its own procedures in place. From a corporate perspective, the fragmented procurement resulted in slow and expensive processes and excessive product costs due to poor leverage of buying power (Nelson, Moody & Stegner, 2001). According to PricewaterhouseCoopers, a 10% reduction in purchase costs easily can lead to a 50% rise in profit margin. IT-based tools have been introduced to support production procurement and supply chain operations. However, procurement activities in the nonproduction items have long been underestimated

1009

Global Integrated Supply Chain Implementation

on an organizational level as well as with respect to the use of IT. Because of little process automation and a majority of manual activities, the nonproduction procurement is often an uncoordinated and non-valued activity (Croom, 2000; Gebauer & Segev, 2000). Available IT systems usually do not cover the full process or are very expensive to set up. Internet and Web-based applications promise alternatives that are less expensive and easier to set up. The new systems (i.e., e-procurement) allow employees to order goods directly from their PCs, either through an Intranet or a Web site. Orders are channeled automatically to suppliers, often via a hub that acts as a host for their online catalogs. The catalogs hold the companies negotiated prices as well as authorization rules that ensure the right people buy only what they are allowed to. When employees put the job out to tender, it will come back with a list of three or four suppliers. Operators of procurement hubs increasingly will scour the world for new low-cost suppliers in order to offer a better service for their purchasing customers. They will check out these suppliers for quality and integrity; if necessary, build catalogs for them; and plug them into their systems. E-procurement also allows employees to combine catalogs from several suppliers, check the availability of items, place and track orders, and initiate payment over the Internet. It does not mean just putting purchasing decisions online, but it also means linking suppliers into the purchasing network and broadening the range of employees who can carry out transactions. Therefore, eprocurement is not an example of computerizing the old manual process but of reengineering the process itself. As a result of significant impact from the Internet, the traditional purchasing function is now facing substantial reengineering and change management challenges. The purpose of this study is to identify the challenges of e-procurement implementation, therefore enhancing its success.

1010

lIterAture revIew Procurement vs. Purchasing Procurement is distinct from purchasing. Procurement includes all activities involved in obtaining materials, transporting them, and moving them toward the production process (Segev, Gebauer & Beam, 1998). Purchasing is the act of buying and services, and represents a core element of procurement. Procurement processes take on many different forms in reality. Considering the types, uses, and value of the goods purchased, three categories of procurement have been distinguished (Hough & Ashley, 1992; Zenz & Thompson, 1994). •

•

•

Procurement of raw material and production goods usually is characterized by large quantities, high frequencies, and important and unique specifications; just in time is often critical. Procurement of maintenance, repair, and operation (MRO) supplies is characterized by low unit cost and high variety, but relatively high frequency; examples include office supplies. Procurement of capital goods means dealing with goods of high value at low frequency (e.g., new factories) and/or procuring items outside the regular purchasing process, often because of convenience or speed requirements.

Close supplier relationships are particularly relevant for direct procurement (raw materials or production goods), where the quality and availability of suppliers can be of critical importance (Lutz, 2001). A company typically spends several years establishing the relationship and ensuring that the supplier meets the high quality standards. The unknown suppliers are unthinkable in this

Global Integrated Supply Chain Implementation

context. For indirect procurement (MRO and capital goods), efforts to consolidate the supply base and to establish relationships with preferred suppliers often consider cost rather than quality and availability (Cousins, 1999). Buying firms expect better product prices and less cost to manage the supplier base. These three types of procurements also involve three main categories of costs (Gebauer & Zagler, 2000). In the first category, the cost of procurement of raw materials is the product cost (and quality). To ensure consistent quality, the pre-selection of suppliers and active supplier management are critical activities of the sourcing cycle. The involvement of suppliers in target-costing activities and collaborative design has proven useful to limit total project cost. In the second category, the cost of procurement of MRO items is the process cost. In this category, the process costs may equal or even exceed the product cost. The third category is the technology cost for capital goods. Typically, the characteristics of capital goods are high complexity, innovation, and strategic relevance. Therefore, the range of available supplies is typically very limited (Brown, 2000). Procurement activities also can be categorized: long-term-oriented strategic and short-termoriented transactional activities (Segev, Gebauer & Beam, 1998). Long-term-oriented strategic tasks include sourcing activities, identifying vendors, and establishing and managing supplier relationships, as well as contract negotiation and management, but also the design and implementation of buying procedures and financial and asset management. Activities are long-term-oriented, and the resulting supplier relationships often last for many years. Short-term-oriented transactional tasks are mostly clerical order-related activities. Many purchasing organizations distinguish between activities of sourcing and buying tasks (Dobler & Burt, 1996). Sourcing processes cover more than just one or a few individual buying operations and include market intelligence, demand forecast and planning, identification of

suppliers, requests for quote and bidding, negotiation of terms of contract, selection of sources and finalizing of contract, and supplier management. Buying processes typically refer to single transactions only and include activities such as selection of product and supplier from catalog or other sources, submission of internal requests and management approval, submission of purchase orders to pre-approval supplies, delivery and payment, after-sales support, and customer service.

the development of Internet-based Procurement systems With procuring processes typically involving a large amount of information processing and communication, procurement is well suited for IT support and automation throughout all its steps. Early initiatives to introduce Internet-based technologies to support procurement concentrated on the automation of highly structured processes. Desktop purchasing systems (DPS) extend traditional EDI systems with user-friendly, browser-based interfaces, increased flexibility, and automated workflow, which are well suited to facilitate end-user empowerment and self-service. Based on electronic catalogs as a central data repository, these systems are readily available and well suited to automate highly repetitive activities, as they prevail in the category of process costoriented procurement (low-unit value and highvariety items purchased at high frequencies, such as MRO items). In many cases, the operational gains from reduced process costs and lead times allowed procurement departments to reduce their administrative workloads, free time, and resources for strategic sourcing activities. Recent developments are most prevalent in the area of Internet-based exchange, be they horizontal or industry specific (Kaplan & Sawhney, 2000; Phillips & Meeker, 2000). While horizontal exchanges connect market participants of the same function, such as automotive industry, exchanges provide information and services to

1011

Global Integrated Supply Chain Implementation

all members of a particular industry. The other examples of trade exchange include MetalSite, e-STEEL, MetalSpectrum, GlobalNetExchange, WorldWideRetailExchange (retail), and E2Open (electronics). Although the boundaries are usually indistinct, exchanges tend to provide less automation than DPS but cover a wider area of products, typically procured at low frequency with a focus on product cost and quality. Also, solutions oftentimes support only a few aspects of the procurement process, such as supplier identification (supplier directories) or obtaining access to product information.

supply chain Management Supply chain management (SCM) has been used to partner with suppliers and to integrate logistics functions and transportation providers to efficiently and effectively manage the value chain. Most of the recent literature on supply chain management focuses on manufacturers’ attempts to integrate processes and form alliances with suppliers to more efficiently and effectively manage the purchasing and supply function. The supply chain management philosophy expands the internally focused integrating activities of logistics by bringing multiple organizations along the supply chain, together with the common goals of efficiency and end-consumer satisfaction (Harwick, 1997). SCM creates a virtual organization of independent entities to efficiently and effectively manage the movement and transformation of materials, components, products, and services along the supply chain until final delivery to the end user (Croom, 2000). Thus, SCM integrates a number of key functions, including purchasing, demand management, manufacturing planning, and materials management throughout the supply chain. The short-term objective of SCM is primarily to increase productivity and reduce inventory and cycle time. To realize this objective, all strategic partners must recognize that the purchasing func-

1012

tion is an important link between the sources of supply and the organization. Indeed, the origin of SCM can be traced back to efforts to better manage the transportation and logistics function. In this respect, SCM is synonymous with integrated logistics systems that control the movement of goods from the suppliers to end customers (Ellram & Billington, 2001). Integrated logistics systems seek to manage inventories through close relationships with suppliers and transportation, distribution, and delivery services. A goal is to replace inventory with frequent communication and sophisticated information systems to provide visibility and coordination. In this way, merchandise can be replenished quickly in small lot sizes and arrive where and when it is needed (Handfield, 1994).

collaborative commerce The concept of collaborative commerce is defined as multiple companies working together to achieve better results than they could together. Clearly, the Internet is the key enabler of that. Corporate purchasing has been shaken by those collaborative activities. A new category of buy-side software from vendors like Ariba and CommerceOne appeared on the scene. This software allows companies to automate and streamline the purchase of indirect, everyday supplies that are not used in products. Then came net markets with their tantalizing promise of even greater cost saving in the purchase of direct products—the raw materials that actually go into a product. Recently, several hundred independent exchanges have opened for business and announced plans to build their own Web-based marketplaces. These online markets create new ways of doing business in traditional industries, such as papers and chemicals, where the process is buying and selling commodity-like products. Buyers and sellers can meet on a virtual trading floor and transact quickly and efficiently.

Global Integrated Supply Chain Implementation

We see that the first wave of Internet-enabled collaboration focused on the supply chain, as companies collaborated with their customers, suppliers, and intermediaries (Bowles, 2000). But the second wave is extending to enterprises with which a company previously had no relationship. Collaborative commerce rapidly is becoming the norm. Over the next years, increased business process integration will lead companies to a big payoff—a more synchronized supply chain that yields better customer service, higher quality products, lower inventory, and faster delivery.

transaction cost theory Economists have classified transaction among and within organizations as (a) those that support coordination between multiple buyers and sellers; that is, market transaction and (b) those that support coordination within the firm as well as the industry value chain (i.e., hierarchical transactions) (Wigand, 1997). Marketing hierarchy progressing from manufacturer to wholesaler, retailer, and consumer is associated with transaction costs. Transaction costs include the costs of searching, bargaining, coordinating, and monitoring, whicht companies incur when they exchange goods, services, and ideas (Benjamin & Wigand, 1995; Wigand, Picot & Reichwald, 1997). The major force driving electronic commerce is the ability of networks to reduce transaction costs (Auger & Gallaugher, 1997; Garcia, 1997). Capitalism depends on information to allocate resources efficiently. When businesses can access the best available information at the most appropriate moment, they can reduce their costs and enhance their productivity. Similarly, when buyers and sellers can easily locate one another and have a good idea of what they can expect in terms of quality and prices, they are more likely to engage in trade. The ever-increasing and innovative use of the Internet or the Web to conduct business is a clear example of firms’ desires to reduce transaction costs. Thanks to information

technology, the evolution from separate databases within the firm to linked databases among firms to shared databases among firms, transaction costs, indeed, are falling rapidly (Wigand, 1997). Malone, Yates, and Benjamin (1987) also suggested that the communication effect via information technology and a tighter electronic linkage between buyers and sellers may lead to reduced transaction costs.

strategic networks Strategic networks are defined as the long-range, deliberate, cooperative, and goal-oriented organizational forms among distinct but related organizations that enable such network member organizations to sustain competitive advantage vis-à-vis their competitors outside the network (Jarillo, 1993). Wingand, Picot, and Reichward (1997) emphasized strategic networks as a distinct organizational form; that is, separate from hierarchy and market. Networks optimize communication, and a more efficient exchange of information becomes possible. As Powell (1990) stated, information passed through networks is less thick than information obtained in the market (since the price mechanism tends to treat information as a commodity and thus tries to make it as scarce as possible) and freer than communication in a hierarchy (since information is not filtered as clearly through power relationships). Therefore, network organizations combine the advantages of hierarchies, such as better control and coordination of actors, with the advantages of small, independent companies, who have more innovative abilities, tend to be in closer contact with the market and more flexible, with smaller staffs, fewer intermediaries, and lower overhead. Malone et al. (1987) believe that the development of interorganizational electronic networks would increase the number of buyers and sellers. The use of open information systems may be seen to provide greater levels of information to

1013

Global Integrated Supply Chain Implementation

buyers, thereby opening up greater competitiveness among providers. In addition, they argued that the use of electronic communication links between firms could reduce both the costs of coordinating economic transactions and the costs of coordinating production. As a result, the lowered coordination costs would encourage more outsourcing, enabling firms to buy goods and services less expensively than by producing them in house (Malone et al., 1987, 1989).

•

chAllenges

•

This study addresses the challenges of e-procurement implementation, thereby providing significant information to executives and operational managers in industry to play a proactive role in global integrated supply chain processes. Overall, four main challenges come from business process integration, technology issues, value creation, and change management.

business Process Integration The premise of business process integration is that the rapid redesign of critical process of a company will generate improvements on the performance of the company and create the competitive advantage in the global marketplace. •

1014

Convergence Between Direct and Indirect Goods. The division between direct and indirect goods is blurred. E-procurement encourages commoditization (brand details often are stripped from the catalogs), which means they will be ideal for standard production items (nuts, bolts, paper clips, etc.) as well as non-production, indirect goods. The real distinction is between purchases that can be commoditized and those that cannot. Traditionally, direct and indirect procurements have been separated. Convergence between them is a big change for an organization.

Back-Office Integration. E-procurement systems need to integrate with purchasing, inventory, warehousing, invoicing, and the planning requirement departments. Also, the buyers and suppliers must determine the business process for document exchange, including product requisition, selection of order, issuance of RFQ, purchase order acknowledgement, evaluation of proposal, negotiation/award of contract, issuance of purchase order, fulfillment of orders, and payment of order. Supply Base Reduction. Small supplier bases go in reverse. This does not happen for critical components, where the need for ever-closer collaboration continues to shrink supplier numbers. But, if you are buying paper clips, why not cast your search as wide as possible? Reverse auctions allow you to spread the net far more widely, and the Internet is excellent at handling complexity. This is not to say that the end buyer will deal necessarily with more suppliers but will be dealing with a bigger supplier base. Organizations hope to spend less to manage many suppliers. The challenge appears in the consolidation of suppliers.

technology Issues Organizations are utilizing technology to integrate business processes. There are still several issues in information technology. •

•

Security Concerns. The issue of security is a major concern, especially in the context of electronic payments. The capability of any system to provide secure data transfer was regarded as a major criterion for both existing and potential users of e-procurement systems. Inefficiencies in Locating Information. This lack of interoperability and the lack of standards make it difficult to pull all

Global Integrated Supply Chain Implementation

•

•

•

buyers and suppliers together into a single protocol or a few market spaces for buying and selling. Despite its steady growth, the current use of Internet-based technologies has not yet reached critical mass. Catalog Content Management. The company must make sure that catalogs are properly maintained in a timely, accurate, and updated manner. Besides that, another challenge the buy-side community faces is when suppliers are not willing to share the information openly with all members of the supply chain by providing all information in the e-catalog. A buyer many be trapped in a situation when he or she compares products costs without knowing the details in the quality specification as well as a good delivery time option. E-Bidding. Writing up an electronic request for quote and submitting it to the electronic market space becomes easy for buying organizations. Suppliers are able to contact each other electronically, negotiate a team-based approach, and automatically respond to the request for quote. The challenge arises from multiple levels of negotiations on the Internet. E-Auction. The new generation MRO, electronic auctions, starts to play an important role. A prospective purchaser could dial in and see the spot price of paper, chairs, or office supplies and determine whether to purchase. In the future, next generation auctions also will feature more complex items and allow matching of supply and demand, not only with respect to price, but also for features such as service, quality, or speed of delivery.

available anywhere, anytime, and by any means. Simplification, transparency, standardization, and automation of procurement processes always are challenging. •

•

Empower Employees. Now employees can check price, availability, and delivery time from their desktop. They can handle the entire procurement process by themselves. From a perspective of human resource, e-procurement can reduce training requirements. Because employees can purchase anytime and anywhere, crews’ relocation also will be reduced. In addition to freeing up the procurement department, the finance, manufacturing, and logistics personnel also need to do more value-added activities by pushing purchasing decisions back to end users. Increased Procurement Control. A variety of MRO items consider difficulty in terms of developing specialist knowledge regarding product and service technical characteristics and supply market conditions. The ability to consolidate and categorize suppliers, services, and MRO goods is seen as an enabler in the move toward greater professional contribution to MRO procurement. In addition, the centralized purchasing function was able to exert greater control over sources of supply, purchase price, and inventory policy. Organizations should manage their MRO items in a more strategic manner through such actions as the establishment of single-source arrangements, consolidation of commodities and services, and increased buying power over the supply base.

change Management value creation The e-commerce world is value creation competition. More values created by e-procurement are toward faster, simpler, cheaper, more convenient,

This is an age of accelerated changes characterized by the globalization of markets, ubiquitous presence of information technology, and integration of business process and enterprises. It

1015

Global Integrated Supply Chain Implementation

will not be the brightest or the strongest who will survive, but those who are most adaptive to change. E-procurement implementation needs several changes. •

•

1016

Role Change in Purchasing Department. There will be changes to business practices and organizational structures over the next years, as e-commerce solutions become more mature and more widespread. As a general development, we see the role change between end users and purchasing departments (i.e., new procurement system continues either to automate purchasing operations or to help push them down to the end user, allowing the purchasing department to concentrate more on strategic and managerial tasks, such as partnership relationships and long-term supply contract). Since employees can purchase directly through their Web access, purchasers no longer need to process orders, invoices, or chase delivery. As a result, purchasing departments become composed of mostly managers and less of clerks, secretarial staff, and administrative support. Additionally, the determining factor of geography reduces, freeing organizations to obtain the best deal and the most appropriate products from anywhere around the globe. Staff Resistance. The purchasing staff resists online solutions because, although not unreasonable, they detect a threat to their job security. Organizations no longer rely extensively on interpersonal communication (telephone, face-to-face negotiation, fax, etc.). In fact, their roles change dramatically, because they are freed from burdensome clerical labor that takes up 70% of their time in manual systems, and they are allowed to put their real skills into practice by negotiating contracts, monitoring supplier performance, and building relationships.

•

Lack of Top Management Support and Vision. This is understandable, because not even researchers and market analysts are sure yet of the exact direction in which electronic procurement will move. There is a long road from friction-free e-procurement to reality. However, successful e-procurement is a topdown process that requires a champion and a visionary at the board room table, who can grasp the strategic potential of the procurement issue. Technology changes rapidly. To create sustainable competitive advantage, organizations need to consider their Internet plan as part of a larger strategy-oriented picture. Revolutionary changes happen much more slowly than anticipated, as many hurdles have to be overcome. Being aware of these hindering factors is just as essential as knowing about the opportunities that new technologies present.

Future trends The consolidation of suppliers shows that increasing integration will continue within organizations and among enterprises. Existing evidence in increasing new generations of e-auction and e-bidding at the industry level also indicates that increases in investment in information technology are associated with a decline in the average firm size and a rise in the number of firms. It may be expected that greater information availability will lead firms to encourage their level of outsourcing or global sourcing. As a consequence, an increase in the proportion of bought-out goods and services will place an increased strategic emphasis on the purchasing process. With the widespread wireless, the future trend will involve mobile e-procurement. Substantial investments have been made to advance mobile technologies and applications, and already there are signs that developments have progressed

Global Integrated Supply Chain Implementation

more slowly than anticipated (e.g., the bidding for UMTS licenses in Europe that still have to pay off telecommunications companies). To date, mobile technologies primarily have been applied in consumer-oriented areas, while the business world still awaits large-scale usage. At present, the use of mobile technologies primarily concerns voice communication rather than the wireless transfer of data, thus effectively replacing (wired) telephone lines rather than desktop computers.

conclusIon In spite of the value that e-procurement creates, the challenges of implementing this application do exist. Lessons learned from a few companies that have embarked on the e-procurement endeavor indicate that factors such as incompetent infrastructure, human resistance to change, and conflicting policies and standards pose immense pressure for the companies to move forward. The biggest challenge among them is change management. E-procurement is not about the introduction of software; it is about the change of business processes and the change of human habits. Moving people from their comfort zones means moving from the familiar, secure, and controllable to the unfamiliar, insecure, and uncontrollable. Sometimes, it is about the shifts in power and influence, such as loss or change of roles in the organization. The applications were easy; the people issues were tougher. Essential elements such as preparing the organization for change, developing a sense of the scope of the change, communicating the motivation and need to change, and training are much more difficult to accomplish than finding technology that works and getting it all plugged in and interfaced (which is not to say technology integration is easy). The hard parts are management tasks. Building organizational support is harder than building identification and communication systems. It is really tough to do, unless manage-

ment gets involved. Initiating change from the top creates a culture that embraces change and a shared vision that energizes the organization. The major organization transformation is not the job of middle management. Rather, the CEO and senior management team need to establish the context of change. Change, therefore, is primarily about leadership. A senior management team needs to communicate the vision of change throughout the organization. A frequent and consistent manner is a key component of that communication. While change initiatives often arise out of crisis and are driven by dedicated leaders, research indicates that change also can be triggered in response to opportunity and organization growth. Change is not just about reducing costs or improving profitability but about the invention of strategies and management processes. Performance evaluations, rewards, career management, and operations all must change. Starting with standardized goods, especially MRO procurement, letting employees shop on their own will leave the procurement department to focus on strategic tasks (i.e., establishing and maintaining close relationships with suppliers and business partners, eventually leading to streamlined processes and leveraged buying power. Also, the company has employees participate in the software upgrade; the company is able to combine training with installation. Employees felt really empowered by the experience and were much comfortable with new interface and software. Furthermore, two organizations have created flatter structures with more empowered employees who are trusted more, expected to conform to shared values, and encouraged to be more entrepreneurial and innovative. Those accelerate change processes. Selling generates revenues; buying right generates profits. E-procurement needs to be viewed as a way of doing business, not as a set of software applications that need to be installed and run. That is why the organization must be prepared for change. The demise of companies will come from a lack of competitive adaptiveness; essen-

1017

Global Integrated Supply Chain Implementation

tially, most of these companies will not survive, because they are too slow to keep up with the pace of change.

reFerences Auger, P., & Gallaugher, J.M. (1997). Internetbased sales presence for small business. The Information Society, 13(1), 55-74. Benjamin. R., & Wigand, R. (1995). Electronic markets and virtual value chains on the information superhighway. Sloan Management Review, 36(2), 62-72. Bowles, J. (2000). E-procurement. Forbes, 166(3), 189-216. Brown, R. (2000). Bechtel’s approach to eprocurement. Berkely: Haas School of Business, University of California, Berkeley. Brynjolffson, E., Malone, T., Gurbaxani, V., & Kambil, A. (1993). Does information technology lead to smaller firms? Cambridge, MA: MIT. Cash, J.I., & Konsynski, B.R. (1985). IS redraws competitive boundaries. Harvard Business Review, 2, 134-142. Cousins, P.D. (1999). Supply base rationalization: Myth or reality? European Journal of Purchasing and Supply Management, 5(3/4), 143-155. Croom, S.R. (2000). The impact of Web-based procurement on the management of operating resources supply. The Journal of Supply Chain Management, 36(1), 4-11.

Garcia, D.L. (1997). Networked commerce. The Information Society, 13(1), 9-41. Gebauer, J., & Segev, A. (2000). Emerging technologies to support indirect procurement: Two case studies from the petroleum industry. Information Technology and Management, 1, 107-128. Gebauer, J., & Segev, A. (2001). Changing shapes of supply chains—How the Internet could lead to a more integrated procurement function. Berkeley: Haas School of Business, University of California, Berkeley. Hammer, M. & Champy, J. (1993). Reengineering the corporation: A manifesto for business revolution. New York: Harper Business. Handfield, R. B. (1994). U.S. global sourcing: Patterns of development. International Journal of Operations and Production Management, 14(6), 40-51. Harwick, T. (1997). Optimal decision-making for the supply chain. APICS-The Performance Advantage, 7(1), 42-44. Hough, H. E. & Ashley, J. M. (1992). Handbook of buying and purchasing management. Englewood Cliffs, NJ: Prentice-Hall. Jarillo, J. C. (1993). Strategic networks: Creating the borderless organization. Jordan Hill, UK: Butterworth-Heinemann. Johnston, H. R. & Vitale, M. R. (1988). Creating competitive advantage with Inter-organizational information systems. MIS Quarterly, 12(2), 153165.

Dobler, D.W., & Burt, D.N. (1996). Purchasing and supply management. New York: McGraw Hill.

Kaplan, S. & Sawhney, M. (2000). E-hubs: The new B2B marketplaces. Harvard Business Review, 78(3), 97.

Ellram, L., & Billington, C. (2001). Purchase leverage considerations in the outsourcing decision. European Journal of Purchasing and Supply Management, 7, 15-27.

Killen, K. H. & Kamauff, J. W. (1995). Managing purchasing: Making the supply team work. New York: McGraw Hill.

1018

Global Integrated Supply Chain Implementation

Lutz, J. (2001). Procurement strategies for eBusiness. Haas School of Business, University of California, Berkeley. Malone, T. W., Yates, J., & Benjamin, R. I. (1987). Electronic markets and electronic hierarchies. Communication of the ACM, 30(6), 484-497. Malone, T. W., Yates, J., & Benjamin, R. I. (1989). The logic of electronic markets. Harvard Business Review, 67(3), 166-170. Moozakis, C. (2001). E-procurement for servicesTexas Instruments uses Clarity to better manage contract workers. InternetWeek, 876, 17-18. Nelson, D., Moody, P. E., & Stegner, J. (2001). The purchasing machine: How the top ten companies use best practices to manage their supply chains. New York: Free Press. Phillips, C. & Meeker, M. (2000). The B2B Internet report: Collaborative Commerce. Powell, W. W. (1990). Neither market or hierarchy: Network form of organization. In B. M. Staw & L. L. Cummings (Eds.), Research in organizational behavior (vol. 12, pp. 295-336). Greenwich, CT: JAI Press Inc.

Ramsdell, G. (2000). The real business of B2B. McKinsey Quarterly, (3), 174. Segev, A., Gebauer, J., & Beam, C. (1998). Procurement in the Internet Age-Current practices and emerging trend. Haas School of Business, University of California, Berkeley. Segev, A., Gebauer, J., & Farber, F. (2000). The market for Internet-based procurement systems. Haas School of Business, University of California, Berkeley. Wigand, R. T. (1997). Electronic commerce: Definition, theory, and context. The Information Society, 13(1), 43-54. Wigand, R. T., Picot, A., & Reichwald, R. (1997). Information, organization and management: Expanding markets and corporate boundaries. Chichester, UK: Wiley. Zenz, G., Thompson, G. H. (1994). Purchasing and the management of materials (7th ed.). New York: Wiley & Sons.

This work was previously published in Global Integrated Supply Chain Systems, edited by Y. Lan; B. Unhelkar, pp. 83-96 copyright 2006 by Information Science Publishing (an imprint of IGI Global).

1019

1020

Chapter 4.4

Environments for VE Integration Maria Manuela Cunha Polytechnic Institute of Cávado and Ave Higher School of Technology, Portugal Goran D. Putnik University of Minho, Portugal

IntroductIon Most definitions of virtual enterprise (VE) incorporate the idea of extended and collaborative outsourcing to suppliers and subcontractors in order to achieve a competitive response to market demands (Webster, Sugden, & Tayles, 2004). As suggested by several authors (Browne & Zhang, 1999; Byrne, 1993; Camarinha-Matos & Afsarmanesh, 1999; Cunha, Putnik, & Ávila, 2000; Davidow & Malone, 1992; Preiss, Goldman, & Nagel, 1996), a VE consists of a network of independent enterprises (resources providers) with reconfiguration capability in useful time, permanently aligned with the market requirements, created to take profit from a specific market opportunity, and where each participant contributes with her best practices and core competencies to the success and competitiveness of the structure as a whole. Even during the operation phase of the VE, the configuration can change to assure

business alignment with the market demands, traduced by the identification of reconfiguration opportunities and constant readjustment or reconfiguration of the VE network to meet unexpected situations or to keep permanent competitiveness and maximum performance (Cunha & Putnik, 2002, 2005a, 2005b) The implementation of the VE model should assure reconfiguration dynamics, which is dependent of (1) the reduction of reconfiguration costs and effort, that is, requires a balancing between reconfiguration dynamics and reconfiguration time and costs, and (2) the capability to preserve the firms’ private knowledge on products or processes. Considering that the VE concept aims to represent a new organizational paradigm for enterprises in general and, in that way, permeating virtually the whole economy and even society (through the concept of virtual organizations), we could talk about the social costs of ineffective

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Environments for VE Integration

and inefficient integration of VE. However, many authors recognize that the present solutions for VE integration are either inexistent or insufficient. Therefore, there is a need for further effort by the community towards satisfactory and competitive solutions. In the article, we introduce some of the most recent developments and environments to cope with the VE requirements, such as the electronic marketplaces, including the recent generation of collaborative electronic marketplaces, breeding environments, virtual clusters, and so forth, and present the market of resources as a tool for managing, controlling, and enabling networking and dynamics in VE integration.

envIronMents For ve IntegrAtIon Value chains have been supported by a wide variety of technologies to communicate, but the pace of competition requires more intelligent and effective information and communication systems and technologies. The literature suggests that “traditional” Internet-based tools (such as WWW search engines, directories, e-mail, electronic marketplaces, etc.), can support some activities of VE integration, helping from procurement processes until the search of partners for a partnership, including electronic automated negotiation, electronic contracting, and market brokerage (Cunha & Putnik, 2003a; Dai & Kauffman, 2001; Dogac, 1998; Hands, Bessonov, Blinov, Patel, & Smith, 2000; O’Sullivan, 1998; Wang, 2001). Several authors (Carlsson, 2002; Martin, 1999) infer that the new VE paradigm claims for intelligent support for transactions, new effective methods for finding partners, intelligent support to virtual teams, knowledge management support systems, reliable decision support in VE/network design/configuring, effective tools for information filtering and knowledge acquisition, and support in the identification of the best alternatives to

keep the network aligned with the market, that is, competitive. Several supporting infrastructures and applications must exist before we can take advantage of the VE organizational model, such as electronic markets of resources providers, legal platforms, brokerage services, efficient and reliable global and intelligent information systems, electronic contractualization and electronic negotiation systems, and decision support systems and tools. This section introduces some examples of the recent generation of electronic marketplaces, the collaborative e-marketplaces, and introduces the recent concept of breeding environments, virtual clusters, electronic institutions, and the market of resources. We dedicate a separated section to the market of resources, a solution proposed by the authors, to fully support VE implementation, operation, and management, which is documented in depth in Cunha and Putnik (2006).

electronic Marketplaces To contribute to the reduction of search time in procurement and engineering, and to reduce transaction costs, manufacturers in several industries created electronic marketplaces (e-marketplaces) to pool their purchasing power and to develop technology platforms to exploit networked technologies. Electronic markets, like Covisint (http:// www.covisint.com) in the auto industry, Elemica in the chemicals industry, (http://www.elemica. com), or ManufacturingQuote (http://www. mgfquote.com) in the engineering domain, in general, provide environments to help collaboration, networking, and, to a certain extent, VE dynamics. Elemica was founded in August 2000 by 22 of the world’s largest chemical firms. It was the premier global neutral information network built to facilitate order processing and supply chain management, offering an integrated suite of product solutions that enable buyers and sellers of chemicals to streamline their business processes

1021

Environments for VE Integration

and to collaborate to achieve savings (Elemica, 2005). Its core business is an interoperable data exchange service capable of routing messages (such as purchase orders and shipping notices) between participants. In 2003, Elemica was able to connect up the chemical industry by offering integration of participants’ ERP systems into a hub-and-spoke network (Metcalfe, 2004). Elemica is an example of a collaboration e-marketplace; that is, it emphasizes interaction services. Collaboration e-marketplaces are expected to benefit participants by reducing the costs and increasing the quality of multiparty information exchange (Christiaanse & Markus, 2003). Covisint, officially announced in December 2000 as an independent company created by Ford, Chrysler, General Motors, Renault, Nissan, and a number of development partners, was projected to be a one-stop shop for the automotive supply chain, supporting buying, selling, and collaboration on a global platform: buyers can access all their suppliers on one site and, the same way, suppliers can have all their clients on one site, all sharing common procedures and processes. Covisint consists of a virtual supplier network specifically created for the automotive industry. Its extension to other industries by strategic partnerships was planned since their creation; at present, Covisint is applying its industry operating system to the health care sector. The Covisint (2001) project scope includes three major areas: •

•

1022

Procurement: It hosts a global market place where industry participants can purchase and sell a wide range of items and services via the Internet. Product development: It provides customers the ability to develop products via real time collaboration and strengthen global integration among partners creating a secure environment.

•

Supply chain: It allows individual organizations to see the current and future status of their supply chain inventory levels, material flows, and capacity constraints via Internet.

The service encompasses the complete interaction between suppliers or suppliers and their customers and includes procurement transactions, preproduction collaborative engineering, and exchange of information during production or for supply chain management. The neutral e-marketplace, Manufacturing Quote (http://www.mfgquote.com), was founded in 1999 and facilitated its first online sourcing transactions in February 2000. It is an online sourcing management system with automated supplier discovery and a global network of independent participating suppliers. MfgQuote uses its proprietary technology to intelligently connect buyers with suppliers of manufacturing services while facilitating the collaboration, quoting, due diligence, and analysis processes. This technology supports the request for quotations or proposals process, supplier discovery, engineering data exchange, revision control, collaboration, due diligence, analytics, and supplier management. Buyers using MfgQuote are typically original equipment manufacturers (OEMs) requiring the services of contract manufacturers and job shops. As a general rule, if an item needs to be manufactured in accordance with a drawing, computer aided design (CAD) model, or technical specification, it is appropriate to be sourced via MfgQuote. Another crucial example of an e-marketplace is given by the European Union through EURES— European Employment Services (http://europa. eu.int/eures/home)—and its project called The European Job Mobility Portal, especially as 2006 was the European Year of Workers’ Mobility. The service is portended as “the easy way to find

Environments for VE Integration

information on jobs and learning opportunities throughout Europe,” where both jobseekers and employers can meet and personalize the service according to their individual needs. EURES offers a human network of advisors to provide the information required by jobseekers and employers through personal contacts. In March 2006, there were about 700 EURES advisors across Europe. This field of intervention is also fundamental when we are addressing VE dynamics. The SEEMSeed project, funded by the European Commission Information Society Directorate-General in the frame of the “Policy-orientated Research” priority, pretends to contribute to a Single European Electronic Market (SEEM) “accessible and affordable to all businesses, organisations and individuals of any nature, size and geographic location, with no technological, cultural or linguistic restraints” (SEEMseed_Consortium, 2005). The SEEM will allow the dynamic creation and operation of collaborative structures to trade goods, services, or work in a peer-to-peer manner in the knowledge economy. The SEEM concept is driven by the changing work paradigms in business. The IST vision is based on ambient intelligence, which will be available in the near future. But making use of it requires not only technological development but also development of business models and behavioral models adapted to the new situation. In fact, several technologies and valuable applications have been developed that can support activities of the VE model such as the emarketplaces; however, they do not cope with the requirements of the VE model; that is, they do not implement the indispensable functionalities to assure the fast reconfigurability requirement.

virtual clusters A virtual industry cluster (VIC) consists of an aggregation of companies from diverse industries with well-defined and focused competences with

the purpose of gaining access to new markets and business opportunities by leveraging their resources (Molina & Flores, 1999). The intention of the formation of VIC is to enable search and selection of partners for the formation of VEs. VE brokers are intermediaries that possess is the ability to look for core competences in a virtual industry cluster and to integrate the competences of partners into successful VE (Molina & Flores, 1999).

electronic Institutions An electronic institution is a framework that, based on communication network, enables automatic transactions between parties, according to sets of explicit institutional norms and rules, ensuring the trust and confidence needed in any electronic transaction (Rocha, Cardoso, & Oliveira, 2005). The Electronic Institution is a meta-institution, which is a shell for generating specific electronic institutions for particular application domains. The meta-institution includes general modules related to social and institutional behavior norms and rules, ontology services, as well as links to other institutions (financial, legal, etc.). The main goal of a meta-institution is to generate specific electronic institutions through the instantiation of some of these modules that are domain dependent according to the current application domain (Cardoso & Oliveira, 2005; Rocha et al., 2005).

breeding environments The virtual organization breeding environment represents a long-term cluster/pool of organizations that are supported and facilitated for the establishment of virtual organizations and other forms of dynamic collaborative networked organizations (Camarinha-Matos & Afsarmanesh, 2004). If traditionally, such clusters were established in a given geographic region, having a common business culture and typically focused on a specific sector of the economical activity of

1023

Environments for VE Integration

that region, today, the challenge is the replacement of these clusters by a new “support-environment” called by the authors as a breeding environment. This environment is supposedly based in effective information and communication infrastructures to provide common grounds for collaboration, facilitation of the establishment of virtual organizations, and assisting with the operation of virtual organizations (Camarinha-Matos & Afsarmanesh, 2004)

Market of resources for virtual enterprise Integration The market of resources is already presented in a broad way in this encyclopedia, namely, its

functional structure and operation. A complete definition can also be found in Cunha and Putnik (2006).

A PrototyPe For the MArKet oF resources From the several functionalities offered by the market of resources to its users, we have chosen the Client Request for VE Creation to illustrate this service. In the prototype of Figure 1, we partially represent the Negotiation of VE Creation Request, where in the first step, the overall aspects of the required project are defined, client search

Figure 1. Request negotiation for VE creation: Step 1 (Cunha & Putnik, 2006)

1024

Environments for VE Integration

constraints, overall negotiation parameters, and a first attempt to fit the project in one or more focused markets (to facilitate the identification of a broker). In the second step (Figure 2), the broker is allocated. At this phase, the client could require an estimation of the cost of the service he is requiring, but the exact cost can only be calculated after the conclusion of the VE design.

The Request for VE Creation continues with the VE design, where, for each of the required resources, in two steps, the client specifies the requirements for resources selection and negotiation parameters (Figure 3) followed by a corresponding validation face to the grammar associated to the resources representation language (Figure 4). It is intended that the broker can chat with the client to

Figure 2. Request negotiation for VE creation: Step 2 (Cunha & Putnik, 2006)

Figure 3. VE design: Step 1 (Cunha & Putnik, 2006)

1025

Environments for VE Integration

Figure 4. VE design: Step 2 (Cunha & Putnik, 2006)

Figure 5. VE request formalization (Cunha & Putnik, 2006)

provide guidance in the design process. After the request for validation, the client receives a list of errors detected on the overall project evaluation, until de VE project is fully designed and valid. Finally, after the validation of the project, the request for the service of creating a VE according to the project can be formalized (Figure 5).

conclusIon The full potential of the VE model can only be achieved through supporting environments, such as those presented in the chapter. A study undertaken by the authors to validate the ability of the market of resources to support the high dynamics intrinsic to the VE model, based on an analytical cost and effort model and on the prototype of the market of resources, revealed its high performance when compared with the tra-

1026

ditional Internet-based solutions such as WWW search engines and directories and traditional electronic marketplaces. Results and discussion of this validation can be found in Cunha and Putnik (2003b, 2003c) and also in this encyclopedia. The market of resources revealed the ability to support higher reconfiguration requirements than the traditional tools (due to the more reduced reconfiguration time and cost it allows) and its suitability increases with product complexity (traduced by the number of required resources). Traditional tools only support simple products (one at each time) and do no support dynamics. By reducing reconfiguration time and cost, the market of resources is an enabler of reconfiguration dynamics and an enabler of dynamic organizational models as the virtual enterprise one. Obviously, dynamic organizational models are not general and “all-purpose” solutions. This model represents and adequate solution for

Environments for VE Integration

highly customized products with small series in highly competitive and changing environments where permanent business alignment is crucial, that is, situations where partnership stability is low (sometimes very low), dependency between partners is very weak, and reconfiguration dynamics should be as high as possible, given the permanent monitoring of the structure to traduce the most competitive solution at every moment of the product life cycle.

reFerences Browne, J., & Zhang, J. (1999). Extended and virtual enterprises: Similarities and differences. International Journal of Agile Management Systems, 1(1), 30-36. Byrne, J.A. (1993). The virtual corporation: The company of the future will be the ultimate in adaptability. Business Week, pp. 98-103. Camarinha-Matos, L.M., & Afsarmanesh, H. (1999). The virtual enterprise concept. In L.M. Camarinha-Matos & H. Afsarmanesh (Eds.), Infrastructures for virtual enterprises (pp. 3-14). Porto, Portugal: Kluwer Academic Publishers. Camarinha-Matos, L.M., & Afsarmanesh, H. (2004). The emerging discipline of collaborative networks. In L.M. Camarinha-Matos (Ed.), Virtual enterprises and collaborative networks. Kluwer Academic Publishers. Cardoso, H., & Oliveira, E. (2005). Virtual enterprise normative framework within electronic institutions. In M.-P. Gleizes, A. Omicini, & F. Zambonelli (Eds.), Engineering Societies in the Agents World V: 5th International Workshop (LNCS 3451, pp. 14-32). Heidelberg, Germany: Springer Berlin. Carlsson, C. (2002). Decisions support in virtual organizations: The case for multi-agent support. Group Decision and Negotiation, 11, 185-221.

Christiaanse, E., & Markus, M.L. (2003). Participation in collaboration electronic marketplaces. In Proceedings of the 36th Hawaii International Conference of Systems Sciences (HICSS). Covisint. (2001). Retrieved October 26, 2007, from http://www.covisint.com Cunha, M.M., & Putnik, G.D. (2002). Discussion on requirements for agile/virtual enterprises reconfigurability dynamics: The example of the automotive industry. In L.M. Camarinha-Matos (Ed.), Collaborative business ecosystems and virtual enterprises (pp. 527-534). Boston: Kluwer Academic Publishers. Cunha, M.M., & Putnik, G.D. (2003a). Agile/virtual enterprise enablers: A comparative analysis. In D.N. Sormaz & G.A. Süer (Eds.), Proceedings of Group Technology/Cellular Manufacturing: World Symposium 2003 (pp. 243-247). Columbus, OH: Ohio University. Cunha, M.M., & Putnik, G.D. (2003b, June 10-13). Market of resources versus e-based traditional virtual enterprise integration (Part I: A cost model definition). In G.D. Putnik & A. Gunasekaran (Eds.), Proceedings of the First International Conference on Performance Measures, Benchmarking and Best Practices in New Economy (pp. 664-669). Guimarães, Portugal: University of Minho. Cunha, M.M., & Putnik, G.D. (2003c, June 10-13). Market of resources versus e-based traditional virtual enterprise integration (Part II: A comparative cost analysis). In G.D. Putnik & A. Gunasekaran (Eds.), Proceedings of the First International Conference on Performance Measures, Benchmarking and Best Practices in New Economy (pp. 667-675). Guimarães, Portugal: University of Minho. Cunha, M.M., & Putnik, G.D. (2005a). Business alignment in agile/virtual enterprise integration. In M. Khosrow-Pour (Ed.), Advanced topics in information resources management (vol. 4, pp. 26-54). Hershey, PA: Idea Group Publishing. 1027

Environments for VE Integration

Cunha, M.M., & Putnik, G.D. (2005b). Business alignment requirements and dynamic organizations. In G.D. Putnik & M.M. Cunha (Eds.), Virtual enterprise integration: Technological and organizational perspectives (pp. 78-101). London: Idea Group Publishing. Cunha, M.M., & Putnik, G.D. (2006). Agile/virtual enterprise: Implementation and management support. London: Idea Group Publishing. Cunha, M.M., Putnik, G.D., & Ávila, P. (2000). Towards focused markets of resources for agile/ virtual enterprise integration. In L.M. Camarinha-Matos, H. Afsarmanesh, & H. Erbe (Eds.), Advances in networked enterprises: Virtual organisations, balanced automation, and systems integration (pp. 15-24). Berlin: Kluwer Academic Publishers. Dai, Q., & Kauffman, R. (2001). Business models for Internet-based e-procurement systems and B2B electronic markets: An exploratory assessment. Paper presented at the 34th Hawaii International Conference on Systems Science, Maui, HI. Davidow, W.H., & Malone, M.S. (1992). The virtual corporation: Structuring and revitalising the corporation for the 21st century. New York: HarperCollins Publishers. Dogac, A. (1998, March). A survey of the current state-of-the-art in electronic commerce and research issues in enabling technologies. Paper presented at the Euro-Med Net 98 Conference, Electronic Commerce Track. Elemica. (2005). Elemica overview. Retrieved October 26, 2007, from http://www.elemica.com Hands, J., Bessonov, M., Blinov, M., Patel, A., & Smith, R. (2000). An inclusive and extensible architecture for electronic brokerage. Decision Support Systems, 29, 305-321.

1028

Martin, C. (1999). Net future. New York: McGrawHill. Metcalfe, D. (2004). Surging elemica signals the rise of the networks (Brief). Forrester Research. Retrieved October 26, 2007, from http://www. forester.com Molina, A., & Flores, F. (1999). A virtual enterprise in mexico: From concepts to practice. Journal of Intelligent and Robotic Systems, 26, 289-302. O’Sullivan, D. (1998). Communications technologies for the extended enterprise. International Journal of Production Planning and Control, 9(8), 742-753. Preiss, K., Goldman, S., & Nagel, R. (1996). Cooperate to compete: Building agile business relationships. New York: van Nostrand Reinhold. Rocha, A.P., Cardoso, H., & Oliveira, E. (2005). Contributions to an electronic institution supporting virtual enterprises’ life cycle. In G.D. Putnik & M.M. Cunha (Eds.), Virtual enterprise integration: Technological and organizational perspectives (pp. 229-246). London: Idea Group Publishing. SEEMseed_Consortium. (2005). Report of the Seemseed Workshop held at the European Commission in Brussels on May 30, 2005: SEEMseed Consortium. European Commission: Information Society Directorate-General. Retrieved October 26, 2007, from http://www.seemseed.org/default. aspx Wang, C.X. (2001). Supply chain coordination in B2B electronic markets. In Proceedings of the 32nd Annual Meeting of the Decision Sciences Institute, San Francisco, CA. Webster, M., Sugden, D.M., & Tayles, M.E. (2004). The measurement of manufacturing virtuality. International Journal of Operations & Production Management, 24(7), 721-742.

Environments for VE Integration

Key terMs Breeding Environments: The virtual organization breeding environment represents a long-term cluster/pool of organizations that are supported and facilitated for the establishment of virtual organizations and other forms of dynamic collaborative networked organizations. Collaboration E-Marketplaces: Collaboration e-marketplaces are focused in helping interaction services, benefiting participants by reducing the costs and increasing the quality of multiparty information exchange. Their objective is to establish and support long-term relationships between parties for information exchange and collaboration instead of simply mediate transactions. Electronic Institutions: An electronic institution is a framework that, based on communication network, enables automatic transactions between parties, according to sets of explicit institutional norms and rules, ensuring the trust and confidence needed in any electronic transaction. The electronic institution is a meta-institution, which is a shell for generating specific electronic institutions for particular application domains. Market of Resources: An institutionalized organizational framework and service assuring the A/VE dynamic integration, reconfiguration, and business alignment. The operational aspect of the market of resources consists of an Internet-

based intermediation service, mediating offer and demand of resources to dynamically integrate in a VE, assuring low transaction costs and the partners’ knowledge preservation. Brokers act within the market of resources as the intermediation agents for agility and virtuality. Its implementation is as an independent organization/company, independent both from the offer and the demand sides of VE integration, that is, independent from the market participants, in order to assure impartiality, fairness, and trust, being able to monitor the activity of all the participants (including brokers) and to enforce the accomplishment of contracts between parties. Virtual Industry Clusters: Consists of an aggregation of companies from diverse industries with well defined and focused competences with the purpose of gaining access to new markets and business opportunities by leveraging their resources and enlarging the universe for partners’ search and selection. Virtual Enterprise (VE): A dynamically reconfigurable global networked organization, networked enterprise, or network of enterprises, sharing information and/or knowledge, skills, core competencies, market, and other resources and processes, configured (or constituted) as a temporary alliance (or network) to meet a (fast changing) market window of opportunity, presenting as main characteristics agility, virtuality, distributivity, and integrability (see Putnik, 2000).

This work was previously published in Encyclopedia of Networked and Virtual Organizations, edited by G. Putnik; M. Cunha, pp. 499-507, copyright 2008 by Information Science Reference (an imprint of IGI Global).

1029

1030

Chapter 4.5

Enterprise Architecture within the Service-Oriented Enterprise Scott J. Dowell Shirnia & Dowell LLC, USA

AbstrAct In his best selling book The World is Flat, Thomas Friedman proclaims “We are entering a phase where we are going to see the digitization, virtualization, and automation of almost everything … the real information revolution is about to begin” (Friedman, 2005). Certainly, the prevalence of high-speed connectivity has eliminated the barriers of doing business around the world. Lower cost and talented workforce in India and China are now easily if not transparently accessible and online. To thrive in the global economy, CEOs are using outsource, in-source, and offshore models to create strong partner-networks throughout the value chain. Technology leader Intel Corporation states in a recent whitepaper, “businesses are enjoying increased agility that allows them to rapidly respond to changing market needs and opportunities” (Intel Corporation, 2005). Enter a new paradigm called the “service-oriented enterprise” (SOE). In the SOE model, an organization views itself as a set of “business services” supported by adaptable, scalable, and reliable

technology. Early-adopters of this model are benefiting through global collaboration, real-time business responsiveness, and productive mobile work forces. By grasping this paradigm shift, enterprise architects can guide organizations in building agility model and compete in the global economy.

IntroductIon Something has changed in our world. In an interesting twist to “who moved my cheese,” the era of a single, integrated “enterprise architecture” is disappearing. The demand to increase efficiency, decrease costs, reduce time to market, and expand revenue streams are causing business leaders to evaluate and re-think their execution models. Collaboration is becoming increasingly important. Martin Brodbeck, Director, Global Application Architecture at Pfizer, Inc. states “… it’s about connecting business processes in a much more horizontal fashion … having a federated infrastructure that provides an architecture

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Enterprise Architecture within the Service-Oriented Enterprise

and security foundation to be able to run these components consistently across your enterprise.” Both public and private sector organizations are moving to a model where the “enterprise” crosses partner boundaries to deliver services within the value chain. In financial markets, investors refer to this business model as a “platform company,” that is, one where knowledge capital is the differentiator and execution is through a set of service providers—each specializing in a particular segment of the value chain. Those that refine their role in the value chain and establish the right complimentary partner-networks deliver faster, cheaper, and better—trumping those who use standalone models. To better understand this paradigm shift, let us review the trends occurring in public and private sector organizations as well as how technology vendors are addressing the emerging model. In the public sector, organizations within U.S. Federal Government are creating internal partner networks by embracing “line of business” (LOB) with supporting centers of excellence (COE). This shift began in 2001 when the Hon. Mark Forman, former administrator of information technology and e-government at the Office of Management and Budget instituted the shared services model to support the Presidents Management Agenda and the eGovernment act. This model allows the Federal Government, a traditionally bureaucratic institution, to act as a private sector organization. Enterprise architecture is the key enabler as agencies strive to eliminate redundant, disparate solutions and create COEs that provide common, commodity services within an LOB. To become a COE, an agency establishes a best practice that can be selected, controlled, and evaluated for efficiency, cost effectiveness, and quality. When an agency is selected to become a COE, it can then “supply” services for a fee to fellow “demanding” organizations. Much like private sector organizations, control and trust are addressed using Service Level Agreements (SLAs) as a form of binding contract. Today, LOBs include case management,

human resources, financial management, grants management, geospatial, and IT infrastructure. Using this model, agencies can focus on delivering core competencies of the Federal Government value chain such as land management, housing, tax collection, or border security while relegating common, commodity services to the appropriate COE partner. Savings from this approach in terms of eliminating redundancy, increasing efficiency, and improving quality are estimated to be in the billions of dollars. Private sector organizations such as Toshiba, UPS, Pfizer, and FedEx are using in-source, outsource, and offshore models to address costs, efficiency, and quality in what they deliver to customers. Thirty percent of the world’s largest 1000 firms are sending work offshore. This percentage is expected to increase in accordance with the expected growth rate (20-30%) for offshore industries in India and China. Outsource and offshore models are prevalent, but let’s look at how organizations use in-sourcing to exploit the partner-network model within a value chain. An example cited by Friedman (2005) in the World is Flat is a good one. Consider the Toshiba/ UPS partnership where UPS has established a computer and printer repair hub in Louisville, Kentucky. Toshiba customers are told that if their laptop needs repair to send it in via UPS. When picked up, the laptop travels to the UPS hub, where UPS employees fix it, and ship it back to the customer. No longer does the laptop need to take the extra trips to a Toshiba center, nor does Toshiba need to dedicate resources to a lower value-add service. By understanding laptop repair can be a commodity service, it can be relegated to a partner and the resulting Toshiba value chain streamlined. According to Friedman (2005), UPS has invested $1 billion dollars in creating supply chain management expertise and is an integrated service provider for such companies as HP, Nike, Jockey, and even Papa Johns Pizza. It is doing more than delivering packages, it is moving into the value-chain of its complementing network of

1031

Enterprise Architecture within the Service-Oriented Enterprise

partners. In the private sector, agility is the new mantra and using a partner-network creates a flexible value chain that can be tweaked to address changing market needs, competitive threats, and new opportunities. Technology thought-leaders quickly began acting on the service-oriented paradigm shift. In 2003, Bill Coleman recognized the convergence of applications, computer resources, and widespread communications leading to a dynamic infrastructure fabric and formed Cassatt Corporation. In 2005, Intel Corporation published a whitepaper on its Web site stating, “This is a fundamental shift to a set of innovative business processes supported by a very modular, manageable IT infrastructure” (Intel Corporation, 2005). Leading vendors such as BEA, Cassatt, EMC, IBM, and Intel are delivering tools to create a modular, manageable IT infrastructure fabric supporting what is termed as the service-oriented enterprise (SOE). These solutions virtualize hardware, network, and storage resources to reduce complexity, lower costs, and increase flexibility of the IT infrastructure. Tools, such as Collage from Cassatt Corporation, extend infrastructure virtualization to support service level automation. Through service level automation, organizations use policy-based optimization to dynamically adjust computing capacity (adding, allocating, and removing infrastructure components) to meet defined service levels. Service levels can be managed in real-time in accordance to the needs of the organization. IT is experiencing a greater role in business transformation. With the maturity of virtualization and service level automation, organizations are adopting IT services management (ITSM) framework to form an “IT as a service” model. This model allows organizations to correctly position IT services within the value chain. Enterprise architects need to be aware of these changes in business and the technology that has sped the SOE adoption in both public and private sector organizations. Moving to SOE introduces

1032

new concepts and changes to the organization to include business services, service-oriented solutions, infrastructure services, and IT organization. Each area is briefly described below: •

•

•

•

Business services: Are meaningful functions provided in response to a business need within the value chain. They are managed using service level agreements that stipulate performance metrics and measured using financial and quality benchmarks. In SOE, they are classified as core (differentiators) and commodity (non-differentiator). Service-oriented solutions: Enable the business services of the organization through automation. Two popular trends are “software as a service” and service-oriented architecture. They are characterized as component-based architecture that can be orchestrated to solve a business service. Acting as plug-n-play components, the solutions can be constructed and re-constructed based on service level to enable the agility aspects of the SOE. Infrastructure services: Are the underlying hardware, software, storage, and network resources of an organization. This infrastructure creates a “fabric” containing pools of compute resource capability. This fabric will span the enterprise providing the ability to dynamically scale (up or down) to satisfy the business needs using service level automation. IT organization changes: The people aspects and business model of IT operations are changing focus to act as a business within the organization. IT organizations will be adopting the information technology services management to increase efficiency and contribution to the organization.

In this chapter, we discuss key areas of which enterprise architects should be mindful as they address the SOE business model. Beginning with

Enterprise Architecture within the Service-Oriented Enterprise

an overview of the SOE, the chapter addresses changes in IT strategy, solutions, infrastructure, and the IT organization.

the servIce-orIented enterPrIse The SOE differs from the traditional enterprise in several ways. A recent article in the IBM Systems Journal highlighted the differences in the two models in terms of business ecosystem, business process, and organizational issues. The comparison is shown in Figure 1. As we see, IT plays a strategic role in transforming the organization to the service-oriented

model. Enterprise architecture and its understanding of people, process, and technology is central to its success. Let’s review what else is different in the two models. SOE emphasizes forming and managing a strong partner-network to create and sustain value. Today, the scope of the value chain typically remains within a single enterprise under strict control of the business executives. In the SOE, real-time information will move among cooperating organizations to facilitate relationships among partners. The logical separation of business need (service consumption) from fulfillment (service provision) will use multiple providers to create value. Partners are continually measured and monitored using service level agreements

Figure 1. Comparison of a traditional enterprise with a service-oriented enterprise (Cherbakov, Galambos, Harishankar, Kalyana, & Rackham, 2005) Traditional Enterprise

Service-Oriented Enterprise

IT role in business (business/IT alignment)

IT has supporting role (“enabler” of business activity). Business organization has the challenge to ensure that IT understands and supports business requirements.

IT plays a strategic role in business transformation, including creation of new sources of business revenue. IT systems mirror the attributes of the business they enable.

Business value creation

Value is created in each phase in the value chain (e.g., from raw goods to finished products). Business value is created mostly within the enterprise.

Real-time information moves across the value net among cooperating businesses, facilitating dynamic relationships among partners. The business value is created through services provided by participants.

Business requirements/ fulfillment coupling

Business requirements are often generated and fulfilled by the same business unit/ enterprise.

Logical separation of business need (service consumption) from fulfillment (service provision). The same business need can be fulfilled by multiple providers.

Process flow and composite services

Process flow is often sequential; value creation is cumulative and based on the value chain. Composition of services is limited.

Process flow is net-like, through composition and enhancement (and often parallel execution) of existing services provided by participants in the business ecosystem.

Process design

Static, sequential flow with decision points in predefined sequence. Modeling is focused on decomposition.

Dynamic, based on execution results of subprocesses. Nearly real-time dynamic orchestration.

Organizational structure

Hierarchical

Horizontal, network-like structure based on service consumer-service provider relationship.

Intermediaries

Limited applicability

Service intermediaries are needed to accelerate negotiations and facilitate switching providers.

Common interpretation of service definitions

Limited applicability

Essential in the service-oriented environment.

Business Ecosystem

Business Process

Organizational Issues

1033

Enterprise Architecture within the Service-Oriented Enterprise

(SLAs). In this model, the enterprise will expand in scope across partner boundaries, extending its traditional organizational boundary scope. Business process flow and design is different in the SOE as well. In the SOE, process flow is less sequential and uses “net-like” patterns. Processes become somewhat autonomous services that are dynamic in nature, orchestrated to execute, and execute based on real-time results. Enterprise architects will be responsible for expressing the organization as a set of business services that are responsible for delivering goods and services in alignment with business goals and objectives. The efficacy of a business service will be measured using financial data such as capital and operational expenses as well as performance and quality metrics found in comparative industry benchmarks. Enterprise architects will be responsible for determining the best method to satisfy the business service. They will advise executives in selecting from a variety of techniques including internal provider, partner collaboration, outsource, or moving offshore using a lower cost workforce. Managing services using SLAs, executives can readily evaluate costs, quality, and performance within each segment of the value chain. The traditional enterprise structure is typically hierarchical, whereas the SOE structure is more horizontal or network-like to enable the service consumer-service provider relationships. In this regard, we may see changes in reward and recognition systems. Enterprise architects addressing organization change may need to structure programs based on service level achievement where internal and external service providers alike meet service level commitments in order to be rewarded. As such, they will likely become increasingly focused on how they best deliver value. In the SOE, the role of IT becomes more prominent in achieving business transformation. As the SOE technical architecture comprises infrastructure and applications as a set of malleable components that can be dynamically constructed and re-constructed to support the value chain.

1034

Organizations are becoming dependent upon IT to support the partner-network and monitor service delivery. The resulting infrastructure must be flexible, scalable, and reliable where capacity is dynamically adjusted based upon service level requirements. IT has greater responsibility in managing delivery throughout the value chain. As we can see, the SOE and traditional organization differ in structure, flow, and execution. In this new model, IT plays a significant role in business transformation. Enterprise architects shape the SOE of the future. They must correctly apply this paradigm in defining a successful strategy and the services, solution, and infrastructure that serve its execution.

ForMIng the soe strAtegy Transforming an organization begins with strategy. The elements of the strategy should address where the organization can maximize value. Its contents include vision, goals, objectives, critical success factors (CSFs), and business drivers that link to strategic outcomes through value chains. In this section, we address the linkage from strategy to measurable outcomes using a strategy map. Strategy maps, developed by Kaplan and Norton (2004), are closely aligned with the balanced scorecard—successful in many public and private sector organizations. The model emphasizes the cause-and-effect relationship of goals, objectives, and outcomes that comprise a value chain. It provides a uniform and consistent way to describe the strategy so that objectives and measures can be established and managed through execution. A strategy map is a four-perspective model provides a common language that executives can use to discuss the direction and priorities of their organization. It is used to link vision and strategy to strategic outcomes While the definition of the perspectives slightly differs between public and private sec-

Enterprise Architecture within the Service-Oriented Enterprise

Figure 2. Strategy map The Mission

The Strategy Financial Perspective

Financial Perspective

customer Perspective

If we succeed, how will we look to our donors?

To achieve our vision, how must we look to our customers?

If we succeed, how will we look to our shareholders?

customer Perspective

Internal Perspective To satisfy our customers and financial donors, which business processes must we excel at?

learning & growth Perspective To achieve our vision, how must our organization learn and improve? Strategy Framework for Public-Sector and Nonprofit Organizations Robert Kaplan and David Norton

tor organizations, the concepts and application are the same. The model uses linkages between financial, customer, internal, and learning and growth perspectives to align strategy to measurable outcomes. Through this linking, enterprise architects identify core and commodity services lie within the value chain. As an overview in applying the model, the first two perspectives, financial and customer, are closely aligned in defining value outcomes. The second two perspectives, internal and learning and growth, are linked to the execution processes. All four perspectives work together to form a living strategy. Let us take a look at a map using an example of “laptop repair.” In the financial perspective, an organization describes what they hope to achieve in traditional financial terms such as ROI, shareholder value, profitability, and revenue. Here we align objectives with a balance of short-term results such as cost reduction with long-term profitable gains in

To achieve our vision, how must we look to our customers?

Internal Perspective To satisfy our customers, which processes must we excel at?

learning & growth Perspective

To achieve our vision, how must our organization learn and improve? Strategy Framework for Private Sector Organizations Robert Kaplan and David Norton

revenue growth. Financial outcomes show how well the strategy is succeeding or failing. They typically address increasing sales or reducing costs. An example financial value statement for a personal computer manufacturer may be focused on improving laptop repair services. Creating a statement to “reduce laptop computer repair and maintenance costs by 50%” indicates value in addressing efficiency and quality services. The outcome will attack cost structure and possibly promote revenue growth by addressing a customer requirement for quick turn-around when using the laptop repair service. With this statement in place, the next step is to align it with the remaining perspectives. Satisfying customers is the way organizations sustain value. The customer perspective identifies targeted consumer segments and the value proposition to satisfy them. If the targeted base value is reliable, quality products, then skills, systems, and processes that result in quality products and

1035

Enterprise Architecture within the Service-Oriented Enterprise

services are of obvious importance to the organization. An example customer value statement is “If my laptop breaks, promptly repair it for me in 3 days or less”. If during the course of using a quality product the customer has an issue, it should be a seamless, painless process to have it back in working order. A continual alignment of goals to the customer perspective and internal efficiencies will reveal core business services of the organization. While financial and customer perspectives describe outcomes, effective and aligned internal processes determine how value gets created and sustained. The internal perspective identifies the efficiencies that are critical in achieving the outcomes listed in financial and customer perspectives. This perspective is where value chain elements and business services are identified. Outcomes may link to partner-network solutions. For example, if the organization wishes to increase the value of its fix and repair service by reducing costs and turn-around time, it may decide a relationship with UPS is the best method to perform the repair service, as Toshiba did. The internal perspective is linked with learning and growth as organizations must determine how solutions impact valuable intangible assets of intellectual and human capital. The learning and growth perspective identifies which positions, systems, and working environment are needed to create the value creating internal processes. These elements represent the most critical elements of an organization, its human and intellectual capital. In responding to the internal process of using an in-source solution with UPS, the learning and growth perspective determines the impact to the intangible assets of the organization. How much intellectual capital is lost in repairing laptops? How much must be retained if the business service is performed by the partner? To be successful, the organization must sustain the knowledge, culture, and leadership while balancing financial, customer value. In this perspective, the organization will confirm core business services. 1036

The strategy map is an easy way to meaningfully link strategy formulation and strategy execution. It helps organizations consider how partnerships can satisfy objectives financial terms, customer value, internal efficiency, and learning and growth. The model works well in the SOE as organization can define the business services within the value chain and the events that govern them. For further understanding of this model, the text Strategy Maps by Kaplan and Norton is an excellent study.

deFInIng busIness servIces In the SOE, the ability to construct and reconstruct business scenarios to meet changing business environment is critical. To do so, the organization should be viewed as a set of business services working together within a value chain to deliver a strategic outcome. With the strategy map in place, enterprise architects shift focus to defining core and commodity business services measured using comparable industry benchmarks such as competitive analysis. Business services comprise process, organization, information, application, and technology elements that fulfill segments of the value chain. To be effective, the enterprise architect needs a consistent method to define and communicate business services and their role in fulfilling strategic outcomes. In this section, we discuss using a supply/demand framework to define and communicate business services. In the SOE, business services act as providers or consumers working together in fulfilling a strategic outcome. For those familiar with objectoriented methodology, the model is relatively straightforward in that a provider contributes a service whereas a consumer uses it in its processing to produce a desired result. However, the SOE model extrapolates this theory several notches to that of partnerships within the value chain. While we understand the business service concept, teams may struggle with communicat-

Enterprise Architecture within the Service-Oriented Enterprise

Figure 3. Supply demand framework service oriented Architecture Foundation Patterns ed-soA-F.1: soA Foundation elements DEMAND SIDE

custoMer:

SUPPLY SIDE

coMPonent:

servIce:

A meaningful function A tangible consumer of services provided for a customer by that lead to results a component.

A tangible provider of services

Results Customer

Service

Customers require services that are provided at satisfactory performance and quality levels

ing and modeling it in a consistent manner. A framework developed by Gordon Babcock of Computer Sciences Corporation (CSC) for the Department of Education (Computer Sciences Corporation, 2005) is a very good way to model business services. The model uses a business perspective to ensure the organization gets the results it needs absent of technology bias. It uses a consistent language to describe concepts from strategic to implementation level. In this model, a customer consumes a service that leads to results. A service is a meaningful function provided by a component for a customer. A component is a tangible provider of services. Results desired by the customer create a demand for a service in the form of requirements for functionality delivered at satisfactory performance and quality levels. A component, which is ultimately constructed with tangible resources (especially technology and people) and which is capable of delivering a service that meets the customer’s service requirements, provides the service for the customer. In so doing, the component is the supplier of the service that meets the customer demand. The

Component

Components must be capable of providing services at satisfactory performance and quality levels

framework provides a set of patterns that reflect typical transaction types within an organization. These patterns use the same modeling constructs in greater and greater levels of detail. In the process of defining business services, enterprise architects should identify those that are considered “core” and key differentiators from the competition. Most organizations find that 25% of their services are “core” and allow them to differentiate themselves from competition. Typically, organizations will find commodity services in the following areas: •

•

Supply chain: Companies like FedEx and UPS have embedded themselves within partner-networks to support product delivery to consumers. China has significant manufacturing resources and processes working today. Human resources: Firms have moved recruiting, benefits management, and payroll to business process outsource firms who specialize in these areas. Delivering these services better, faster, and cheaper than internal functions. 1037

Enterprise Architecture within the Service-Oriented Enterprise

•

•

Information technology: Application development has been moved offshore to India or to popular system integration companies like Accenture, EDS, CSC, and IBM. Customer service: Call centers and help desk functions are sent offshore from the U.S. to be supported by companies primarily located in Europe and India. Because of widespread, high-speed connectivity, this service can be provided without regard to location.

When defining the business service, be sure to collect measurements that are comparable to industry and competitive benchmarks. In the U.S., a good source is the Bureau of Economic Analysis (BEA) as it provides time-series data on a variety of U.S. macroeconomic variables. In general, the business services data collection should include answers to the following: • • • •

What are the costs to execute the business service? Is there a way to measure and compare to industry benchmark standards? Can partners deliver the service at same level, quality, and lower cost? Is the service so efficient that it constitutes a new business offering?

By answering these questions, the organization will understand what areas provide greatest value to the business. The goal of any SOE solution is the ability to change and adapt based on business need. From a strategic perspective, business services are implemented using internal processing or by a partner using in-source, outsource, offshore model. Most organizations have expertise in core aspects and have other areas that are non-differentiating or commodity operations. The reason a business wants a partner to perform a particular business service is because the partner is considered an expert in that particular area. Consuming a service

1038

is usually cheaper and more effective than doing the work internally. Organizations must be able to easily employ a partner to perform non-core, commodity services in a more cost effective manner with the same or better service levels. Using the strategy map framework, enterprise architects can link strategy to strategic outcomes and identify which business services are critical to the organization. They will identify where the business services fit into the value chain and define sets of strategic and tactical initiatives that will have significant return on investment and deliver the business vision. Using the framework enterprise architects will be able to quickly define and communicate the role of a business service within the value chain. With business services defined, organization is in the position to link its business services with best of breed capabilities provided internally or by external partners. This component-based structure, a business is able to recognize change as it is occurring and react appropriately, ahead of the competition, and keep pace with the demands of its customers, partners, and employees.

servIce-orIented solutIons From a CIO perspective, the key managing to service-oriented solutions is in understanding, defining, and measuring service level achievement to meet strategic outcomes. The enterprise architect understands that in the service-oriented world business services are susceptible to change and as such they are good candidates to be implemented using a plug-and-play, component-based model. In this manner, they too can be ostensibly constructed and re-constructed based on the needs of the organization in a close to real-time manner. As creating and managing SLAs are much discussed in other texts, the contents of this section briefly address considerations in selecting an approach service-oriented software solutions.

Enterprise Architecture within the Service-Oriented Enterprise

Today, industry is touting two options satisfying service-oriented needs. The first option is employing the software as a service (SaaS) model where an organization subscribes to software offerings from a partner provider. Popular offerings include SalesForce.com delivering CRM; employees delivering HR; and NetSuite delivering financials. The second option is service-oriented architecture (SOA). While SOA is not a new concept, its popularity has recently increased with the advent of Web services, orchestration, and infrastructure virtualization. Enterprise architects should understand that it is the service-oriented concepts, not just technology, that instills the component-based framework and orchestration necessary to drive the SOE. It is the ability to freely subscribe, use, and release a service for a specific business purpose that makes the architecture so valuable. With the prevalence of communication bandwidth, companies can offer software applications as a service to those organizations who do not want the infrastructure. The key architectural principle for selecting a SaaS solution is ensuring a single instance of the software runs on the provider environment—and all users log into that instance. Releasing organizations from managing servers, version control, and disaster recovery, Providers have made SaaS a feasible model for the SOE. These products, once considered only viable for small-to-midsize businesses, are now used by the large corporations as well. They enable organizations to be up and running faster, better, and cheaper. The enterprise architect can find these offerings for most back office functions— those that are typically considered commodity services. The SaaS selection should be based upon standard evaluation criteria as well as the ability to extend the information model and possibly personalize the application to meet unique operational needs. With SaaS, the organization can define service levels for application performance execution while continuing to perform the service in-house. In some cases, organizations are fearful

to fully move service to a partner. However, the next logical step is to find the provider that can perform the same business service with better quality at a lower cost. For commodity services, the move is inevitable. SOA represents many things to many people today. In this discussion, it is considered a loosely coupled architectural strategy that is technology and vendor agnostic. The SOA concept naturally fits the SOE paradigm with its separation of presentation, business logic, and data tiers, orchestration, and asynchronous messaging. Using a range of technologies, architects designate applications services at an elementary-level. Because they are at the elementary level, the application services can be orchestrated, into a series of steps, to reflect how a particular business service will execute based upon a given event or result. Abstraction is a key mechanism to de-constructing and re-constructing components and integrating partner solutions without interruption to business. In this approach, the application and data are abstracted from its implementation, so its provider is transparent to the customer. Like SaaS, the consumer does not need to know if the application service is housed internally or subscribed from a provider. In December 2005, Michelson of the Patricia Seybold Group attended the SOA InfoWorld Conference and stated in her review that: Enterprises are using SOA to provide both agility and productivity for business and IT. The secret is to approach SOA as an architectural strategy. In such, make decisions based on your business, technology portfolios, and people. Don’t be misled by vendors who claim SOA can be bought in a box. Don’t be misled by technology snobs who claim SOA is Web Services. Remember loosecoupling, well-defined interfaces, and standards based messages. (Michelson, 2005) This is sage advice for all enterprise architects to follow. While service-oriented solutions are viable today, some gaps still exist in reliability, legacy 1039

Enterprise Architecture within the Service-Oriented Enterprise

support, and data semantics. These gaps will be remedied soon, but the architect must be mindful of them while defining solutions. In terms of reliability, the best service will only be as strong as its weakest link or slowest performing component. This means, we need the correct infrastructure, one that can ensure adequate performance and compute resources that are continually available to the service. In terms of legacy support, there will be tightly-coupled, domain-specific applications supporting business services like finance, payroll, or marketing. Oftentimes, these applications and infrastructures are stovepipes of hardware, software, connectivity, and license fees. This implementation is expensive, encourages hardware/OS/SW disparity, and prohibits easy growth in accordance with the demand of the business. In the SOA model, the first step is to define how these applications can offer services for consumption by other applications or providers. They need standard interface points or consumption mechanisms to integrate with external services and support partner collaborations that require access. In terms of data semantics, the architect should create a data model that can be considered the single source of key naming terms, definitions, and relationships. To implement the SOA correctly, the data model is used as a reference point where services only message each other rather than exchange specific logic. As application services support business services, they too are measured through SLAs directly tied to business requirements. The SLAs define performance, financial, and qualitative metrics and are regularly measured to industry benchmarks or competitive analysis data. If the SLA is not being met, it should go under review and a new solution selected.

Case Study: Pfizer Global Pharmaceuticals (Manasco, 2005) Pfizer Global Pharmaceuticals (PGP) is one of the world’s largest drug companies. In the com-

1040

petitive pharmaceutical marketplace, leveraging technology to its fullest value is mandatory. In 2005, Pfizer examined how the services oriented approach could be leveraged to improve business capability. The following case study was found on Information week (www.informationweek. com). PGP needed an enterprise-wide servicesoriented architecture to make application integration operational. Key business data from line of business applications reside in differing business units, on differing computing platforms, located in differing geographies, must be shared. Shared services comprise both technical and business services, and must be leveraged by multiple lines of business (LOB) across the world, regardless of disparate technologies. The key functional objectives of the shared services strategy included leveraging existing data across a wide number of processes, supporting flexibility in business processes, establishing consistent standards for IT systems, and preserving the value of their existing IT assets. PGP wanted to maintain and enforce consistent policies across their computing infrastructure—deemed critical to making shared services usable enterprise-wide. The PGP technical architecture includes Web services that are security aware with business process management, content management, and XML firewalls as important elements of their new integration infrastructure. Brodbeck, Application Architecture Director of PGP, states, “Most technology investments made in the past five years have driven efficiencies in vertical processes (e.g., order process). Pfizer’s opportunity with SOA is to drive efficiency in processes that match Pfizer’s strategic needs across multiple groups within the company—either line of business, geographic, or technical group—and have an impact on unique elements of the business (e.g., clinical trials). The products must be standards-based and actually service-oriented themselves. Just putting a Web services interface on a monolithic product only gets you so far.” The goal for PGP is to alter the

Enterprise Architecture within the Service-Oriented Enterprise

competitive dynamics within the pharmaceutical industry. At PGP, the Enterprise SOA Fabric™ provides the potential to accelerate the core processes around Pfizer’s drug discovery and clinical trials while greatly reducing the cost of this enabling infrastructure. As Pfizer is successful at driving efficiencies in areas like drug discovery, clinical trials, and drug marketing, they will garner a substantial and defensible competitive advantage. PGP is altering the operating dynamics of IT by redefining their infrastructure capabilities. Working with Blue Titan’s Network Director and Cassatt Collage, the company leveraged existing technologies and platforms across operating units and lines of business. PGP developed a shared services strategy that now enables it to draw on existing data from a wide array of processes, establish consistent standards for IT systems, and enforce IT policies across infrastructure. Shared services have made it possible for developers to roll out and deploy applications much more quickly. The PGP approvals portal, the first productivity driving application of its SOA efforts, is a single place for executives to gain approvals for project expenses and invoices by providing access to 20 systems on the back-end. The solution condensed employee training from one week down to one day and help desk costs related to project management were cut by 50%.

InFrAstructure servIces In SOE, the key principle is easily changing all components of the enterprise. This principle applies to the supporting infrastructure layer as well. Infrastructure comprises the hardware servers, network, storage, and software configuration items managed by IT in support of application services. In the SOE, the infrastructure must be reactive, flexible, and scalable to continually meet the demands stipulated in the business service levels. Today, technology vendors are creating

tools that apply virtualization, compute resource pooling, and service level automation to make infrastructure compatible to the service-oriented concept. Infrastructure costs a lot. A 2004 IDC study found nearly $95 billion dollars was applied to managing infrastructure in North America. The report estimated that 57% of the IT budget is attributed to rote maintenance and administration tasks such as patch management. Most data centers are over provisioned with servers running at 15%20% of peak utilization levels. Applications are stove piped into segregated hardware, software license, data resources, and network elements. This architecture is in-flexible and costly and does not support the SOE concept. Instead, it stymies the organization as it cannot quickly shift computing resources to where they are needed. It requires the business to purchase licenses for each CPU where the specific software will run—not per utilization or transaction load associated with a particular service level. This view of infrastructure must change to implement the SOE. Enterprise architects will solve this dilemma by establishing a principle stating infrastructure must be “on-demand” and applying infrastructure virtualization. While virtualization has become a broad term that refers to the abstraction of resources, in the infrastructure context we are referring to network, servers, and storage resources. Combining virtualization and service level automation creates an infrastructure that can continually change and self-manage. Selfmanagement tasks include server failover, server image provisioning, hardware provision, operating system provision, and software provision, supporting application services. In service level automation solutions, the infrastructure components are dynamically managed using business rules that are defined based upon the SLAs of the business service. Software license fee structures will change. With infrastructure virtualization, organizations can shift license fee models from “pay per CPU”

1041

Enterprise Architecture within the Service-Oriented Enterprise

structure to that of a “usage based” structure. Because the infrastructure will constantly and dynamically react to service level demands, servers can no longer be tracked as static entities with assigned software components. Instead, software components (such as Web server, application server, operating system, etc.) are “in-use” when dynamically added into the infrastructure or “not used” when dynamically removed from the infrastructure. For license management, the infrastructure will track usage (number of CPUs, time, transactions) during a specified usage period. The IT department, enterprise architect, and vendor will negotiate the period—monthly, quarterly, yearly—to apply the cost of licenses and the maintenance fee. This approach is more in-tune with the service-oriented model. Several technology vendors offer infrastructure virtualization solutions. While companies such as IBM, EMC, and Sun have interesting tools, Cassatt Corporation appears to have the best approach. Cassatt Collage is technology agnostic and uses network, data, and compute resource virtualization to make the infrastructure flexible and dynamic to the needs of the business. It automates many of the daily system administration tasks such as patch management and hardware provisioning. Its application of service level automation ensures the infrastructure meets commitment levels specified in the business service.

case study: cassatt corporation Cassatt Collage combines goal-driven automation and virtualization control to respond to change and drive higher service levels. In Collage, business priorities and service-level agreements are used to create simple policies for balancing resources across applications. Drawing from a common resource pool, Collage assigns resources to meet service level requirements and automatically reassigns them as conditions change. Sharing peaks and valleys in capacity drives higher utilization

1042

rates and thus reduces hardware and associated maintenance costs. Where traditional management software focuses on physical resources such as servers and networks, Collage manages both physical and virtual entities. Collage enables this transformation of IT functions using existing, offthe-shelf hardware, operating systems, network switches, and applications. The tools comprise three areas: Goal driven automation, virtualization control, and infrastructure management. Each area is briefly described next. Goal-driven automation is used to optimize resource allocation by taking existing policies, priorities, and service level agreements and mapping them to goals. Based on these goals, an optimization engine automatically responds to critical events. If the optimization engine analysis determines that an application does not meet its service levels, it applies best-fit algorithms to determine the optimal course of action to bring the application into compliance. Virtualization control is used to deliver unified control of all the application components required to deliver the appropriate service levels. Collage leverages a variety of virtualization technologies, including virtual machine managers (VMM), Java virtual machines (JVM), virtual local area networks (VLAN), and its own virtualized image deployment, the image delivery service. Managing the environment includes defining policies and detailing application resource requirements. An activity reporting facility tracks which servers are running, which software, and when changes were applied for billing, auditing, and compliance. In addition, Collage provides management tool integration APIs to interface with various enterprise management systems. The features of Cassatt Collage represent the infrastructure toolset of the SOE. Through these tools, enterprise architects can establish a lower cost, efficient environment that is managed dynamically using SLAs specified in the business service.

Enterprise Architecture within the Service-Oriented Enterprise

Cassatt at Pfizer To explain how virtualization is making headway in the private sector, Information Week reported the progress made at Pfizer Pharmaceuticals in the March 2006 issue. The article shows how Cassatt Collage is supporting the Pfizer PGP architecture and its range of technology platforms. The article includes a brief comparison to other companies supporting the infrastructure virtualization space. Pfizer’s core business unit, Pfizer Global Pharmaceuticals, plans to virtualize more of the company’s middleware, particularly its BEA Systems’ WebLogic application servers, and use them as a flexible, dynamically allocateable resource. In this initial foray into infrastructure virtualization, Pfizer planned to make 14 WebLogic application servers (running on 14 hardware servers in the data center) into a single virtualized resource using Cassatt Collage software and its Web Automation Module (WAM). Using WAM, the Pfizer business applications are no longer constrained by a specific physical application server, but will be virtualized to acquire compute resources and application server services from underutilized servers within the infrastructure. With Cassatt Collage and Web automation, Module Pfizer can “manage our WebLogic environment as if it were one machine,” even though it’s spread across multiple servers, says Richard Lynn, VP of global applications and architecture. As the first phase is completed, Pfizer plans to add another 86 servers into the Cassatt management environment by the end of 2006. Pfizer plans to have 500 servers under virtualization by 2007 using a combination of Cassatt and VMware technology. Plans include extending virtualization to include portal servers and portal applications as well as Oracle DBMS, IBM DataStage for ETL, and Microsoft Windows Server applications. The benefit of managing servers using virtualization is obvious now. “We would need at least double the 500 servers if we weren’t running Collage and VMware,” reported Lynn.

The Collage software management is based upon SLA or other built-in performance rules to provision servers based on utilization levels. With WAM, the WLS software is separated from the hardware servers on which they run, and as such, are treated as a pool of resources. This is different than “load-balancing” on clusters as it understands the middleware component and its relationship to the overall goal of the SLA. Treating middleware independent of hardware and applications offers greater operational flexibility and efficient use of hardware resources. In contrast, the WebSphere Extended Deployment can also virtualize application server resources. It creates many small virtual machines in logical partitions on IBM servers and allocates JVMs and application server units as demand increases. This solution is software platform dependent, unlike the hardware resource approach of Cassatt. Using the Cassatt software over a three-year period, Pfizer plans to save “several million dollars” by reducing operations and software costs. The savings stem in part from higher server usage levels as Lynn estimated the WebLogic servers will go from about 40% utilization to more than 75% utilization. This is important as most data center servers run at approximately 15%-30% utilization—tying up unnecessary costs within the infrastructure (Babcock, 2006).

It orgAnIzAtIon chAnges The SOE means changes to people, processes, and technology. We discussed the changes from a strategy perspective with creating business services; application perspective with SaaS and SOA; and an infrastructure perspective with virtualization and service level automation. This section discusses how the IT organization will change to execute “as a business” in the role of service provider for such things as service level management, application management, capac-

1043

Enterprise Architecture within the Service-Oriented Enterprise

Figure 4. ITSM framework

ity management, security management, infrastructure management, and problem resolution. To make this change, private and public sector organizations are adopting the de-facto standard of information technology services management (ITSM) to run their operations in a common, structured manner. ITSM and the IT infrastructure library (ITIL) combine to provide a framework of common IT processes and services. Emphasizing alignment of IT and business objectives, ITIL comprises a library of best practices and processes to support management and delivery of IT services to the organization. By implementing the ITSM/ITIL processes, organizations have a standard means to measure efficiency and cost effectiveness of their IT services as compared to industry benchmark. The ITSM Forum is a standards body that has categorized the ITIL processes into several modules matching the activities and duties of a common IT Organization. Each module is briefly described below: •

1044

Service delivery: This module includes the processes associated with planning and delivery of quality IT services. It focuses on strategic processes required with improving the quality of the IT services delivered. Activities under service deliver include service

•

•

•

•

level management, capacity management, financial management, availability management, and continuity management. Service support: This module describes the processes used in day-to day support and maintenance activities associated with provisioning IT services. Service support activities include configuration management, change management, release management, incident management, and problem management. ICT infrastructure management (ICT IM): This module describes all aspects of infrastructure management to include identification of business requirements through the tendering process, to the testing, installation, deployment, and ongoing operation and optimization of the components and IT services. Planning to implement service management: This module examines the issues and tasks involved in planning, implementing, and improving service management processes within an IT organization. The module addresses cultural and organizational change, developing vision and strategy, and the method of approach. Application management: This module describes processes to manage applications

Enterprise Architecture within the Service-Oriented Enterprise

•

from the initial business need, through all stages in the application lifecycle including application retirement. It focuses on the alignment of IT projects and strategies to the business. Security management: This module describes the process of planning and managing levels of security for information and IT services. The scope includes all aspects associated with reaction to security Incidents. The module also addresses the assessment and management of risks, vulnerabilities, and countermeasures.

IT departments in both the public and private sector are adopting ITSM but are struggling with creating the best procedures to manage its services. Because data centers often vary in structure from plan and attack to chaos and react, the adjustment to standard processes is difficult. To operate as a business, IT organizations must change the way they execute to reflect a set of services with measurable service levels. ITSM and ITIL are becoming the de-facto standard for IT processes within private and public sector alike. By developing a set of standard services based upon the ITSM/ITL framework, corporations have a measurable way to gauge how effective their organization is operating. Industry experts report that IT organizations can reduce their annual IT operating costs by as much as 30% by adopting these best practices.

case study: wipro technologies The following article found in the January 2006 itSMF Research paper at www.itsmf.org describes the benefits of applying ITSM in one of the largest offshore development companies located in India—Wipro Technologies. The study attributes a dramatic improvement in service delivery and service management from applying the ITSM framework to its operations. Wipro Technologies doesn’t just adhere to the

principles of ITIL, it shares them with customers worldwide. One of India’s largest IT services vendors, Wipro, began implementing ITIL best practices in 2001 as part of an enterprise-wide quality initiative aimed at lowering costs and improving efficiencies in the company’s technology infrastructure services (TIS) unit. TIS operates Wipro’s Global Command Center (GCC), which manages IT services for nearly 300 global customers. In the highly competitive services industry, “We need to remain at the top as a quality service provider,” says Viswanathan Sankara, manager of mission quality in Wipro TIS. “ITIL is the world’s de facto standard for best practices around managing IT infrastructure.” Wipro’s challenge: How could it create a flexible, reliable management system to support the scores of incidents the GCC handles daily? Ultimately, Wipro improved internal operations through better workflow automation, better response time, and ITIL best practices. As a result, most of Wipro’s clients have seen direct benefits. One has seen an estimated 35% cost savings, mainly from automating tasks, which have helped reduce the support team’s headcount from 46 to 35, an effort savings of 24%, response time, which has improved from an average of two hours to 30 minutes, and global sourcing, co-locating the support team onsite in the UK and offshore in India, where labor costs are significantly lower. Sankara also cites several soft benefits as well. “ITIL, as a framework helps marry IT and business needs. It reminds us, for example, that our users view e-mail not as a technology, but as a critical business tool.” To achieve such success requires a top-down management commitment to excellence. That commitment is held with Chairman Azim Premji, whose mantra is: “Quality, like integrity, is nonnegotiable” (itSMF, 2006).

conclusIon In conclusion, the move to the service-oriented enterprise model is inevitable. With the accep-

1045

Enterprise Architecture within the Service-Oriented Enterprise

tance of capitalism in India and China and availability of high-speed connectivity, the scope of the “enterprise” is dramatically extended. Using strategy maps to link strategy to strategic outcomes, organizations can identify key business services that impact the value chain. Private and public sector organizations are stronger and more efficient through adoption of the partner-network model and the ability to adjust to a changing global market. Private sector organizations find competitive advantage based by understanding how they best contribute to the value chain and relegating commodity services to partners. Public organizations too find value by embracing SOE and promoting shared services in the context of centers of excellence. From a technology perspective, application services now support the service-oriented paradigm as well. Organizations can choose to enable current software into loosely coupled, message-based environment or make agreements with SaaS partners. Technology vendors like IBM, Cassatt, EMC, and others are providing infrastructure virtualization tools that enable storage, servers, and network to be reactive, scalable, and manageable through service level automation. IT organizations are adopting the service-oriented paradigm using ITSM and running IT as a business. Enterprise architects are the primary resource in implementing the SOE within the public and private sector organizations of the future. In this role, they must understand direction, strategy, and differentiator segments of the value chain of the organization. They will help executives determine which business services are differentiators and which are considered a commodity. For each business service, enterprise architects will select the correct model—internal, in-source, outsource, or offshore—to deliver the best solution in alignment with business direction. Success in execution will be measured using SLAs and industry benchmarks. The enterprise architecture team will monitor the ability of each business service in meeting the service

1046

level commitment. They will institute change as necessary. While SOE does not equal SOA, the emergence of service-oriented applications allows teams to create component-based solutions that are adaptable to changing business needs. Using such technologies as Web services and orchestration tools, a plug-and-play environment can be established to facilitate reuse and exploiting partner relationships. In terms of infrastructure, virtualization and service level automation tools from thought-leading companies like Cassatt Corporation allow IT departments to manage capacity and compute power based on SLAs. These tools remove the costly stove-pipe and over provisioned server hardware found in many data centers around the world. The ability to ratchetup or ratchet-down compute resources based on service level demands reflects the service-oriented of the global business. From a people perspective, organizations are embracing a service-oriented culture where focus is in delivering quality service to the enterprise. Roles will somewhat change in both business and IT organizations when moving to the serviceoriented enterprise. Personnel must understand how the action they take affects the overall ability to deliver on agreed upon service levels. Changes to reward and recognition systems will include how well teams meet service levels and quality of service requirements. Communication strategies must include messaging that reflects the importance of services and service level achievement of the organization. In this world of interchanging parts, the IT organization and their business operations brethren must adopt the service-oriented perspective. Adopting ITSM, the IT department is able to act as a service within the organization. ITSM helps IT teams define common services executed by the department. Using SLAs, organizations will measure the effectiveness of the IT department and make changes to increase value. When the business is viewed as a set of services that can

Enterprise Architecture within the Service-Oriented Enterprise

be coupled or de-coupled at will—then all must understand their value to the corporation. People must understand how their work affects the business and its components or they risk being replaced by a vendor that can do it better, faster, and cheaper. Today, the service-oriented concept impacts the business, organization, application, and technology domains of the enterprise architecture model. This important trend should be embraced by any enterprise architect who wishes to remain viable in the next decade. Prepare for enterprise architecture within the service-oriented world of the future.

Computer Sciences Corporation. (2005). Serviceoriented architecture (SOA) patterns and practices, Draft 1.0.

reFerences

Kaplan, R. S., & Norton, D. P. (2004). Strategy maps. Boston: Harvard Business School Press.

Babcock, C. (2006). Virtualization’s next stage. Retrieved March 20, 2006 from http://www. informationweek.com/showArticle.jhtml;jsessio nid=1YDF1RNVNUYZCQSNDBECKH0CJU MEKJVN?articleID=183700351

Manasco, B. (2005). Pfizer’s SOA strategy. Retrieved February 21, 2006, from http://blogs.zdnet. com/service-oriented/?p=215

Cherbakov, L., Galambos, G., Harishankar, R., Kalyana, S., & Rackham, G. (2005). Impact of service orientation at the business level. IBM Systems Journal of Service-Oriented Architecture, 44(4).

Friedman, T. L. (2005). The World is flat. New York: Farrar, Straus, and Giroux. Intel Corporation. (2005). Service-oriented enterprise—The technology path to business transformation. Retrieved April 3, 2006, from http://www.intel.com itSMF. (2006, January). itSMF USA research letter Volume 2 Issue 1: Wipro ITIL gains. Retrieved May 16, 2006, from http://data.memberclicks. com/site/itsmf/Research_Newsletter_-_January_2006_Issue.pdf

Michelson, B. M. (2005). Best practices, lessons learned, and takeaways from enterprise SOA practitioners. A Report from InfoWorld’s SOA Executive Forum. Retrieved March 26, 2006.

This work was previously published in Handbook of Enterprise Systems Architecture in Practice, edited by P. Saha, pp. 382399, copyright 2007 by Information Science Reference (an imprint of IGI Global).

1047

1048

Chapter 4.6

Telecommunications Management Protocols Katalin Tarnay University of Pannonia, Hungary

AbstrAct In this chapter, the fundamentals of communication protocols are presented, and then a special application area, the telecommunications management is introduced. The main part of this chapter deals with the telecommunications management protocols. First, the model for Telecommunication Management Network is explained, and then the most widely used protocol, the Simple Network Management Protocol (SNMP), is introduced. This is followed by a discussion on the open system management protocols and the mobile Internet management protocols for Authentication, Authorization and Accounting (AAA), their comparison and evaluation. Subsequently, the expected trends are presented. The conclusion part summarizes the content of this chapter emphasizing the main ideas.

IntroductIon The Internet and the Internet services have become an essential part of our everyday life. The importance of IP-telephony, voice over IP and IPTV

is growing year by year. Mobility has become a buzzword of Internet services. It is quite difficult to answer whether user mobility, device mobility or vehicle mobility is more important. All of these are supported by different network services which meshes our business and private life. To fulfill all these complex services, the network should be reliable under variable circumstances, and it must be simply available. The users and the service providers equally require high quality services. While the network operations are continuously changing, the Quality of Services (QoS), the time constraints and the simplicity of the network resources should remain unchanged. The telecommunications management itself is responsible for the unchanged network operations under variable circumstances. To summarize, the telecommunications management system monitors, controls and coordinates the network resources, while the telecommunications management protocols are the fundamental tools to fulfill these requirements. The objective of this chapter is to present the main protocols of this field. This chapter consists of five sections followed by references and key terms. The first section discusses the necessity of telecommunications man-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Telecommunications Management Protocols

agement protocols and summarizes the structure of them. The next section provides the background information on protocols and telecommunications management, and justifies why this particular method was selected. The next section focuses on the main telecommunications management protocols divided into four parts. The first part explains the Telecommunications Management Network (TMN) model and its architecture. The next part describes the operation of the Simple Network Management Protocol (SNMP), which is the most widely used management protocol. The third part deals with the Open System Interconnection (OSI) protocols, while the fourth part presents the AAA (Authentication, Authorization and Accounting) protocols. The next section forecasts the future trends by elaborating on what kind of new services and protocols are expected. The last section summarizes the main ideas of the chapter. At the end of the chapter, the references and the glossary of key terms are provided.

bAcKground This section provides an overview of the basics of communication protocols and the telecommunications management. The communication protocols can be compared to dialogues. A simple protocol specifies the rules of a message exchange between the network nodes fulfilling some communication task. The rules are applicable to three areas: the message format, the message exchange and the time assumptions. The message is similar to a word in a human dialogue, where the message format is the correctly spelled word. The message exchange means the phrase or sentences told to each other. The correct message exchange has some goal, e.g. inquiring some information. In a network this could be the task of monitoring a network resource. Monitoring needs a request to read a parameter value and a response with the value of that. The response time is limited. It is similar to a human dialogue, i.e. asking a question and waiting for the answer.

The communication protocols are standardized. This worldwide standardization enables the extension of the network. The network nodes have a layered structure, either the five layer of TCP/ IP net, or the seven layer architecture according to the Open System Interconnection (OSI) standards. A protocol specifies the message exchange between peer layers of two different nodes. The telecommunications management protocols are generally application layer protocols. A protocol message has typically two parts, a header part and a data part (see Figure 1). Figure 1 shows the general message structure composed of the header and the data. The header contains the message identifier, the identifier of the source and destination nodes. Sometimes an indication of priority is also included. The presence of other fields in the header depends on the function of the message. Some fields contain values that are constant, others values are variable. The header is followed by the data or information part .The exchange of protocol messages realizes the steps of the protocol operation (see Figures 2 and 3). Figure 2 presents a generic message structure of the message header that includes a message type identifier and a sequence number. The header is followed by information sent to the destination node. Figure 3 illustrates a dialogue that may take place between a service user and a service provider (Tarnay, 1991; König, 2003). The main purpose of telecommunications management protocols is the monitoring, controlling and coordinating the network resources to ensure high quality, reliable and error free network operation. The telecommunications management is composed of the telecommunications management station, the Management Information Base, the telecommunications management protocols Figure 1. A protocol message

Header

D a ta

1049

Telecommunications Management Protocols

Figure 2. A message example h e a d er

PDU type

Sequence num ber

A gent address

data

P riority

D estination

V alue

N am e

Figure 3. A time sequence diagram: a dialogue between a service user and a service provider time

Service user

Service provider

service R E QUE ST service INDICA T ION

service R E SPONSE service CONFIR MA T ION

and the managed objects which are representing network resources. Such a system realizes some management functions. The management functions may be divided into two groups: the basic management functions, which are the fault, account, configuration, performance and security management, and the advanced management functions, which are the authentication, authorization and accounting management. The advanced solutions ensure approximately equal Quality of Services level in the whole network (Garg, 2002; Stallings, 2002). The Quality of Services (QoS) deals with resource reservation rather than the achieved service quality. The packet-switched networks and computer networking in general need protocols supporting QoS. In the field of telephony, an important subset of QoS is the Grade of Services (GoS) which is the ration of lost and sent packets. While majority of other discussions only deal with one protocol, our presentation familiarizes

1050

the reader with all important telecommunications protocols by comparing and evaluating them. The other key feature of our method of discussion is to first of all consider the protocols from the aspects of telecommunications management.

MAIn Protocols oF telecoMMunIcAtIons MAnAgeMent the telecommunications Management network (tMn) The Telecommunications Management Network (TMN) is a protocol model for managing open systems. It is a part of the International Telecommunication Union Telecommunication Standardization Sector (ITU-T) recommendations M-series and is based on OSI management specifications in the ITU-T series X.700. TMN provides a

Telecommunications Management Protocols

framework for achieving interconnectivity and communication across heterogeneous systems and telecommunication networks. To achieve these goals, TMN defines a set of interface points which perform the communication task (e.g. call processing). The standardized interface element allows the cooperation of elements from different manufacturers using a single management control. TMN can be used in the management of ISDN, B-ISDN, GSM and ATM networks. TMN has four layers modeling the management of business, service, network, and element. The business management performs functions related to business aspects, analyzes trends and quality. It also provides a basis for billing and other financial reports. The service management performs functions for handling services of the network, like administration and the charging of services. The network management performs functions for distribution of network resources: configuration, control, and supervision of the network. The element management contains functions for handling individual network elements, like alarm management, handling of information, logging and maintenance.

simple network Management Protocol (snMP) SNMP was the first management protocol used in Internet management. The reason for its rapid spreading was its simplicity. However, this simplicity had also disadvantages, namely it did not support any accounting mechanism. To compensate the lack of these services, the second version of SNMP, SNMPv2 was developed. Currently the most up-to-date version of SNMP is the third version, SNMPv3, which is commonly used in wireless networks. SNMP is not tied to any particular set of data structures. It refers to a collection of tools used in analyzing network information; the protocol itself is part of this suite. SNMP operates on a collection of related objects identified in a Management

Information Base (MIB). Objects in a MIB are identified according to a naming scheme, which is based on Abstract Syntax Notation One (ASN.1) and which uses a hierarchical naming structure. The SNMP model includes a management station, a management agent, a MIB and a network management protocol. In this particular meaning, the management agent is the managed object, however, the terms ‘user agent’ and ‘software agent’ is also often used in telecommunications. Generally, the term ‘agent’ describes a software abstraction, an idea or a concept. The software agent is a piece of a computer program that acts for a user in a relationship of agency, while the user agent is the client application used with a particular network protocol. In SNMP, the object identifier is used to refer to a single MIB object. The object identifier is a sequence of non-negative integers that represents a traversal of an object tree. This tree starts with the root, while the branches of the object tree are referred to as subordinates. In SNMP, objects are identified by writing the path that leads to get to a specific device. The protocol operation is divided into two parts: the normal mode and the trap mode. In normal mode the state of managed objects and the parameter values are queried, answered and in some cases, the value is changed. In trap mode the possible errors are detected and collected, and some actions are initialized to inform other management stations to prevent dangerous or even harmful inferences. During normal operations, the management station sends messages to the management agent, the agent responds to the management station and the management station sends messages to another management station. From a functional perspective, these messages could be reads and writes. Three message types belong to the read function: ‘getRequest’, ‘getNextRequest’ and ‘getBulkRequest’. These message types are sent by the management station to the agent. The agent answers with the ‘getResponse’ message. To write,

1051

Telecommunications Management Protocols

Table 1. Comparison of SNMP versions SNMPv1

SNMPv2

SNMPv3

Standards

RFC-1155,1157,1212

RFC-1441,1452 RFC-1909,1910 RFC-1901 to 1908

RFC-1902 to 1908 + 2271 to 2275

Publication year

1988

1993

1998

Structure of Management Information (SMI) -specific data types

simple: integer, octet strings, object IDs application-wide: network addresses (only 32-bit IP addresses), counters (32 bit), gauges, time ticks, opaques, integers, and unsigned integers

New: bit strings Changes: other types of network addresses, counter (64 bit)

SNMPv3 uses SMIv2 standard from SNMPv2

simple request/response protocol protocol operations: Get, GetNext, Set, and Trap

Similarity: Get, GetNext, Set Changes: Trap message format New protocol operations: GetBulk and Inform

SNMPv3 uses SNMPv2 protocol operations and its PDU message format

SNMPv2 is incompatible with SNMPv1 in two key areas: message formats and protocol operations. Solution: RFC 1908 defines two possible SNMPv1/v2 coexistence strategies: proxy agents and bilingual network-management systems

SNMPv3 is compatible with SNMPv2

SNMPv2: Party-Based security SNMPv2u: User-Based Security (1995) SNMPv2*: User-Based Security (1995) Internet draft only SNMPv2c: Community names (Plaintext strings)

User-Based Security and View-Based Access Control

Protocol Operations

Interoperability

Security Features

Community names (Plaintext strings)

the ‘setRequest’ message is used by the management station, which is answered in dialogues by ‘getRequest’ and ‘getResponse’ messages. Read and write messages have well-defined formats composed of fields or group of fields. The first field defined in the message format is the message type. The message types are also referred as Protocol Data Units (PDUs). The next field contains the request identifier, and then the error status and the error index are represented. The variables to be queried, which belong to the ‘getRequest’ and ‘setRequest’ PDUs, are the names and the values. These are enumerated in a predetermined order.

1052

RFC 1902 (SMIv2)

In trap mode, the protocol operates with trap messages. The first field of the trap message is the PDU type, the second group of fields determines the location the agent (enterprise and agent address), and the third group of fields is the error type, the error code and the timestamp. The last group is the list of names and values of the parameters, called the trap information (Case, et al., 1989; McGinnis & Perkins, 1996; Simoneau, 1999; Zeltserman, 1999). Table 1 compares the three existing SNMP versions. The first version has a simple, but adequate operation ensuring the ‘read’ and

Telecommunications Management Protocols

‘write’ functions with ‘get’, ‘getNext’ and ‘set’ messages, and it also supports a simple error detection mechanism with the ‘trap’ function. Version two is intended to be used in big collections of data in a table format using the ‘getBulk’ message and for mutual exchange of information between different management stations using the info messages. Version three is similar to version two in its data representation, which is based on structures of management information specific data types (e.g. SNMPv2 has bit strings or counter fields similar to SNMPv3). SNMPv1 only uses a plain text string as a community value. Finally, the higher versions have better security solutions using user-based security.

open system Interconnection Management Protocols Open System Interconnection (OSI) is a network model where communications are based on seven layers. Each layer has three interfaces: One interface is the protocol which defines the rules of operations between peer network entities, and the other two interfaces are connected to layers above and below through service elements. The protocol is always created in order to provide some communication functions. If the purpose of this communication function is to manage a telecommunications network, then the protocol is called a telecommunications management protocol. The first developed telecommunications management protocol for the OSI network model is the Common Management Information Protocol (CMIP). CMIP is quite complex, therefore it requires expertise to manage CMIP-based networks. This is the main reason why TCP/IP devices support SNMP instead of CMIP. Although CMIP has been around for more than a decade, it has only a few implementations, mainly in the telecommunications sector. TCP/IP networks and IEEE 802 LANs both have CMIP specifications, described as CMIP over TCP/IP (CMOT), and CMIP over

Logical Link Control (CMOL or LAN/MAN Management Protocol, LMMP). In CMIP, similar to SNMP, the management application also exchanges information via managed objects, where these objects are attributes of the managed devices. With the use of the managed objects, these devices can be monitored, controlled and their parameters can be modified. Implemented by CMIP, defined in the Common Management Information Service Element (CMISE) the following services are available: ‘ACTION’, to select an action, ‘CREATE’, to create a copy of a managed object, ‘DELETE’, to delete a copy of a managed object, ‘GET’, to query a value of a copy of a managed object, ‘CANCEL_GET’, to terminate a running query process, and ‘SET’, to set a value of a copy of a managed object. In the opposite direction, the agent can report an occurrence of an event with the ‘EVENT_REPORT’ message to the management application (see Figure 4). Figure 4 presents an illustrative dialogue showing how an event report is requested and answered. The time sequence diagram provides a better understanding of the timing of different steps. To transfer management information between open systems, associations need to be established in the appropriate Open System Interconnection (OSI) layers. Previously the following services were used in the Common Management Information Service to establish associations: ‘INITIALIZE’, to establish association with another CMISE, ‘TERMINATE’, to terminate an existing association, and ‘ABORT’, to terminate an association under unusual circumstances. Later, these services were handed over to the Association Control Service Element (ACSE), which is capable of supervising the authentication to establish associations between OSI-method applications. In addition, in CMIP implementations, the Remote Operations Service Element (ROSE) may be used. ROSE is an application layer protocol, which allows entities to perform remote operations in distributed environments.

1053

Telecommunications Management Protocols

Figure 4. A characteristic dialogue as a time sequence diagram. CMISE Service user

CMISE Service user

CMISE service provider (CMIP)

M – E V E NT – R E POR T req

M – E V E NT – R E POR T ind

(II, M, MOC, MOI, E ty, E ti, E I)

(…) M – E V E NT – R E POR T resp (II, MOC, MOI, E ty, CT , E R , E )

M – E V E NT – R E POR T conf (…) M – CA NCE L – GE T req

M – CA NCE L – GE T ind

(II, GII)

(…) M – CA NCE L – GE T resp (II, E )

M – CA NCE L – GE T conf (…)

Table 2 shows the comparison of SNMP and CMIP. CMIP is more secure, but very complex and this has a notable drawback: more complexity means more sophisticated handling. The fundamental difference between SNMP and CMIP is how the devices are defined. CMIP uses an objectoriented method to define the devices individually, while SNMP uses a variable based method, where every variable has its own type identifier. CMIP uses event reports, while SNMP operates with TRAP messages. In conclusion, CMIP offers more opportunities than SNMP, but due to its complex handling methods, today it is rarely used (International Telecommunication Union, 1992; Black, 1995; Raman, 1998).

Mobile Internet Management Protocols remote Authentication dial-in user service (rAdIus) RADIUS (Remote Authentication Dial-In User Service) is an AAA (Authentication, Authorization and Accounting) protocol. Originally it was developed for Internet service providers to identify and authorize their users. The server running RADIUS not only controls the user authentication, but authorizes and / or bans the access to the terminal. RADIUS also logs the events of connection and disconnection of the users, making the protocol suitable for billing purposes. The authentication method depends on the location of

Table 2. Comparison of SNMP and CMIP.

1054

Simple Network Management Protocol (SNMP)

Common Management Information Protocol (CMIP)

Standardized organization

IETF

CCITT Recommendation X.711, ISO/IEC 9596

Model

TCP/IP

OSI (CMOT is the variant of CMIP for TCP/IP model)

Security

+

+++

Complexity

+

+++

Protocol level

application

application

Network traffic

-

---

Telecommunications Management Protocols

the data required. Under simple circumstances the data is stored on the RADIUS server itself. While under ideal circumstances, the information required for authentication is stored on a LDAP (Lightweight Directory Access Protocol) domain controller or on a database server running Simple Query Language (SQL). Using an access point (AP), the authentication technique is as follows: after the client has reported its intent to connect to the AP, it sends the user name and the password. Until the client has not been identified, it can only use an Extensible Authentication Protocol (EAP). The AP forwards the data (still using EAP) to the RADIUS server. RADIUS sends the login information to the domain controller and also converts the EAP messages to RADIUS format. The domain controller compares the data collected by RADIUS with its own data and responds to RADIUS. Finally, if everything matches RADIUS grants access to the AP. RADIUS-MIB (RADIUS Management Information Base) is an extension to the MIB used by the Simple Network Management Protocol (SNMP). This fact makes the RADIUS-MIB suitable for the handling of objects to implement the AAA process (as described previously). The RADIUSMIB has two parts: the client side objects and the server side objects (Rigney, et al., 1997)

lightweight directory Access Protocol (ldAP) LDAP is a directory service mainly used to access a hierarchical database. Unlike the most widely implemented relational databases, it uses a tree graph. LDAP databases are optimized for reading and searching, therefore it is most commonly used when data access and read are more important than data modifications. It can store all kinds of data, as long as they are organized into a tree hierarchy.

extensible Authentication Protocol (eAP) EAP is a transfer protocol, a framework for the actual authorization methods. There are five most notable EAP variations. EAP-MD5 (Message-Digest algorithm 5) supplies the fundamentals of security requirements based on user name and password. It leaves a digital fingerprint on every package it addresses in the data flow. It does not require any kind of client-side Public Key Infrastructure (PKI) certification; therefore the EAP-MD5 is not secure, but it is fast because of its simple structure. This protocol can also be used in wired networks. EAP-TLS (Transport Layer Security) maintains a high protection level for both the client and the server. The user name and the password are still required, but this protocol also uses a TLS session and requires PKI certifications on both sides. This fact is also the disadvantage of EAP-TLS, because the two-sided certification puts a significant load on the client. EAP-PEAP (Protected Extensible Authentication Protocol) is also called a protected EAP. The aim of this protocol is to establish a secure transfer agent via an encoded TLS tunnel for the other EAP versions. It does not support authorization by user name and password, but requires confidence between the client and the server in creating and transferring the TLS key. This is a significant difference between EAP-PEAP and the older versions. EAP-TTLS (Tunneled Transport Layer Security) was developed as an alternative to PEAP. As EAP-PEAP, this protocol also uses an encoded TLS tunnel for the transfer, but clients can also be authenticated by user name and password. EAP-TTLS (unlike EAP-TLS) only requires certification from the server during the authentication process. As this protocol can maintain a high security level without mutual certifications, it is considered to be one of the best solutions for wireless networks.

1055

Telecommunications Management Protocols

The Lightweight Extensible Authentication Protocol (LEAP) was developed by Cisco and completely proprietary to Cisco, therefore it is only compatible with Cisco products. It requires a two-side authentication: first, the client identifies itself to the authenticator, then the authenticator identifies itself to the client. Only after this procedure can a network access be established. Similar to EAP, the authorization is made by user name and password, and does not require complex PKI certifications. Considering its security level, LEAP is somewhere between EAP-MD5 and EAP-TLS.

Figure 5. The basic model of COPS.

common open Policy service (coPs)

diameter Protocol

COPS is an application layer protocol over TCP (Transmission Control Protocol). In wide area networks, COPS also provides Quality of Services (QoS) at an approximately equal level. From the point of view of COPS, the network has a simple client-server structure, where the client is the Policy Enforcement Point (PEP) and the server is the Policy Decision Point (PDP) (see Figure 5). The client and the server are connected through COPS, which is used to communicate policy information. The PEP can initiate a connection and sends keep-alive messages in case of no information exchange is presented. If the connection is lost, the PEP tries to establish the connection again, if it does not succeed, it tries to reach another PDP. There is a number of COPS messages, for example the ‘In Interface’ message, which defines the source location of the message, the ‘Out Interface’ message, which defines the destination of the message, and the ‘PDP Redirect Address’ message, which defines the next PDP address where the message has to be forwarded in case of former rejection. COPS has two operational models, the outsourcing and the provisioning model. In the outsourcing model, PEP delegates the decision making step to the PDP (Durham, et al., 2000; Mallenius, 2000). In the

1056

network device PE P

L PDP

PDP PE P: Policy E nforcement Point PDP: Policy Decision Point L PDP: L ocal Policy Decision Point

provisioning model, PEP creates a fixed policy setting before any traffic is initialized. PDP can modify this predefined policy as required.

The Diameter protocol provides the Authentication, Authorization and Accounting (AAA) framework for Mobile IP, delivers attribute value pairs, which carry specific information for AAA, security and configuration. Diameter is extensible through addition of new commands (e.g. can define new accounting or authorizing applications), it has a built-in error notification function and it is capable to negotiate the capacity of the resources with managed objects. Diameter is fully compatible with RADIUS. A Diameter session consists of commands and exchanges of attribute value pairs between authorized clients and servers. The base protocol provides the minimum requirements for AAA, mobile IPv4 or remote network access applications. In Diameter operation, any node can initiate a request, which makes Diameter a peer-to-peer protocol. The message format includes the message type, the version number and the application type. Table 3 contains the comparison of the main AAA protocols, SNMPv3, COPS, RADIUS and Diameter. All the four AAA protocols are application layer protocols. SNMPv3, COPS and RADIUS are based on client-server structure, while Diameter has a peer-to-peer architecture. Each of these four protocols has advantages from

Telecommunications Management Protocols

different points of view. SNMPv3 has the strength of security, COPS can ensure the Quality of Services, while RADIUS and Diameter have good AAA capabilities (Calhoun, et al., 2003; Hosia, 2003; Carnegie Mellon Software Engineering Institute, 2007).

Future trends In the near future, only small steps are expected in protocol development. To answer questions regarding long term trends is not easy. It seems to be clear that two seemingly different points of view will dominate: the user-centric and the service provider requirements. User-centric solutions ease the user’s effort to access and use the network. Service providers and users are both interested in high quality transmission, reliable operation and adequate accounting. The most important requirements are equally important for users and service providers. One of these requirements is security. The telecommunications management protocol messages carry a lot of important information about the message route

and its environment; therefore it is a necessity to ensure security. In the near future, the strength of cryptography is expected to be increased, for instance identity based cryptographic methods and new message syntaxes are being developed. As for service providers, routing is an important issue. There are trends dealing with telephony routing over IP, and also the application of IPv6 is under consideration (Boyen, 2007; Devarapalli, 2007; Housley, 2007; Carlberg & O’Hanlon, 2008). Another interesting new direction is the application of telecommunications management methods for other networks. For example, a sensor network is composed of sensors measuring the temperature changes. The management station monitors the temperature in a predefined order and compares the values. This sensor network can be considered as a mobile ad hoc sensor net. Still, probably the most important future trend is the network convergence, also called the media convergence. It means the coexistence of telephone, video and data communication within a single network. User requirements and consumer demands equally focus on network convergence, especially in the world of the Internet. It is impor-

Table 3. Comparison of AAA protocols SNMPv3

COPS

RADIUS

Diameter

Publication year

1998

2000

1997

2003

Main standard

RFC-2271

RFC-2748

RFC-2058

RFC-3588

Standardized organization

IETF

IETF

IETF

IETF

Functions

Collect and set management information on network

exchanging network policy information between a PDP in the PEPs as part of overall Quality of Service

AAA applications

AAA + congestion control

Security

optional IPsec

optional IPsec or TSL

optional IPsec

Always use IPsec or TSL

Transport layer protocol

default UDP, optionally TCP

TCP

UDP

SCTP or TCP

Reliability

+

++

++

+++

Robustness

+

+

++

+++

Architecture

client-server

client-server

client-server

peer-to-peer

1057

Telecommunications Management Protocols

tant to note that sending text based information, ‘surfing’ on the Web, and sending voice messages at the same time demand the significant increase of bandwidth. Also, more sophisticated applications require more effective network resources. Data exchange of increasingly rich contents requires new technologies. Therefore, the network convergence plays an important role in the telecommunications management.

conclusIon This chapter presented the main telecommunications management protocols. First, the general concepts of protocols were briefly discussed, and then the basics of telecommunications management were outlined. The main protocols were classified according to three groups: SNMP, OSI protocols and AAA protocols. The section for future trends was based on ideas for new requirements which should initiate the development of new protocols. The ideas of this chapter can be summarized as: The telecommunications management protocols have a great importance, but despite of them being well developed even today, candidates for new protocols are expected. The telecommunications management methods will appear in many application areas of ebusiness. These applications will have an impact on telecommunications. Simplicity, security and openness are the keywords of the future telecommunications management protocols.

AcKnowledgMent Special thanks to Dr. Maria Toeroe, PhD (Senior Researcher, Ericsson Canada, Inc., Montreal) and to Dr. József Harangozó, PhD (Associate Professor, Budapest University of Technology and Economics, Budapest) for their useful suggestions. The author is also grateful to Dr. János Miskolczi, PhD (Senior Consultant, Ericsson Hungary, Ltd.,

1058

Budapest), Tibor Dulai, Dániel Muhi and Szilárd Jaskó (Assistant Professors, University of Pannonia, Veszprém) for their continuous support and brilliant ideas.

reFerences Black, U. (1995). Network Management Standards: SNMP, CMIP, TMN, MIBs, and Object Libraries. New York: McGraw-Hill Companies. Boyen, L. M. (2007, December). RFC 5091 Identity-Based Cryptography Standard (IBCS). Calhoun, P., Loughney, J., Guttman, E., Zorn, G., & Arkko J. (2003, September). RFC 3588 Diameter Base Protocol. Carlberg, K., & O’Hanlon, P. (2008, January). RFC 5115 Telephony Routing over IP (TRIP). Carnegie Mellon Software Engineering Institute (2007). Common Management Information Protocol (CMIP). Retrieved January 2008, from http:// www.sei.cmu.edu/str/descriptions/cmip_body. html Case, J. D., Fedor, M., Schoffstall, M. L., & Davin, J. (1989, April). RFC 1098 Simple Network Management Protocol (SNMP). Devarapalli, V. (2007, December). RFC 5096 Mobile IPv6 Experimental Messages. Durham, D., Boyle, E. J., Cohen, R., Herzog, S., Rajan, R., & Sastry, A. (2000, January). RFC 2748 The COPS (Common Open Policy Service) Protocol. Garg, V. K. (2002). Wireless Network Evolution, 2G to 3G. New Jersey: Prentice Hall. Hosia, A. (2003). Comparison between Radius and Diameter (T-110.551 Seminar on Internetworking). Helsinki, University of Helsinki, Department of Computer Science.

Telecommunications Management Protocols

Housley, R. (2007, November). RFC 5083 Cryptographic Message Syntax (CMS) AuthenticatedEnveloped-Data Content Type. International Telecommunication Union (1992). Management Framework for Open Systems Interconnection (OSI) for CCITT Applications. Retrieved January 2008 from http://www.itu.int/ rec/T-REC-X.700-199209-I/en König, H. (2003). Protocol Engineering (in German). Weisbaden, B. G. Teubner Verlag. Mallenius, S. (2000). The COPS (Common Open Policy Service) Protocol (Research seminar on IP Quality of Service). Helsinki, University of Helsinki, Department of Computer Science. McGinnis, E., & Perkins, D. (1996). Understanding SNMP MIBs. New Jersey, Prentice Hall.

Key terMs Accounting: Accounting means the tracking of network resources by users. The typical information gathered in the accounting process is the identity of the user, the level of the services delivered, and the time interval in which the services were being used. Authentication: Authentication means that a user who is requesting services is a valid user of the network services requested. Authorization: Authorization means that a user can access some services based on its authentication, but the access in only provided for a given amount of time. Therefore authorization is a kind of limitation of the authentication rights.

Raman, L. (1998, March). OSI Systems and Network Management. IEEE Personal Communications, 36, 46-53.

Outsourced Policy: Outsourced policy is a model where a policy enforcement device issues queries to delegate a decision for a specific policy event to another component external to it.

Rigney, C., Rubens, A., Simpson, W., & Willens, S. (1997, January). RFC 2058 Remote Authentication Dial In User Service (RADIUS).

Policy: Policy is the ability to define conditions for accepting, rejecting and notifying routes according to the actual information.

Simoneau, P. (1999). SNMP Network Management. New York: McGraw-Hill Companies.

Provisioned Policy: Provisioned policy is a model where network elements are pre-configured, based on policy, prior to processing event. Provisional policy is contrasted with outsourced policy.

Stallings, W. (2002). Data and Computer Communications. New York: Macmillan Publishing Company. Tarnay, K. (1991). Protocol Specification and Testing. New York: Plenum Press. Zeltserman, D. (1999). A Practical Guide to SNMPv3 and Network Management. New Jersey: Prentice Hall.

Quality of Services (QoS): Quality of Services refers to an ability to deliver network services according to the parameters specified in a service level. Quality of Services is also an agreement containing service availability, delay, throughput and packet loss ratio, and the ability to provide different priority to different applications, users or data flows.

This work was previously published in Handbook of Research on Telecommunications Planning and Management for Business, edited by I. Lee, pp. 502-514, copyright 2009 by Information Science Reference (an imprint of IGI Global).

1059

1060

Chapter 4.7

Strategic Outsourcing:

Opportunities and Challenges for Telecom Operators Varadharajan Sridhar Management Development Institute, India

AbstrAct Telecom operators have a wide variety of functions to perform including marketing of telecom products and services, managing their networks, providing after-sales customer service, and innovating new products and services in tune with fast changing technologies. Though until recently the telcos have kept their core network management functions in-house, there are recent announcements of large scale outsourcing of network management functions. As operators, especially those providing mobile services, have evolved from offering voice services to advanced data and video services, the Information Technology (IT) services required for appropriate management of these vale added service offerings have also become complex. Some carriers have also outsourced their IT functions to large IT services vendors. In this chapter we deliberate the reasons for strategic outsourcing such as core competency, production economies, and transaction costs as presented in the literature and

analyze these in the context of outsourcing model pioneered by an Indian mobile operator. We also explain vulnerabilities and risks associated with these outsourcing contracts and measures to be taken by the firm to mitigate their effects.

IntroductIon Outsourcing is defined as the process of commissioning part or all of an organization’s assets, people, and/ or activities to one or more external service providers (Lee, 2006). Lee (2006) further points out that since outsourcing can make organization either agile and proactive, or sluggish and reactive, it is just not an operational decision but a strategic one with far-reaching consequences. Quinn & Hilmer (1994) point out the following two strategic outsourcing approaches used by chief managers of organizations: 1.

Concentrate the firm’s own resources on a set of “core competencies” where it can

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Strategic Outsourcing

2.

achieve definable preeminence and provide unique value for customers. Strategically outsource other activities— including many traditionally considered integral to any company—for which the firm has neither a critical strategic need nor special capabilities.

By doing the above, firstly, the firms maximize return on internal resources. Second, well developed core competencies provide formidable barriers against future and present competition. Third, the firms that outsource are able to fully utilize the external supplier’s investments, innovations and specialized professional capabilities to their advantage. Fourth, this joint strategy decreases risk, shorten cycle times, lowers capital and operating expenditures for the firm. Through out 1990s, large firms in the United States first began outsourcing non-core information technology (IT) services to large companies domestically, preferring to have these services provided securely and reliably from outside, rather that building up in house expertise. Outsourcing work mainly included software application development and maintenance. Typically the IT services and their associated processes tend to be human intensive and are traditionally outsourced to countries where the labor costs are lower and from where the services could be delivered remotely without sacrificing quality and efficiency (Sridhar & Bharadwaj, 2006). Referred to as offshoring, the organization’s products and services in this case are provisioned from locations in other countries (Davis, et al.,2006). Examples of such offshore outsourcing areas include customized software development, package software implementation, software product testing, customer care support services, IT infrastructure management and back office operations. US companies expanded off-shoring through partnership, acquisitions and local subsidiaries. Thus they followed a less risky and more strate-

gic approach of alliances by keeping the control with them. Their sourcing strategy more closely resembled the “in-sourcing” strategy of traditional offshore investments for global manufacturing. Sridhar & Bharadwaj (2006) discuss details on the model of growth of IT and IT Enabled Services outsourcing industry.

strategic outsourcing Models Following are the three different outsourcing strategies pursued by firms (Lee, 2006):

Independent Outsourcing Strategy In an independent strategy, relationships with external providers are tenuous, with interactions lasting for a very brief period of time. In this strategy, firms acquire resources externally but manage them internally. Firms develop indigenous competency thus minimizing dependence on external entities for critical organizational resources. This approach pursues a minimal outsourcing, buy-in contract and short-term duration strategy to gain outsourcing benefits by redirecting the business in to core competencies.

Arm’s Length Outsourcing Strategy An arm’s length approach is based on non-idiosyncratic relationships with the presumption that sellers are interchangeable. These relationships commence with a detailed specification of each party’s obligations. The control of unspecified obligations are vested on the provider. In order to minimize the exposure to provider opportunism, such relationships are loosely coupled, and long-term commitments are avoided. The outcome of such relationships is typically cost efficiency through the competitive pricing of services. In summary, this strategy focuses on improving the business’ financial position by pursuing a selective outsourcing, fee-for-service contract, and medium-term approach.

1061

Strategic Outsourcing

Embedded Outsourcing Strategy Embedded arrangements are superior in their ability to facilitate knowledge transfer and acquisition. The strength and stability of the relationships are derived in large part from both parties being committed to a long-term relationship. Opportunism is curtailed by the anticipated cost of foregoing a long-term relationship. Personal ties and emergent trust prevail and partners undertake joint problem solving. Hence the objective of this outsourcing strategy consists of comprehensive outsourcing, partnership, and long-term relationship to strengthen resource and flexibility in technology service that underpins the firm’s business direction. Though there are a number of studies on IT outsourcing as pointed out by Sridhar & Bharadwaj (2006), there is a dearth of studies of IT outsourcing practiced in different industry verticals such as manufacturing and telecom. In this chapter, we look specifically at the strategic outsourcing in the telecom industry. Telecom operators have a wide variety of functions to perform including marketing telecom products and services, managing their networks, providing after-sales customer service, innovating new products and services in tune with fast changing technologies. Though until recently the telcos have kept their core network management functions in-house, there are recent announcements of large scale outsourcing of network management functions. As operators, especially those providing mobile services have evolved from offering voice services to data and video services, the IT services required for appropriate management of these value added service offerings have also become complex. Some carriers have also outsourced their IT functions to large IT services vendors. In this chapter, we discuss the motivations behind such outsourcing contracts, taking examples from a mobile service provider in India. In the next section, we discuss trends in outsourcing by telecom operators. Subsequently we discuss rea-

1062

sons for outsourcing by telecom operators citing examples from the Indian telecom industry on outsourcing contracts. We also discuss vulnerabilities of outsourcing and imitations effects. We conclude with future research directions.

trends In outsourcIng by telecoM oPerAtors Following are the three different areas of outsourcing being pursued by the telecom operators: 1.

2.

3.

Network operations and management: Network capacity planning and deployment, integrating network equipment, network maintenance, installation and fault repair, deployment of new network services. IT Management: IT infrastructure management, desktop and server management, Operational Support Services (OSS), Billing Support Services (BSS), customer relationship management software development and implementation, deployment of new IT services. Customer Relationship Management: Call centre services.

However, the nature and complexity of the above operations differ across different types of services (viz. mobile, fixed) offered by the telecom operators. The amount of outsourced work differs depending on the following models adopted by the telecom operators: 1.

Full Outsourcing: The contracting partner takes full responsibility for the functions and services. Typically this involves transferring both staff and assets by the operator to the contracting partner. Examples include Redstone which outsourced its entire UK operations to BT Wholesale, Hutchison “3” in Italy and the UK.

Strategic Outsourcing

2.

3.

4.

Out-tasking: In this model, the telco borrows skilled engineers and other resources from the contractors. However it retains full control and management of network operations and services. Examples include Movistar in Puerto Rico which out tasked the technical support functions to Lucent. Build Operate and Transfer: The contractor takes responsibility for designing, building and deploying the network. After the services are commenced, the assets are transferred to the operator. This model is typically used for green field projects such as network build-out by new entrants or new network services such as 3G/4G by the incumbent operators. Examples include the technology upgrade of Eurotel of the Czech Republic. Managed Capacity: The contractor takes responsibility to provide the operators with capacity to provide various service offerings. Examples include Bharti Airtel in India outsourcing capacity management to Nokia-Siemens and Ericsson.

Indian Mobile Market Quick deployment, competition, advancement in technologies, and reduced cost of access has propelled the growth of mobile services in India much like in other emerging countries. Indian mobile subscriber base continues to grow and has reached about 225 million in December 2007 from about 142 million a year ago. Figure 1 illustrates the exponential growth of mobile services in India. India currently has the world’s third largest mobile subscriber base in the world, and is slated to exceed that of the US by the end of this year to become the second largest in the world, next only to China. The compounded annual growth rate of mobile subscriber base has been 84.2 percent over the last five years. Revenue from cellular mobile services touched $12.5 billion for the fiscal year ending March 2007 (Voice & Data, 2007).

Figure 1. Growth of mobile services in India

However, Sridhar (2007) points out that intense competition, very low prices, very low Average Revenue Per User (ARPU), and high regulatory levies are characteristics of the Indian mobile industry. These have forced Indian telecom operators to adopt innovative methods to improve productivity and efficiency and reduce expenses.

outsourcing by bharti Airtel In 2003, Bharti Airtel, the largest private telecom operator in India outsourced its network management and IT operations. In March 2003, Bharti outsourced its data centre operations, billing support systems, application development, and customer relationship management valued at $750 million in a 10-year contract with IBM (Singh & Dubey, 2004). Bharti’s agreement with IBM was based on revenue sharing. Over a period of ten years, IBM would design, build up, and maintain Bharti’s IT network in a full outsourcing model in exchange for a portion of Bharti’s revenues (Martinez-Jerez, & Narayanan, 2006a). During the contract period, IBM would operate Bharti’s data centre, its disaster recovery site at Chennai, India, and the billing that Bharti does in its licensed service areas around the country, its Customer Relationship Management programme, all applications development, as well as the IT help desk. IBM would also handle over 80% of Bharti Airtel’s current programme and project management.

1063

Strategic Outsourcing

Bharti followed this with outsourcing network management to Ericcson (in 14 license service areas) and Nokia Siemens (in 7 license service areas) for a 3-year $724 million contract. During this period, Ericsson and Nokia Siemens would manage base stations (antennae, switches, routers, transmitters and receivers) within their areas of operation, deploy new base stations as required, roll out new networks and applications, and take on board roughly 800 of Bharti Airtel staff. They would also add new staff dedicated to Bharti Airtel as the network and business of Bharti expanded. As a result of these outsourcing contracts, Bharti Airtel would now just handle a few things: marketing, sales and distribution. Apart from that, it would just monitor its vendors, see that they stick to the parameters of the contracts, and make sure that they deploy and build only the best systems and networks for Bharti’s operations (Singh & Dubey, 2004). While the IBM outsourcing deal followed the full outsourcing model, the network management was on a managed capacity model. The success of this outsourcing model is explained in detail in Martinez-Jarez & Narayanan (2006b). We discuss the reasons for the outsourcing contract (for details on Bharti Airtel, the reader is referred to Appendix I).

for IT related outsourcing were cost control and reduction, focusing on core competencies, access to new expertise and technologies and improved flexibility. Way back in 1989, when Kodak announced outsourcing data center operations to IBM, telecommunication services to the Digital Equipment Corporation, and PC support to Business Land, it created quite a stir in the IT Industry. Never before had such a well known organization, where IS was considered to be a strategic asset, turned it over to third party providers (Applegate & Montealegre, 1991). Kodak appears to have legitimized outsourcing, creating what is known as “The Kodak Effect.” A number of high profile multi-billion dollar “mega-deals” were signed increasing the awareness of outsourcing.

What is Core for Bharti? The Indian mobile industry is highly fragmented with as many as 6-9 operators in most of the service areas. Figure 2 illustrates the amount of competition and market power as indicated by the Herfindahl Hirschman Index (HHI). (viz. lower the HHI, more is the competition). With more than 85% of mobile subscribers being pre-paid, Bharti decided that acquiring and retaining customers is a very important core activity in which it should concentrate its energy and resources. Hence Bharti

reAsons For strAtegIc outsourcIng core Areas of the Firm Companies consistently make more money than their competitors only if they can perform some activities—which are important to customers— more effectively than anyone else. The argument of focusing on core competency is cited by many researchers (Lacity, et al, 1996; Mcfarlan & Nolan, 1995; Prahalad & Hamel, 1990; and Willcocks, et al 1995). In a qualitative research, Pinnington & Woolcock (1995) have found that the drivers

1064

Figure 2. Competition in mobile services in India

Strategic Outsourcing

Figure 3. Growth of mobile subscribers of Bharti Airtel

in its outsourcing strategy kept marketing, sales and distribution activities to itself so that they can dominate over their competitors in customer acquisition and retention. Most of the telcos still consider their networks to be core to their business. This is especially true of government operators who consider networks to be their property and have been managing their erstwhile monopoly network operations by themselves. Though Bharti entered in to the telecom services market in 1995, the chief managers of the firm did not have the fixated idea of managing the network by them selves. Bharti created something akin to the “Kodak effect” in telecom outsourcing as it was watched by many operators world over for the success of it (Martinez-Jerez & Narayanan, 2006a). The shift in focus to concentrate resources on customer facing core activities seems to have paid of for Bharti. This is reflected in the growth in subscriber base of Bharti since 2003 as illustrated in Figure 3.

Maintaining competitive Advantage Quinn & Hilmer (1994) point out that the key strategic issue in insourcing versus outsourcing is whether a company can achieve a maintainable competitive edge by performing an activity, usually cheaper, better, in a more timely fashion or with unique capability on a continuous basis.

They further pointed out that Ford Motor Company found that many of its internal suppliers’ quality practices and costs were nowhere near that of external suppliers when it began its famous “best in class” worldwide benchmarking quality studies. However outsourcing entails contractual risks such as vendor bankruptcy, vendor’s inability to deliver, and contract breach by the vendor. To mitigate these, the firm engages in screening the vendor ex-ante and monitoring vendors ex-post. In screening, the firm’s goal is to identify a potential vendor who is best suited for providing a certain service. Through proper screening, firms can reduce the risk of opportunism and adverse selection (Vitharana & Dharwadkar, 2007).

How Bharti Chose its Partners and Managed them? Bharti chose Ericsson and Nokia Siemens, the top two mobile network equipment manufacturers for network management. Further, Bharti decided to partner with the best-in-class in managed IT services so that the technical aspects of developing and managing various IT services are also outsourced. IBM, the global leader in managed IT services, was selected to provide Bharti with complete and comprehensive end-to-end management of all of Bharti’s hardware, software and applications requirements along with expert management of the IT infrastructure. Even while IT companies in India were going after large export IT off-shore contracts, IBM won the major domestic contract from Bharti due to expertise and world leadership (Sridhar, 2008). Telecom technologies change rapidly and risk of technology obsolescence is very high in the industry. Outsourcing network management and capacity planning to equipment vendors like Ericsson and Nokia-Siemens, Bharti transferred the technology obsolescence risk to the vendors. With constant growth in the market, Bharti was finding it difficult to recruit and train skilled man-

1065

Strategic Outsourcing

power for its IT and network functions. However, large vendors such as IBM, Nokia-Siemens and Ericsson had huge skilled technical manpower and were in much better position to do the corresponding functions more efficiently than the telecom operators such as Bharti (Martinez-Jarez & Narayanan, 2006a). The success of outsourcing is related to the service quality (Grover, et al, 1996). With highly trained manpower, the vendors of both IT and telecom were able to provide the much needed quality of services to Bharti.

Production economies Neoclassical economics regards any business organization as a production unit motivated by profit maximization. Williamson (1981) argues that a firm justifies sourcing options based on production economies. In the context of telecom and IT, a firm will choose to outsource or in source based on the comparative costs of internalizing the functions versus the price it has to pay vendors for the services (Saarinen & Vepasalainen, 1994). The propensity to outsource exists due to reduction in production cost as cited by Lacity, et al. (1996), Loh & Venkatraman (1992a), McFarlan & Nolan (1995). Although the reports in press and media tend to inflate the potential savings (Lacity & Hirschheim, 1993), the comparative cost advantages offered by vendors are a major factor in outsourcing services (Ang & Straub, 1998). Loh & Venkatraman (1992b) have empirically supported a positive relationship between IT cost structure and outsourcing. It is hypothesized by Ang & Straub (1998) that the higher the production cost advantage offered through IT outsourcing, the greater the degree of outsourcing. Thus the key compelling force driving the companies to outsource is savings due to reductions in direct wage costs and other operating expenses. Murray & Kotabe (1999) have shown a negative relationship between asset specificity and internal

1066

sourcing of supplementary services. The result suggests that unlike product sourcing strategy where asset specificity and internal sourcing are positively related, supplementary services tend to be sourced externally to reduce fixed investment and increase operational flexibility.

How did Bharti Achieve Production Economies? In both network and IT outsourcing contracts, Bharti transferred its employees who were performing the functions outsourced to the payroll of the contracting partners. Soon after the outsourcing contract was signed up to 1000 engineers were transferred from Bharti to the vendors. According to one of the chief managers of Bharti these engineers were happier working for the technology companies than with the service providers. This apart from decrease in wage costs, improved efficiency of operations as well. The managed capacity model with network vendors allowed Bharti the flexibility to pay the vendors on Erlang basis as and when the network capacity was up and running and was used. This avoided excess capital expenditure by Bharti on its network infrastructure deployed in anticipation of future demand. This also allowed Bharti a window of credit period and hence rationalized the capital expenditure in tune with the actual demand. The focus of the Indian mobile operators was switching from plain vanilla voice to value added services. Indian operators had to adopt 2.5G and 3G services to provide these services which required large capital expenditure (Martinez-Jarez & Narayanan, 2006a). The managed capacity model followed by Bharti protected it against such large expenditures. Due to capacity based payment to network vendors, it was estimated that the capital expenditure of Bharti declined by as much as $730 million in 2007 (Singh & Dubey, 2004).

Strategic Outsourcing

transaction costs

it up with continuing personnel development and infrastructure management.

Quinn & Hilmer (1994) discuss that while outsourcing, analysts must include both internal transaction costs as well as those associated with external outsourcing. External transaction costs refer to the effort, time, and costs incurred in searching, creating, negotiating, monitoring and enforcing a service contract between buyers and suppliers (Mahoney 1992). These transaction costs can erode comparative advantages in the production costs of vendors. However Ang and Straub (1998) have shown that both production cost and transaction costs are important in decision while outsourcing, however production costs are the overwhelming dominant factor, about six times as large as that of transaction costs. Considerable reduction in production cost with only marginal increase in transaction cost increases propensity to outsource. If the products and services were to be internal, firms must back

How did Bharti Reduce Transaction Costs? Due to high growth in mobile services, Chief Managers of Bharti were tendering, negotiating and working with the vendors every six months for network expansion. This resulted in (i) huge management bandwidth being spent on follow-up and other non-innovative, non-customer oriented activities and (ii) delays in deploying networks in a very competitive market place and (iii) unpredictable business models (Singh & Dubey, 2004). Quinn & Hilmer (1994) argue that one of the great gains in outsourcing is the decrease in executive time for managing peripheral activities—freeing top management to focus more on the core of its business.

Table 1. Example SLAs Bharti had with Network Outsourcing Partners (Banerjee, 2008). Areas of Measurements 1

Target

Lower Control Limit

Upper Control Limit

No Reward Limit

Network Availability

1.1

Network Availability of Switch

>99.95%

99.97%

99.2%

99.4%

80

Annual Expenditure on EC

6% and above

57.56

N = 148

Table 3. Goodness-of-fit for the final measurement model Item

Suggested Range

Measurement Model Value

χ2

P>0.05

P =0.05

χ2/d.f.

0.90

0.99

Comparative Fit Index

>0.90

0.96

Tucker-Lewis Index

>0.90

0.98

RMSEA

[2]>>[3]

RP

3.87 (0.62)

3.91 (0.72)

3.74 (0.83)

1.66

Not significant

Factors

U

2.99 (0.87)

2.84 (0.91)

2.81 (0.87)

1.52

Not significant

TC

3.98 (0.63)

3.67 (0.61)

2.76 (0.58)

11.37**

[1]>>[2]>>[3]

F

3.91 (0.65)

3.71 (0.59)

3.32 (0.66)

16.36**

[1]>>[2]>>[3]

RA

4.11 (0.51)

3.79 (0.63)

3.69 (0.77)

4.54*

[1]>>[2]>>[3]

TP

3.63 (0.54)

3.37 (0.59)

2.91 (0.73)

12.33**

[1]>>[2]>>[3]

TMS

3.87 (0.71)

3.70 (0.78)

3.21 (0.71)

14.65**

[1]>>[2]>>[3]

RT

3.34 (0.49)

3.11 (0.62)

3.13 (0.80)

7.91**

[1]>>[2]>>[3]

All three groups perceive that they operate in relatively different competitive sectors. This result is consistent with the findings of King et al. (1989), who found that pressure from competition is an important facilitator of a firm’s effort to deploy strategic information systems. However, Thong and Yap (1995) and Teo et al. (1997) observe competitiveness of the environment to be insignificant in the decision to deploy IS. This article establishes firms deploying B2B e-commerce do so, partly, because of the business environment they operate in, because both users and nonusers of EB may have different strategies and orientation regarding their business environments. Hence, the competitive intensity in an environment is a key determinant for firms deploying EB. Regulatory policy is a significant determinant for EB use among financial services firms in Nigeria, but it is not a significant dedifferentiating factor among EB users and nonusers. The relevant authorities in Nigeria such as the Nigeria Internet Group and the Information and Communication Technology Agency, should work very closely with the industries to develop comprehensive information technology frameworks that could support both national and global business operations. This could be done by using benchmarks

from, say, Singapore, United States and Finland. Similarly, the results indicate that uncertainty is a significant factor in firms EB use, which illustrates the growing necessity for businesses to employ electronic systems to enable business operations in unstable emerging markets, such as Nigeria. However, uncertainty was not a significant factor determining differences among financial firms use of EB. This may be because of the relatively stable political structure and governance in the country for the past 8 years following the inception of civilian governance in Nigeria. Technology capability emerged as a significant determinant of EB deployment and performance in the firms. This indicates the prominent position advances in technology takes in business dealings. New technology applications such as the Internet and wireless applications are driving significant changes in business landscape and direction for future business opportunities. Technology capability also emerged as a differentiating factor among the business groups. The stronger and advanced the technology used by the firms, the greater the tendency for better performance. The results depict that fit is a strong determinant of EB system deployment. Post-hoc analysis indicates significant differences among the three

1277

E-Business Deployment in Nigerian Financial Firms

groups. Users with in-house solutions view EB as an innovation more consistent with their firms’ culture and information system infrastructures, compared with users with outsourced EB solutions. Similarly, users without in-house solutions perceive EB to be more consistent with their firms’ culture and information system infrastructure compared to nonusers. This result reveals the significance of fit between EB and the firm, which is consistent with the findings of Tornatzky and Klein (1982). The result also corroborates the contention that firms would deploy technologies with features that relatively match the firms’ business processes and experiences (Ettlie, 1983). Similarly, Relative advantage of the innovation is a significant determinant in EB deployment. The results in Table 6 indicate significant difference among the three groups. This implies that users with in-house solution perceive their firms as having a relative advantage, by way of the benefits of EB deployment. In addition, users with outsourced systems gain relative advantage using EB. The results also illustrate that technology policy is a significant determinant in the deployment of EB. Further, Post-hoc analysis suggests that all the three groups of firms are significantly different from one another. EB users without in-house solutions tend to have more aggressive technology policy compared to non-users of EB (Teo et al., 1997; Ettlie & Bridges, 1982). Early users of innovation will thus consider technology policy to be a key component of their corporate strategy formulation. In addition, Top managers’ support is a significant EB use determinant in Nigerian firms. In addition, Post-hoc analysis reveals that all three groups of firms are significantly different from one another. Users with in-house EB tend to have the highest level of top management influence, followed closely by users with outsourced systems, and nonusers. The results illustrate that risk taking is a significant determinant in EB use and performance. This implies that the risk-taking propensity of top management has enormous impact on the

1278

implementation of EB. The participants in this research perceive EB deployment as risky because it commands substantial financial investment and often, requires changes in the firm and management structure, strategy and practices, but are willing to take the challenges because of anticipated competition intensity. In addition, security and standardization issues are currently being resolved, and with the commitment from the government, commercial activities involving EB will grow even stronger.

CONCLUSION AND IMPLICATIONS FOR PRACTICE This article illustrates that all three TOE constructs are very important in EB use and performance among financial firms in Nigerian. This article identifies 9 significant determinants of EB use in firms within Nigerian context. They are technology policies, top managers’ support, risk seeking, fit with firm culture, beliefs and IS infrastructure, relative advantage, technology capability, competitive intensity, uncertainty, and regulatory policy. The outcome of this article would be critical for the financial services industry in Nigeria as they plan further investments in EB systems. By applying the TOE framework, firms could successfully identify and address key factors in the environment, in the enterprise and related EB issues necessary to enable effective and functional financial firms in Nigeria and at the international level. The intensity of competition in the financial industry increases with every new technological application and therefore, it is imperative for financial practitioners in Nigeria to be cognizance of the fact and prepare their firms for the business challenges of the next decade of 21st century. In essence, although the competitive use of EB is permeating all businesses today, firms that are more sophisticated and aggressive in deploying and using advanced EB systems would be

E-Business Deployment in Nigerian Financial Firms

able to keep up with the competition if not gain competitive advantage. The pressure to provide unique and acceptable services and products at reduced costs means increased deployment of EB innovations even in traditionally low information and knowledge intensive sectors. The outcome of this article will also be useful to the Nigerian government and its agencies. All the economic sectors of Nigeria recognize government’s role in facilitating EB deployment, however, existing regulatory policies are at best inadequate and less comprehensive to enable the complex dynamic legal and structural frameworks needed to, successfully allow maximum business use of EB innovation. In this regard, the Nigerian government, as a matter of urgency, needs to work closely with the private sector to determine the gaps in ICT policy implementations and initiate concrete directions for a stronger EB processes.

EB, suggest that although the external environment appears to push firms to deploy EB, the internal environment (firm and technological factors) is still important in determining innovation systems deployment. This indicates that while the external environment are critical key factors in the deployment of EB, the firm’s internal environment complexities tend to be significant considerations in IS deployment decision processes among Nigerian financial firms. Finally, this article contributes to EB literature and creates additional poll of resources practitioners and academics could use to further enrich and extend our knowledge of the evolving phenomenon. Empirical data on EB development and growth in Nigeria is a small step, a step nonetheless, toward enhancing and extending the discussion on EB as a global platform for business, economic and industrial activities.

Implications for Research

Limitations of this Research

Findings in this article are consistent with traditional academic models of technology-organization-environment [TOE] framework (Zhu et al., 2002; Eze & Kam, 2001) in a new substantive area, Nigeria. In this regard, it extends the field of IT, EB, and the diffusion and TOE perspectives of the firm. In addition, this research builds on previous innovation research, and corroborates some of the findings of these studies indicated earlier (e.g., the importance of top management influence), and raises some vexing questions as well. For example, in the context of Nigeria, are uncertainty and regulatory policy still significant factors differentiating financial firms deploying EB from those that do not, given the complexities in the Nigerian economy? This puzzle is one already being addressed in a follow-up research within the African region to determine the extent environmental uncertainty, regulatory policy, and competitive intensity influence ICT deployments in firms operating in West Africa. These findings, based on the perception of users and nonusers of

There were some study limitations. First, the conclusions drawn from the data, while theoretically sound, are based upon perceptions of single informant. While CIOs are expected to be knowledgeable, study results would have been more reliable if paired with a second informant outside the IT area. Although all responses were anonymous, it is still possible that the CIO responses are biased in favour management information systems benefits. Second, the survey instrument relied primarily on perceptual data. Although, Venkatraman and Ramanujam (1987) and Dess and Robinson (1984) argue that subjective data correlate with objective data, further studies may consider a mix of both subjective and objective data. Third, the sample composition was, on average, large firms and as a result, inferences on the findings would be most appropriate in related cases such as South Africa and Malaysia with respect the firms that participated in this investigation.

1279

E-Business Deployment in Nigerian Financial Firms

Agenda for Future Research Possible further research areas from this article include; first, it would be useful to gain greater understanding of EB deployment in small firms from multiple industries. Comparison between these categories of firms in terms of EB implementation purposes, and usage patterns, may be useful for the firms to, properly chart the direction of the innovation implementation. Second, extending future studies to include comprehensive performance impacts of EB, how such impacts can be evaluated, and the evolution of EB, would be useful for firms competing in 21st century. In addition to using a static cross-sectional approach, a longitudinal study on the EB deployment may provide insights on the dynamics of the innovation implementation processes that may be more useful. Future research may also consider a comparative study involving Asian, African and European or American firms to determine any underlying dynamics across business cultures, policy issues and entrepreneurial activities in e-business deployment. This would provide some contingency frameworks for practitioners and policymakers at an international level as EB continues to evolve into a universal business phenomenon across the globe. Finally, future studies may consider using additional TOE factors and possibly revising some of the factors in this article to provide for more content coverage and generalization. This, however, should be done with particular respect to the research circumstance.

REFERENCES Anderson, J.C., & Gerbing, D.W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103, 411-423. Chua, P.Y.K., & Hui, K.L (2001). Determinants of small business EDI Adoption: An empirical In-

1280

vestigation. Journal of Organizational Computing and Electronic Commerce, 11(4), 229-252. Clemons, E.K., & Hitt, L. (2001). Financial services: Transparency, differential pricing, and disintermediation. In R. Litan & A. Rivlin (Eds.), The economic payoff from the Internet revolution (pp. 87-128). Washington, DC: Brookings Institution Press. Clemons, E.K., & McFarlan, W.F. (1986). Telecom: Hook up or lose out. Harvard Business Review, 64(4), 91-97. Cockburn, C., & Wilson, T.D. (1996). Business use of the World Wide Web. International Journal of Information Management, 16(2), 83-102. Compeau, D. (1995). Computer self-efficacy: Development of a measure and initial test. MIS Quarterly, 19, 189-211. Cooper, R.B., & Zmud, R.W. (1990). Information technology research: A technological diffusion approach. Management Science, 36(2), 123-139. Dess, G.G., & Robinson, R.B. (1984). Measuring organizational performance in the absence of objective measures: The case of privately-held firm and conglomerate business unit. Strategic Management Journal, 5, 265-273. Dun, & Bradstreet. (2000/01). Key business directory of Singapore. ASEAN series (Vol.1). Singapore. Eccles, R.G., & Crane, D.B. (1988). Doing deals: Investment banks at work. Boston: Harvard Business School Press. eGlobal Report. (2002). Retrieved November 18, 2007, from www.eMarketer.com eGlobal Report. (2005). Retrieved November 18, 2007, from www.eMarketer.com Ettlie, J.E. (1983). Organizational policy and innovation among suppliers to the food processing

E-Business Deployment in Nigerian Financial Firms

sector. Academy of Management Journal, 26(1), 27-44. Ettlie, J.E. (1986). Implementing manufacturing technologies: Lessons from experience. Managing technological innovation. San Francisco: Jossey-Bass. Ettlie, J.E., & Bridges, W.P. (1982). Environmental uncertainty and organizational technological policy. IEEE Transactions on Engineering Management, EM-29, 2-10. Eze, U.C. (2006, May 5-6). The impact of firm and business environment contexts on e-business value. In Proceedings of the MWAIS 2006 Conference, Grand Rapids, Michigan, USA. Eze, U.C., & Gilbert, A.L. (2004). The significance of e-commerce to firms’ operations in relation to business location. Australiasian Journal of Information Systems, 12, 75-93. Eze, U.C., & Kam, T.S. (2001). The impact of enterprise strategy and enterprise structure on the level of e-commerce deployment in enterprises in Singapore. Journal of Global Information Technology Management, 4(2), 38-54. Fan, M., Stallaert, J., & Whinston, A.B. (2000). The Internet and the future of financial markets. Communications of ACM, 43, 83-88. Floyd, S. (1988). A micro level model of information technology use by managers. In U.E. Gattiker (Ed.), Studies in technological innovation and human resources: Managing technology development (pp. 123-142). Berlin & New York: Walter de Gruyter.

Grover, S.K., & Lederer, A.L. (2004). The impact of industry contextual factors on IT focus and the use of IT for competitive advantage. Information & Management, 41(7), 899-919. Holsapple, C.W., & Whinston, A.B. (1996). Decision support systems. New York: West Publishing Company. Iacovou, C.L., Benbasat, I., & Dexter, A.S. (1995). Electronic data interchange and small organizations: Adoption and impact of technology. MIS Quarterly, 19(4), 465-485. Intel Information Technology White Paper. (2003, May). Defining the value of e-business: Seventeen standard measures (pp. 1-14). Intel Publishing. Kerlinger, F.N. (1986). Foundations of behavioral research. CBS College Publishing. King, W., Grover, V., & Hufnagel, E. (1989). Seeking competitive advantage using informationintensive strategies: Facilitators and inhibitors. Information technology and management strategy. Englewood Cliffs, NJ: Prentice Hall. King, W.R., & Sabherwal, R. (1992). The factors affecting strategic information systems applications: An empirical assessment. Information and Management, 23(2), 217-235. King, W.R., & Teo, T.S.H. (1996). Key dimensions of facilitators and inhibitors for the strategic use of information technology. Journal of Management Information Systems, 12(4), 35-53.

Galbraith, J.R. (1973). Designing complex organization. Reading, MA: Addison-Wesley.

Kohli, R., & Devaraj, S. (2003). Measuring information technology payoff: A meta-analysis of structural variables in firm-level empirical research. Information Systems Research, 14, 127-145.

Grover, V. (1993). An empirically derived model for the adoption of customer-based interorganizationl systems. Decision Sciences, 24(3), 603640.

Kwon, T.H., & Zmud, R.W. (1987). Unifying the fragmented models of information systems implementation: Critical issues in information systems research. New York: John Wiley.

1281

E-Business Deployment in Nigerian Financial Firms

Lederer, A.L., & Mendelow, A.L. (1988). Convincing top management of the strategic potential of information systems. MIS Quarterly, 12(4), 526-536. Mata, F., Fuerst, J., & Barney, J. (1995). Information technology and sustained competitive advantage: A resource-based analysis. MIS Quarterly, 19(4), 487-505. Nabseth, L., & Ray, G.F. (1974). The diffusion of new industrial processes. London & Cambridge: University Press. Nunnally, J.C. (1979). Psychometric theory. New York: McGraw-Hill. Porter, M.E. (1985). Competitive advantage (3rd ed.). New York: Free Press. Porter, M.E. (2001, March). Strategy and the Internet. Harvard Business Review, March, 62-78. Premkumar, G., & King, W.R. (1992). An empirical assessment of information systems planning and the role of information systems in organizations. Journal of Management Information Systems, 9(2), 99-125. Premkumar, G., & Ramamurthy, K. (1995). The role of interorganizational and organizational factors on the decision mode for the adoption of interorganizational systems. Decision Science, 26(3), 303-336. Ramamurthy, K., Premkumar, G., & Crum, M.R. (1999). Organizational and interorganizational determinants of EDI diffusion and organizational performance: A causal model. Journal of Organizational Computing and Electronic Commerce, 9, 253-285. Rawn. (1994). The business of the Internet: An introduction to the Internet for commercial organizations. Retrieved November 18, 2007, from http://www.rtd.com/people/rawn/business.html Reich, B.H., & Benbasat, I. (1990). An empirical investigation of factors influencing the success of

1282

customer-oriented strategic systems. Information Systems Research, 1(3), 325-347. Rogers, E.M. (1995). Diffusion of innovations. New York: The Free Press. Sato, S., Hawkins, J., & Berentsen, A. (2001). E-finance: Recent developments and policy implications. Tracking a transformation: E-commerce and the terms of competition in industries (pp. 64-91). Washington, DC: Brookings Institution Press. Teo, T.S.H., & Pian, Y. (2003). A contingency perspective of Internet adoption and competitive advantage. European Journal of Information Systems, 12, 78-92. Teo, T.SH., Tan, M., & Buk, W.K. (1998). A contingency model of Internet adoption in Singapore. International Journal of Electronic Commerce, 2, 96-118. Teo, T.S.H., & Too, B.L. (2000). Information systems orientation and business use of the Internet: An empirical study. International Journal of Electronic Commerce, 4(4), 105-130. Tornatzky, L.G., & Klein, K.J. (1982). Innovation characteristics and innovation adoptionimplementation: A meta-analysis of findings. IEEE Transactions of Engineering Management, 29(1), 28-45. Ujah, E. (2004, June 21). E-business infrastructure: A factor for business growth in Nigeria. Nigeria Business Times. Ujah, E. (2005, October 10). Electronic business and small business development in Nigeria. Nigeria Business Times. Weill, P., & Olson, M.H. (1989). An assessment of contingency theory. Journal of Management Information Systems, 6(1), 59-85. Williamson, O.E. (1983). Organizational innovation: The transaction cost approach. In J. Ronan

E-Business Deployment in Nigerian Financial Firms

(Ed.), Entrepreneurship (pp. 101-133). Lexington, MA: Lexington Books.

ternational Conference on Information Systems, Barcelona, (pp. 337-348).

Zhu, K., & Kraemer, K.L (2005). Post-adoption variations in usage and value of e-business by organizations. Information Systems Research, 16(1), 61-84.

Zhu, K., Kraemer, K.L., Xu, S., & Dedrick, J. (2004). Information technology payoff in e-business environments: An international perspective on value creation of e-business in the financial industry. Journal of Management Information System, 21(1), 17-54.

Zhu, K., Kraemer, K.L., & Xu, S. (2002). A crosscountry study of electronic business adoption using the technology-organization-environment framework. Presented to the Twenty-Third In-

Zmud, R.W. (1984). An examination of “push-pull” theory applied to process innovation in knowledge work. Management Science, 30(6), 727-738.

This work was previously published in the International Journal of E-Business Research, Vol. 4, Issue 2, edited by I. Lee, pp. 29-47, copyright 2008 by IGI Publishing (an imprint of IGI Global).

1283

1284

Chapter 4.21

Fotogenika.com:

A Small Virtual Organization Serving the Mexican Market Esperanza Huerta Instituto Tecnológico Autónomo de México, Mexico

EXECUTIVE SUMMARY

ORGANIzATION BACKGROUND

Fotogenika is a small e-business that was born out of the idea of two young Mexican entrepreneurs. It started its operations in March 2004, and after a few months, it managed to successfully create a small customer base. Fotogenika.com is the commercial name of a company established in New York City that delivers digital pictures in Mexico. The company serves Mexicans living out of their country who want to keep in touch with their families in Mexico. Owned by Mexicans living in the U.S., Fotogenika understands the strong ties among Mexican families and their need to keep in touch with their family. Fotogenika shows how culture is important to serve customers in America and how to focus on a profitable market niche. Also, this case presents the technology and marketing challenges that small startup e-businesses face, as well. Finally, Fotogenika’s business proposition demonstrates the advantages of displacing a product digitally to where it will be produced and delivered at a low cost.

Gabriela Perezcano, co-founder of Fotogenika. com, was quite satisfied with what her company had accomplished. In June 2004, just a few months after starting operations, Fotogenika had successfully created a small customer base. A virtual organization, where most of its processes were outsourced, Fotogenika printed and delivered digital pictures in Mexico from orders based in the U.S. After proving that Fotogenika’s business proposition was successful, Perezcano was ready to expand her business. Perezcano was born in Mexico City and migrated to the U.S. because her husband had a job there. Having a strong business background and an entrepreneur mentality, she detected a profitable business niche. As a Mexican living in a foreign country, she understood the need to keep in touch with her family. Family ties are strong among Mexicans. Mexicans living in the U.S. are concerned about the welfare of their families in Mexico. This concern leads Mexicans to continu-

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Fotogenika.com

ously send money to their families. In fact, in 2003 Mexicans in the U.S. sent $13,266 million to their homes (Ingresos por Remesas Familiares, 2004). That same year, the money Mexico obtained from their citizens living in the U.S. was second only to the money Mexico obtained from oil (Ingresos por Remesas Familiares, 2004). People keep in touch with their loved ones by different means. Phone calls, e-mails, and other communication media are commonly used. However, people like to share their experiences through pictures, as well. At present, two photography technologies exist: analogue and digital. The capability of storing digital pictures in electronic devices has not diminished people’s need to have their pictures printed. In fact, important dealers in the photography industry, like Kodak, have increased their investment in printing digital photography (Barret & Carr, 2004). Aware of the growing number of Mexicans living in the U.S. with increasingly higher income levels, Perezcano decided to deal with that market (See Appendix 1 for statistics on Mexicans living in the U.S.). Customers in the U.S. would place their orders, and the company would print and deliver their digital pictures to Mexico. Fotogenika’s service was simple and straightforward. Customers uploaded their pictures to their personal album on Fotogenika’s Web page. They ordered the pictures that were later printed and delivered to Mexico. In order to provide a value-added service for customers with slow Internet connections, customers were able to burn their pictures onto a CD and send it to Fotogenika’s office by mail. Fotogenika would upload the pictures at no cost and return the CD to the customers. Also, customers without digital pictures could send the pictures to Fotogenika. Fotogenika would scan and upload the pictures for a fee. Then, Fotogenika would return the pictures to the customers. With the clear concept of concentrating on core activities in mind, Perezcano decided to establish Fotogenika as a virtual organization, outsourcing

most of its business processes. The term virtual organization has been used to define different concepts, all of them involving the distribution of work across geographical or organizational boundaries (Ariss, Nykodym, & Cole-Laramore, 2002; DeSanctis, Staudenmayer, & Wong, 1999). First, an organization is considered virtual when it employs telecommuters (Ariss et al., 2002; DeSanctis et al., 1999; Markus, Manville, & Agres, 2000). Second, an organization is considered virtual when it involves several companies to perform a task (Lawton & Michaels, 2001). Third, an organization is considered virtual when most of its processes are outsourced, keeping in-house only the core activities (Ariss et al., 2002; Lawton & Michaels, 2001). The latter definition applies to Fotogenika. However, the term virtual organization is better understood as a continuum in a range of different types of relationships rather than a pure organizational form (DeSanctis et al., 1999). DeSanctis et al. (1999) identify four dimensions that define different types of relationships: space, time, culture, and boundaries. Virtual organization companies, compared to traditional companies, are more likely to establish distributed, asynchronous, multicultural, and external relationships. As a continuum, companies can have different degrees of virtuality. Fotogenika heavily relied on the pure virtual organization spectrum. In the space dimension, traditional organizations are colocated, whereas virtual organizations are distributed (DeSanctis et al., 1999). Fotogenikas’ office was located in the U.S., whereas production facilities were located in Mexico. In the time dimension, traditional organizations operate synchronously as opposed to virtual organizations that operate asynchronously (DeSanctis et al., 1999). Fotogenika’s portal processed customer orders in 24 hours. As soon as an order was placed, it was sent to the Mexican lab for printing and delivery. The Mexican lab operated during the day, and the commitment was to

1285

Fotogenika.com

process customer orders within 24 hours from receiving the order. In the cultural dimension, traditional organizations share a common culture, whereas virtual organizations are multicultural (DeSanctis et al., 1999). Fotogenika was related to a multicultural environment. The company had links with American and Mexican organizations. Also, customers, mainly Mexicans, are immigrants who have developed a particular cultural identity (chicano culture) different from that of Mexicans living in Mexico. In the boundary dimension, traditional organizations establish mainly internal relationships as opposed to virtual organizations that establish external relationships (DeSanctis et al., 1999). Most of Fotogenika’s business processes were outsourced. Thus, the company mainly had established external relationships in order to fulfill its needs. One of the main advantages of a virtual organization is that it allows managers to focus on core activities (Matthews, 2004). But what constitutes a core activity has changed over the years (Matthews, 2004). For Fotogenika, customer service and logistics were its core activities. This allowed the company to deal with marketing and customer preferences. This strategy had been used successfully before by Dell and is called direct business model (Lawton & Michaels, 2001). With the direct model, Dell establishes a direct link with individual customers and gets a great deal of information on customer preference trends, which Dell shares with its providers (Lawton & Michaels, 2001). Dell observes customer preferences on a daily basis (Lawton & Michaels, 2001). If, for instance, customer preferences were shifting to larger PC monitors on a certain customer segment, Dell would share that information with its suppliers, allowing them to adjust their inventory (Lawton & Michaels, 2001). Similarly, Fotogenika would be able to assess market trends and know about customers’ demands. If customers were to demand frames for their pictures or specific

1286

products, such as pictures printed on calendars, Fotogenika would assess the need to provide new services. By June 2004, Fotogenika had no employees. The founders rendered all services from Perezcano’s house. In the future, Fotogenika might need to rent an office and hire employees to provide services for its increasing customer body. Fotogenika’s business proposition was based on the following three strategies: 1.

2.

3.

Print at the delivery point. Transmitting digital information is faster and cheaper than transporting physical information. This is not a new concept. For instance, USA Today, the top-selling U.S. newspaper, sends the digital version of the newspaper to its national and international sites where it is printed (McMeekin, 2002). Locate production facilities where costs are low. Again, this is not a new strategy. For instance, it is well-known that the software industry oustources systems development to India, where costs are lower than in the U.S. Establish cultural affinity. Companies that focus on specific market segments provide services and products close to what their customers are used to. Fotogenika’s Web site was in Spanish and displayed pictures of Mexican people. A Spanish portal not only allowed Mexicans who do not speak English to use the service but also transmitted cultural affinity. Customer service also was provided in Spanish, which developed a close relationship with its customers.

Fotogenika’s strategies were not new, but when applied to the company’s service and target market, it gave it a competitive advantage. As opposed to large firms, small organizations “must start out in a niche market with some means of differentiating themselves from their competition (differentiation focus)” (Jeffcoate, Chappell, & Feindt, 2002, p 27).

Fotogenika.com

Fotogenika used both service and price as a competitive advantage. In terms of service, Fotogenika rendered its services in Spanish and used its cultural affinity to develop a sense of trust in its customers. In terms of price, Fotogenika’s services were cheaper than those provided by its competitors. The total price paid by customers had two components: the price for the printouts and a shipping charge. For the pictures, Fotogenika’s prices were slightly lower than those of its competitors in most print sizes. Having lower printing costs provided the company with an attractive marginal income. The shipping charge is what really made the difference for the customers. Fotogenika shipped from Mexico City at substantially lower prices. A customer shipping to Mexico City would pay approximately $20 for delivery if ordered within the U.S. Ordering through Fotogenika, the shipping price was $2. Fotogenika’s competitors can be divided into two groups: (1) American companies delivering pictures worldwide, such as ofoto.com1 (owned by Kodak), snapfish.com, and shuterfly.com; and (2) Mexican companies such as upfoto.com and mifotodigital.com (owned by Kodak). American companies shipping to Mexico charged international delivery prices. Even Mexican companies charged more for shipping than Fotogenika did. The major threat might be Kodak, who had worldwide facilities. Kodak had proprietary sites

in the U.S. as well as in Mexico. However, both sites were operated independently; that is, pictures ordered through ofoto.com to be delivered in Mexico were charged international shipping fees. See Appendix 2 for a summary of prices offered by Fotogenika’s competitors. Being a virtual organization had allowed Fotogenika to start as a small business, requiring a small investment. Brick-and-mortar companies move toward a virtual organization in order to take advantage of cost savings, flexibility, and other benefits (DeSanctis et al., 1999). Fotogenika was born as a virtual organization. No transition from brick-and-mortar was made. Figure 1 depicts Fotogenika’s organizational structure as a virtual organization. To sum up, Fotogenika had been established as a small e-business in terms of investment. However, the margins that had been obtained from printing and delivering at low costs had made Fotogenika an attractive investment. Proxy income statements are shown in Appendix 3. Information on type of customers and market growth are shown in Appendix 4. Perezcano was satisfied, because Fotogenika was achieving its goals.

SETTING THE STAGE Perezcano’s partner was an expert in photographic technology. He had a thorough knowledge of the

Figure 1. Fotogenika’s organizational structure Accounting firm •Tax reporting

Printing Lab in Mexico •Printing Fotogenika •Logistics •Customer Service Fed Ex or similar •Delivering

ISP •Hosting

1287

Fotogenika.com

Mexican photography market and personally knew people who worked in the most important Mexican labs. The management of relationships in virtual organizations is a strategic variable (Lawton & Michaels, 2001). He had established an alliance with the lab in Mexico based exclusively on a preestablished fee per picture and delivery. There had been no fixed costs associated with the alliance; that is, Fotogenika only paid for the pictures it sent, and there was no commitment to send any minimum number of pictures. Due to the large volume of operations, UPS and FedEx charged the Mexican lab discount prices that Fotogenika by itself would not have been able to apply for. In this sense, the strategy of the firm had been to successfully manage a network of relationships (Lawton & Michaels, 2001). When business areas are outsourced, the outsourcer transfers the provider not only the task itself but also the knowledge to complete the task. (Lawton & Michaels, 2001; Matthews, 2004). The outsourcer then relies on the provider to perform a task. The risk for the outsourcer, therefore, is that the provider underperforms (Matthews, 2004). When a provider is not performing at the expected level, the outsourcer either can switch providers or re-establish in-house control (if it is still feasible). Either option is costly and time-consuming. The dependence on the provider increases the risk for the outsourcer (Matthews, 2004). Fotogenika’s alliance involved a low risk. If the alliance with the Mexican lab failed or if it became unable to fulfill Fotogenika’s orders, Perezcano’s partner would be able to reach an agreement with a different lab. Just like Dell computers, Fotogenika was competing as a network of alliances. Being a small startup business, Fotogenika had faced the challenge of how to actually get people to order products from its Web site. People need to trust that an online business will deliver a satisfactory product. The perceived reputation and size of the store influences consumer trust in an Internet store (Jarvenpaa, Tractinsky & Vitale, 2000). People trust large organizations more than

1288

small business (Jarvenpaa et al., 2000). However, the effect of size perception might depend on the type of merchandise (Jarvenpaa et al., 2000). When there is not too much at stake, the size of the company might not be important. The amount of money spent in each order of digital printouts is generally low, usually less than $100. As such, customers’ perceived risk on the transaction might be low, and they might be willing to try out Fotogenika’s service just to see if it works. In terms of reputation, people favor companies with which they are already familiar (Quelch & Klein, 1996). Therefore, Fotogenika was at a disadvantage compared to big names in the industry such as Kodak. Fotogenika needed to build up a reputation and to transmit to its customers that the company was able to fulfill their expectations. Information Technology (IT) is the critical enabler for virtual organizations (DeSanctis et al., 1999; Strader, Lin & Shaw, 1998). Virtual organizations, as a network of firms, require a great deal of integration and coordination (Strader et al., 1998). IT is a cost-effective tool that provides the capabilities to store and share information among participants. According to Strader et al. (1998) the information infrastructure for virtual organizations should include the following components: “1) a global information network for electronic brokerage, 2) electronic access to external environment data, 3) electronic connections between organization partners, 4) electronic access to virtual organization operational data, and 5) intra organizational information system support” (p. 82). The Internet is a technology that can be used in all components. However, the Internet lacks the security to hold communications among virtual partners. For interorganizational communications, an intranet provides a solution to security concerns (Strader et al., 1998). Small organizations such as Fotogenika usually lack the skills or the time to implement an e-business application (Wagner, Fillis & Johansson, 2003). Therefore, Perezcano decided to

Fotogenika.com

completely outsource the IT function. The web site was developed by a third party and was hosted by an Internet Service Provider (ISP) for a fixed monthly payment. The ISP took care of basic security measures, such as backing up information and securing server’s operations. The initial development of the site cost approximately $4,000. Updates to the site would have to be agreed upon on a one-by-one basis. In terms of interorganizational communication, Fotogenika did not need to transfer customers’ credit card information to the Mexican lab. For each order, the Mexican lab needed access only to the pictures to be printed and the customer’s delivery address. To deal with interorganizational communication, Fotogenika had an intranet developed by the third party as part of the initial project. Within the intranet, the Mexican lab had secured access to Fotogenikas’ customer database and was able to download directly the orders to be processed. Fotogenika’s philosophy was to provide customers with a simple, short, and friendly buying experience. Therefore, Fotogenika’s Web site was small, well organized, and easy to use. Fotogenika’s functionality was simple. The Web site was able to do the following: • • • •

Display information Register customers Administer customer electronic albums Execute transactions

For security reasons Fotogenika did not store customers’ information online. This meant that every time customers wanted to place an order they were required to type in their information. Also, since all order information was kept offline, customers who wanted to know about the status of their orders had to contact customer service directly.

CASE DESCRIPTION One of the main challenges that Fotogenika faced was to compete in terms of functionality. American residents were already used to high levels of service doing e-transactions. For instance, returning customers are not asked to provide their information every time they do a transaction. However, at Fotogenika, as a security measure, no credit card information was accessible after a customer placed an order. This practice protected the company and its customers against phishing attacks. In a phishing attack, customers get an e-mail, supposedly sent by a company with whom they are customers, asking them to update their personal information. The e-mail is really sent by a hacker who replicates the company’s Web site and obtains customer information. Phishing attacks are costly, not only in terms of the frauds resulting from stolen information but also in terms of customer service. For instance, EarthLink estimated that one phishing attack cost the company at least $40,000. These costs come from providing services to customers calling call centers and resetting customer information (Dragoon, 2004). Storing customer information is, without any doubt, a feature highly convenient for returning customers. However, storing customer information exposed Fotogenika and its customers to costly risks that small businesses can hardly afford. So far, the company did not know whether customers valued this security measure or considered it inconvenient. Functionality was also an issue in terms of customer service. The Web site did not offer automatic order tracking. Customers needed to contact customer service directly to inquire about the status of their orders. The lack of automatic tracking might be inconvenient for some customers. Also, it increased the workload of customer service. Perezcano had been assessing whether the limited functionality of the Web site would be an

1289

Fotogenika.com

obstacle to acquiring and retaining customers. A better functionality would imply an increase in costs. The current Web site would need to be redesigned and implemented. However, estimating the costs would be easier than estimating the real impact of providing more functionality. Perezcano wondered whether such increased functionality would pay back. As a small startup e-business, Fotogenika had faced other challenges. Fotogenika had not developed a reputation yet. Therefore, the company had to rely on different strategies in order to build trust with potential costumers. Consumers need to assess the seller’s competence (Tan & Sutherland, 2004); that is, customers need to believe that the seller has the abilities, skills, and expertise to provide the service (Papadopoulou, Kanellis, & Martakos, 2003; Tan & Sutherland, 2004). For this reason, Fotogenika displayed the Kodak logo on its Web site and indicated that Kodak paper was used to print the pictures. Another strategy to build consumers’ trust is to display privacy and consumer protection principles (Lee & Turban, 2001; Patton & Josang, 2004; Shneiderman, 2000; Tan & Sutherland, 2004). Therefore, Fotogenika displayed its customer satisfaction policies, including privacy protection and consumer refund policies. Third-party trust certifications are key to building consumer trust in Internet shopping (Hoffman, Novak, & Peralta, 1999). Fotogenika needed to ensure its customers that its store was a secure site and that its transactions were handled securely. For this reason, Fotogenika obtained a third-party trust certification with trustlogo.com. Shneiderman (2000) also suggests disclosing patterns of past performance and providing references from past performance. Fotegenika’s site did not offer this information. These features could be added to the site. It also has been suggested that culture might be an important factor in the disposition to trust (Jarvenpaa & Tractinsky, 1999; Tan & Sutherland, 2004). Customers develop trust when interacting

1290

with salespersons with similar background (Jarvenpaa & Tractinsky, 1999). Culture is manifested, among other things, by the language used (Luna, Peracchio, & De Juan, 2002). Language not only transmits cultural affinity but also reduces the cognitive effort to process the site (Luna et al., 2002). Fotogenika’s site was in Spanish. It also stated that it was a company created and owned by a Mexican. The company, therefore, expected its Web site to generate a sense of cultural affinity in potential customers. Along with the technical measures and the cultural affinity, Fotogenika believed that being an American company would increase the customers’ levels of trust. If Americans happened to order digital printouts from a Mexican company and run into some problem, they would not be protected by American laws. Americans, therefore, would prefer to deal with an American company. Since Fotogenika operated across borders, the company needed to deal as well with the managerial issues that arise when companies operate internationally. According to Sheldon and Strader (2002) there are at least four internationalization issues: (1) standardization of content and appearance; (2) financial issues; (3) transportation issues; and (4) legal issues. Standardization of content and appearance implies that all information must be understandable by users worldwide (Sheldon & Strader, 2002). By June 2004, Fotogenika’s target market was focused on Mexicans living in the U.S. However, telephone numbers, times, dates, and forms were displayed on an international form that was understandable worldwide. In terms of measurement, Mexico uses the metric system. For this reason, The company’s site informed customers about picture sizes in both the metric and the English system. Financial issues refer to the method of payment (Sheldon & Strader, 2002). Fotogenika accepted credit card payments only. Money orders and personal checks were not allowed. Accepting payment methods other than credit cards would

Fotogenika.com

certainly give customers more option payments, especially for those who distrust providing their credit card information. On the other hand, it would also require modifying not only the site functionality but also the managerial procedures in order to handle payments. Transportation issues refer to shipping and complaining with the import regulation (Sheldon & Strader, 2002). Shipping is not a relevant issue on digitized products such as pictures. Fotogenika’s compliance with import regulation was not complex. Customers owned the pictures, and Fotogenika charged for the printing services. The international transaction was held between Fotogenika and the Mexican lab. Therefore, international issues for professional service payments abroad were managed by Fotogenika. Customers did not need to worry about customs and taxes. Reverse logistics was not an issue, either. If customers were not satisfied with the printing service, the company would reprint the picture or reimburse the money without requiring customers to return the pictures. Legal issues refer to compliance with local laws (Sheldon & Strader, 2002; Wijnholds & Little, 2001). Fotogenika complied with privacy, advertising, and content regulation in the U.S. However, if the company decided to expand its current target market to focus on Mexicans worldwide, it would have to review these issues. In terms of legal protection, as already stated, U.S. customers can sue sellers in their own states (Wijnholds & Little, 2001). In addition, being a small company with limited money to invest in marketing, Fotogenika needed to define a cost-effective strategy to let people know about the company. Fotogenika’s first idea was to send ads to e-mailing lists of Mexicans living in the U.S. The advantage of this method was that it would reach the target market. However, there was a risk that potential customers might consider Fotogenika a spammer. Perezcano was sure that she had to establish a marketing plan in order to assess different marketing channels.

CURRENT CHALLENGES FACING THE ORGANIzATION In short, Perezcano was quite satisfied with Fotogenika’s performance so far. But as an entrepreneur, she also had been thinking about the many challenges that Fotogenika might face. She had to share her ideas with her partner and to develop future strategies. Small businesses cannot afford big mistakes. Every decision in terms of technology, marketing, and service must be explored thoroughly. Fotogenika had a successful start, but it needed to expand its business. It could expand its market to provide printing services to Mexicans not only in the U.S. but also around the world. However, the company needed to assess the changes that would be required in Web site functionality and in managerial procedures. It also could expand its business to deliver pictures around the world. So far, Fotogenika delivered pictures in Mexico. If Fotogenika wanted to deliver pictures around the world, it must determine which business model it would use. The company could still print the pictures in Mexico and deliver them worldwide through international delivery. Or it could also replicate its business model to establish alliances with local printing labs or even other online printing services. Fotogenika was also aware of other sources of competition. Online printing services were not the only way customers could print their photos. Home and kiosk printing were more popular than online printing (see Appendix 5). There was also the threat of a war price from retailers such as Wal-Mart and Costco2 and, in general, by printing kiosks (see Appendix 6). Along with the cultural affinity strategy to reach customers, the company needed to consider that women print the most digital pictures (Biederman, 2005). For instance, for kiosk printing, 60% of consumers were women (Biederman, 2005). The marketing strategy and Web site design could be affected if this fact was deemed important.

1291

Fotogenika.com

Every change in strategy certainly would imply changes in the Web site functionality. Without in-house IT expertise, Fotogenika had to rely on a third-party provider. Fotogenika needed to reassess this alliance continuously in order to determine the effectiveness of the relationship and to evaluate different alternatives. So far, Fotogenika’s business model had profited from IT. The company ultimately had delivered a physical product — a printed picture. However, Fotogenika had displaced the product digitally up to where the picture would be printed and distributed at low cost. In addition, Fotogenika’s knowledge of the Mexican culture had allowed it to focus on a profitable niche of the digital photography market — Mexican migrants in the U.S.

REFERENCES Ariss, S., Nykodym, N., & Cole-Laramore, A. A. (2002). Trust and technology in the virtual organization. S.A.M. Advanced Management Journal, 67(4), 22-25. Barret, L., & Carr, D. F. (2004, September 1). Eastman Kodak: Picture imperfect. Retrieved October 1, 2004, from http://www.baselinemag. com/article2/0,1397,1655499,00.asp Biederman, M. (2005, March 17). Self-service printing is redefining the camera store, and even the maternity ward. The New York Times, p. G 1. Bulkeley, W. M. (2005, March 17). A price war hits digital photos. Wall Street Journal, p. D 1. DeSanctis, G., Staudenmayer, N., & Wong, S. S. (1999). Interdependence in virtual organizations. In C. L. Cooper, & D. M. Rosseau (Eds.), Trends in organizational behavior (Vol. 6, pp. 81-104). Chichester, NY: John Wiley & Sons. Deutsch, C. H. (2005, January 28). Kodak bets old strategy can go digital. The New York Times, p. C 2. 1292

Dragoon, A. (2004, September 1). Fighting phish, fakes and frauds. Retrieved September 30, 2004, from http://www.cio.com/archive/090104/phish. html Hoffman, D. L., Novak, T. P., & Peralta, M. (1999). Building consumer trust online. Communications of the ACM, 42(4), 80-85. Ingresos por Remesas Familiares. (2004, February 3). Retrieved October 14, 2004, from http://www. banxico.org.mx/fBoletines/Boletines/calendario 2004/03feb2004remesasfamiliares.pdf Jarvenpaa, S. L., & Tractinsky, N. (1999). Consumer trust in an Internet store: A cross-cultural validation. Journal of Computer-Mediated Communication, 5(2), 1-35. Jarvenpaa, S. L., Tractinsky, N., & Vitale, M. (2000). Consumer trust in an Internet store. Information Technology and Management, 1(1), 45-71. Jeffcoate, J., Chappell, C., & Feindt, S. (2002). Best practice in SME adoption of e-commerce. Benchmarking, 9(2), 122-132. Lawton, T. C., & Michaels, K. P. (2001). Advancing to the virtual value chain: Learning from the Dell model. Irish Journal of Management, 22(1), 91-112. Lee, M. K. O., & Turban, E. (2001). A trust model for consumer Internet shopping. International Journal of Electronic Commerce, 6(1), 75-91. Luna, D., Peracchio, L. A., & De Juan, M. D. (2002). Cross-cultural and cognitive aspects of Web site navigation. Academy of Marketing Science, 30(4), 397-410. Markus, M. L., Manville, B., & Agres, C. E. (2000). What makes a virtual organization work? Sloan Management Review, 42(1), 13-26. Matthews, J. (2004). The rise of the virtual company. Supply Management, 9(15), 32-33.

Fotogenika.com

McMeekin, T. (2002, January). One year later, USA Today is going strong with CTP workflow at all 36 print sites. Retrieved October 1, 2004, from http://www.newsandtech.com/issues/2002/01-02/ nt/01-02_usa.htm Papadopoulou, P., Kanellis, P., & Martakos, D. (2003). Designing electronic commerce environments on trust-building principles. Revue S.I.M., 8(3), 55-74. Patton, M. A., & Josang, A. (2004). Technologies for trust in electronic commerce. Electronic Commerce Research, 4(1-2), 9-21. Quelch, J. A., & Klein, L. R. (1996). The Internet and international marketing. Sloan Management Review, 37(3), 60-75. Sheldon, L. A., & Strader, T. R. (2002). Managerial issues for expanding into international Web-based electronic commerce. S.A.M. Advanced Management Journal, 67(3), 22-30. Shneiderman, B. (2000). Designing trust into online experiences. Communications of the ACM, 43(12), 57-59.

organization management. Decision Support Systems, 23(1), 75-94. Tan, F. B., & Sutherland, P. (2004). Online consumer trust: A multi-dimensional model. Journal of Electronic Commerce in organizations, 2(3), 40-58. U.S. Census 2000. (2000). Retrieved October 1, 2004, from www.census.gov Wagner, B. A., Fillis, I., & Johansson, U. (2003). E-business and e-supply strategy in small and medium sized business (SMEs). Supply Chain Management, 8(4), 343-354. Wijnholds, H. D. B., & Little, M. W. (2001). Regulatory issues for global e-tailers: Marketing implications. Academy of Marketing Science Review, 2001(9), 1-12.

ENDNOTES 1

2

Strader, T. R., Lin, F.-R., & Shaw, M. J. (1998). Information infrastructure for electronic virtual

Ofoto changed its name in 2005 to kodakgallery.com. This threat became real in 2005 (Bulkeley, 2005).

1293

Fotogenika.com

APPENDIX 1 Target Market: Mexicans Living in the U.S. (U.S. Census, 2000) Figure 2. Percentage of Latinos living in the U.S.

Total Population 35,305,818 Hispanic or Latino (of any race) Not Hispanic or Latino 246,116,088

Figure 3. Percentage of Mexicans in the Latino population Hispanic or Latino by Type Mexican 10,017,244

1,241,685 3,406,178

Puerto Rican 20,640,711

Cuban Other Hispanic or Latino

APPENDIX 2 Prices (Delivered in Mexico City Including Shipping through FedEx or Similar) Table 1. Prices including shipping Wallet 4X 5X 6X 8X

ofoto.com shuterfly.com upfoto.com mifotodigital fotogenika.com 21,78 21,78 8,98 NA 3,68 20,28 20,38 7,28 3,2 2,34 20,98 20,98 7,74 3,4 3,18 NA NA 8,49 3,7 3,58 23,98 23,98 9,98 5,7 5,68

NA — not available Prices accessed on June 2004

1294

Fotogenika.com

APPENDIX 3 Proxy Income Statements Table 2. Proxy income statements Fotogenika Proxy Income Statement U.S. dollars

Net sales Cost of goods Gross margin Operating expenses Net income

2004 23,208 14,675 8,533 8,475 58

2005 73,853 46,622 27,231 10,794 16,437

2006 138,115 86,833 51,282 19,348 31,934

2007 181,170 113,819 67,351 18,063 49,288

2008 202,388 127,110 75,278 18,511 56,767

Notes: Income statements consider only services offered by Fotogenika at that time of the teaching case setting (June 2004).

APPENDIX 4 Types of Customers Classified by Average Products Ordered Table 3. Types of customers Quantity A B C

D

Product 16 4x 16 4x 1 6x 20 4x 1 5x 2 8x 10 4x 2 5x 3 8x

% 40% 25% 25%

10%

The percentage represents how many orders for each type of customer are out of the total number of orders. The type of customers and percentages have been estimated, based on Perezcano’s partner’s knowledge of the photography market.

1295

Fotogenika.com

Table 4. Estimated number of daily orders Year

# of orders 1 2 3 4 5

7 9 10 12 15

The estimated number of daily orders has been determined, based on a conservatively estimated growth of the customer base.

APPENDIX 5 Digital Photography Market in Number of Printed Images by 2004 (Biederman, 2005) Table 5. Digital photography market in number of printed images Digital images printed by all methods Home printing Retail locations Online services

1.9 billion 57% 33% 10%

Estimated number of printed images for 2007

10.7 billion

Table 6. Digital photography market in dollars (Bulkeley, 2005)

1296

Consumer expenditure in prints by 2004

$8.2 billion

Digital pictures printed from the pictures taken

20%-30%

Fotogenika.com

APPENDIX 6 Kiosks Printing Services (Bulkeley, 2005) Table 7. Kiosks printing services Number of kiosks in 2004 Estimated number of kiosks by 2008

75,000 121,000

The main players in kiosk printing services are Kodak, Fuji, and Sony. Kodak is the leader (Deutsch, 2005). A recent player entering the market is Pixology, a software developer firm for the kiosks at Cotsco (Biederman, 2005).

This work was previously published in the International Journal of Cases on Electronic Commerce, Vol. 2, Issue 2, edited by M. Khosrow-Pour, pp. 64-80, copyright 2006 by IGI Publishing (an imprint of IGI Global).

1297

1298

Chapter 4.22

Xceed:

Pioneering the Contact Center Industry in Egypt Sherif Kamel The American University in Cairo, Egypt Maha Hussein The American University in Cairo, Egypt

EXECUTIVE SUMMARY The global spending on outsourcing has exceeded one trillion U.S. dollars in 2000 and it is expected to reach much higher heights by 2010. Outsourcing represents a major opportunity for developing nations with different capacities and skills in the field of information and communication technology (ICT) coupled with communication, business, and marketing capacities of their human capital. Contact centers are one of the growing trends that can benefit from the opportunities enabled through outsourcing. Over the last decade, India, the Philippines, and Mexico took the lead in the contact center industry in the context of developing nations. Moreover, in the 1990s Egypt, through its massive efforts to position itself as one of the ICT hubs in the Middle East, had started its efforts to develop itself as a destination for offshore outsourcing as well as penetrating the global marketplace for contact centers. This case

demonstrates the process of establishing Xceed, the pioneer contact center in Egypt serving a global community of customers and excelling to become one of the brand names of the industry worldwide.

ORGANIzATIONAL BACKGROUND On a sunny afternoon, Adel Danish, president and CEO of Xceed, sat in his office, with his two vice presidents, Ahmed Refky and Alaa El-Shafei. They had been discussing the future of the company. Danish stood up and went to look out the window. The sight he met was of vast desert, with a number of scattered state-of-the-art buildings and several others still under construction. All of the company’s achievements and future aspirations came into view. They had done so well in the past, and the future looked promising. One

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

Xceed

of the challenging formulas that they managed to realize, and made the case unique and different, was to successfully manage Xceed as a private company although being a purely public establishment. However, despite the achievement of the past, management needed to strategize which road should they travel, and what was best for the business to grow and compete? Xceed, Egypt’s pioneer and leading contact center, premises were located in a smart village complex, which was inaugurated in 2004 to be Egypt’s premier technology park, built on 450 acres on the outskirts of Cairo (Egypt). Located approximately 20 minutes from the center of one of the busiest capitals of the world and a few kilometers from the great pyramids, the smart village is central to all major destinations within greater Cairo. The idea behind the smart village initially conceived in 1989 was to create a space where information technology companies could operate within a community conducive to their business needs. Microsoft, Alcatel, Hewlett-Packard, Ericsson, and Vodafone Egypt represent a sample of the IT organizations that have moved premises to the smart village. Once all the phases of development were completed, the smart village would accommodate 67 office plots and approximately 30,000 employees within a total office area of 1,336,000 square meters. Ninety percent of the smart village had been designed to encompass an expansive green area, lakes and streams, making it an ideal location for doing business. In an effort to promote and encourage public private partnership (PPP), the Ministry of Communications and Information Technology (MCIT), established in 1999, relocated its premises to the smart village (www.mcit.gov.eg). The mandate of MCIT was to support and empower the information society in Egypt. This was reflected in its involvement in different projects related specifically to business and industry development in the information and communication technology (ICT) sector and in its commitment to providing universal access to telecommunications services

(Kamel, 2005b). MCIT supported the expansion of the telecommunications services through deregulation, liberalization, and government-private sector partnerships. It also encouraged foreign direct investment (FDI) as well as the transfer of technology into the nation to support in the overall business and socioeconomic development (Kamel, 2006). In 2002, the World Trade Organization (WTO) granted Egypt permission to liberalize its telecom market. Accordingly, the government set a deregulation plan towards the end of 2005, identifying a number of objectives to be realized. These included setting-up the environment for multi-operators and multimedia services while reiterating the telecommunications regulatory authority organizational structure, regulatory rules, and directives. This involved the liberalization of basic and international voice services along with the introduction of new services and technologies (MCIT, 2005). Egypt rapidly developed a sophisticated telephone network and a modern and reliable fixed line; mobile and Internet networks have already been established and moving at a fast pace. Such advancements constituted optimum conditions for a strong and promising contact center industry in Egypt. Since 1999, MCIT had taken steps to ensure the deregulation of the telephone market. Telecom Egypt (TE) monopoly over communications services was disintegrated and the company was scheduled for liberalization in December 2005. In a special effort to develop the contact center industry, the government dropped telephone rates to Europe and North America rates, standing at approximately 0.07 U.S. dollars and 0.05 U.S. dollars per minute, respectively. In order to guarantee that Egypt would remain competitive in the telecommunications sector, MCIT is continuously developing partnerships with several major global communications firms including Siemens, Alcatel, and Cisco, to train engineering graduates and to establish an IT-literate workforce as part of the overall efforts to build Egypt information

1299

Xceed

society (Kamel, 2005a). Ahmed Nazif, prime minister of Egypt said in 2004 “we have taken long and steady steps towards achieving our goal of becoming an information society, but we feel that this is only the beginning. Creative professionals, a supportive government, and a healthy business environment have been the key to our current success, and they will continue to be fundamental to our future achievements.” It is important to note that when Xceed first started their call center operation in 2003, their vision was to become the foremost provider of outsourced customer contact solutions for commercial and government customers in Egypt and the region, with aspirations to attract other opportunities globally. From the start, Xceed developed an extensive customer list that included the likes of local telecommunications giant TE, with a customer base of more than 10 million subscribers as well as leading local and global ICT companies such as Microsoft EMEA, Microsoft Egypt, Oracle Global Product Support Center, EDS, NetOne, Nestle Waters, and France Cegetel Neuf Telecom. Moreover, the list included local ministries such as MCIT and the Ministry of State for Administrative Development (MSAD) in addition to the Aviation Information Technology, Carrefour, and CIT Global. In 2005, Xceed managed an average of 1.6 million customer contacts per month both live and via electronic interaction. Nearly 840 Xceed employees operated from the company unique state-of-the-art facility, and services were offered in nine different languages: Arabic, English, French, German, Spanish, Italian, Portuguese, Greek, and Hebrew (www.xceedcc.com).

SETTING THE STAGE The story of Xceed started long before the current smart village location was inaugurated. When MCIT was established in 1999, significant transformation took place and numerous opportunities

1300

began to present themselves. A new board was appointed in June 2000 to cope with these changes. This is when Danish joined the board of directors of TE, the sole fixed line telecommunications operator in Egypt. One year later, Nazif, the minister of communications and information technology at the time, expressed the need for establishing a company which would function as the IT arm of TE, a second entity that would work as the data communication arm, and a third to become the mobile operator. Accordingly, Masreya (Arabic translation for Egyptian) Information Systems, the IT arm of TE, was established in September 2001, and the 10-employee company was set up in rented offices in a commercial building downtown Cairo. Masreya had a mandate to design and develop solutions for the two problem areas facing TE: the billing system and the customer relationship management (CRM) program. The recommendation to replace the in-house developed system with a state-of-the-art off-the-shelf package capable of handling billing system problems was swiftly resolved with the in-house development of an application that tracked the subscription status. The CRM program presented more of a challenge. When the team looked to see what the existing resources were to develop the program, they found that none was available. In the absence of any frame of reference, they had to come up with a solution that would address the problem, from scratch. After undertaking further research into the possibilities of implementation, it was realized that it was necessary to create a call/contact center. With a vision for long-term success, Danish, a veteran of initiating major and successful IT projects in Egypt, France, and the United States, started to entertain the possible provision of such a service in Egypt, not only to serve the local market but also to provide worldwide offshore outsourcing services. Danish decided to study the concept further. In taking his decision, he had several models in mind including the Indian and Irish models. His previous experience with Eircom,

Xceed

the telecommunications company, led him to visit them and explore their business model. At the time, customer support for TE was provided by numerous local homegrown call centers and a different phone number was allocated to each TE branch. The decision was made to eradicate all these separate customer support lines and group them into one call center. The initial number of seats suggested was between 500 to 600 seats, which were to be divided between fixed line and mobile phone services with 200-300 seats for fixed lines and 300 seats for mobile lines. During that time, TE was in the process of launching a mobile operator; however, due to market and economic reasons at the time, the plan was postponed to a later date. When the Xceed team realized the magnitude of the operation and the quality of service they had in mind, it became apparent that they could not continue to operate from within a small office space and the search for a more suitable location began. The team visited several locations but could not find anything that would adequately accommodate their needs. Eventually, it was decided that in order to promote and further develop the smart village complex as a growing and promising technology park, the call center would be built on its premises. This would enable it to be better positioned in the local market and be able to compete in an ever-growing global marketplace that has long been characterized as both dynamic and subject to fierce competition and rapid development. The decision to build the call center involved a major change in strategy. Instead of the call center operating mainly for TE, the management thought of expanding its scope and transforming it into revenue generating contact center. This meant that the contact center would maintain its role as the call center support for TE while expanding its seats to enable it to sell its services to other opportunities in the global marketplace. In May 2002, the design of the premises commenced and contractors began working on

the location at the smart village. The design of the building had to take into account the fact that Masreya Information Systems was still the IT arm of TE and not solely a call center. A division in the business objective had to be clear and manifested in the physical location. This distinction is quite apparent: one building houses, the management of Masreya Information Systems and the other building houses Xceed, the contact center. The two adjacent buildings are joined together by a bridge to allow flexibility in the future. When the company was first established, it was 92.5% owned by TE, the remaining amount was equally owned by the three major local state banks; National, Misr, and Cairo banks, at 2.5% per bank. Capital was later raised in 2005, making TE’s share at 98.5% and the bank’s at 0.5% each. The decision to put the mobile operator on hold freed up almost 300 seats in the contact center capacity, making it a 25%-75% share between TE and possible accounts from the global market. The decision was made to market the 75% at the global level for export. The call center was designed to accommodate 1,000 seats by 2005 and 1,200 by 2007 or earlier should the need arise, based on market needs and opportunities enabled. The official inauguration of the contact center took place on September 22, 2003. In an attempt to find a suitable name for the contact center, the management carried out a survey within the company, where people had to choose one out of five names they considered to be catchy, interesting, marketable, global, and in some way representative of the service. The final decision was Xceed, and true to its name since its establishment, the company had been exceeding its expectations in terms of the quality of service provided, exposure, and in its capacity to reach out to the global market and take the lead in providing a supreme customer service. According to Danish “Xceed was chosen for its dynamism and the implications of the name. We are not in the business of satisfying the customer; we are in the business of delighting them

1301

Xceed

and exceeding their expectations.” Xceed was not just a contact center, it was the seed of a growing industry. It is important to note that in 2005, the company was by far the largest capacity contact center in Egypt and the region. Furthermore, the Xceed contact center was ready to operate and compete in the global market, attracting customers from different regions around the world. The unwritten vision of the business was that it would provide opportunities for the youth and future generations; every seat accommodated approximately three employees, which translated into 3,000 job opportunities. The use of IT was intended to boost call center performance whereas making targeted improvements involving more cost-effective technologies help boost operations and increase revenues using IT (Pietraszek & Ramchandran, 2006).

The Industry The literature review of the outsourcing industry indicates that among the reasons for successfully outsourcing contact centers is explaining that the customer service strategy needed to be well defined and progressive and not just to provide a good service (Khandelwal & Gilson, 2005). Companies successful in outsourcing their call centers normally increased their revenue by 20% to 35%, cut costs by 15% to 25%, and improved the quality of their customer relationship management. Exhibit 1 portrays the key offshore motivators for customer care investors. The case explained that the concept of call centers was designed to enable companies to respond to customer questions. Initially, call centers were not seen as a business opportunity but simply a tool for handling inquiries. The change came in the 1990s when call centers became automated and CRM packages were integrated into call center technologies. There is no doubt that call centers have become essential to the marketing and customer care strategies of many businesses over the past 30 years (Khandelwal & Gilson, 2005).

1302

Moreover, there is no doubt that outsourcing of information services is transforming the nature of business in the information industry (Clark, Zmud, & McGray, 1998). The global offshore-outsourced contact center market will grow from 138,000 agent positions in 2004 to 241,000 agent positions by the end of 2007 due to the cost saving schemes that many western companies have implemented, as indicated by a research study conducted by Datamonitor in 2005. Egypt is currently considered a viable customer service choice for companies wanting to reduce overhead costs, while maintaining a very high degree of customer interaction quality. “Call centers are going to move to Mauritius, they’re going to move to Egypt, where they have a call center of 1,000 people now that works for Microsoft.” This statement was made by Thomas Friedman, the New York Times columnist, in an IT convention in India (Friedman, 2005a, 2005b). He continued, “A call center that would have gone to Bangalore 5 years ago; now it’s in Cairo.” Currently, all Fortune 500 companies have at least one call center (Gilson & Khandelwal, 2005). By 2007, domestic and foreign outsourcers would be expected to employ about 12% of all call center agents serving North America, and offshoring to foreign markets would account for 7% of the total number of positions. Datamonitor estimates that the total market size for the Egyptbased outsourced contact centers in 2005 is 655 agent positions. This number was expected to rise rapidly over the next 5 years, at a compounded annual growth rate (CAGR) of just over 50%, to 3,775 agent positions by 2009. Agent positions in Egypt were at par with key near shore markets including Poland, the Czech Republic, and Hungary. The Datamonitor study also noted that despite the fact that the number of agent positions forecast was relatively small, Egypt contact center offshore outsourcing had the potential to exceed projected levels. This would depend on the ability of local outsourcers to sell their services to foreign firms, overcome existing perceptions of the do-

Xceed

mestic business climate, and compete with other offshore destinations. As indicated in exhibits 2 and 3, in 2005, Egypt was very competitive as an offshore-outsourced contact center destination. The total cost included the cost paid for and the wages earned by the particular customer care agent listed. Specifically, Egypt, at 54% of the cost of a U.S. inbound voice-based customer care agent, was a less expensive option than central European locations including Hungary and Poland. Egypt was less costly on an agent basis than Canada and Mexico; both favored locations of U.S.-based outsourced customer care (Datamonitor, 2005). The only market that was still cheaper than Egypt was India. However, it should be noted that the cost difference between the two locations was marginal and was offset by the additional costs incurred in India, such as telecom transportation. In addition, the overall cost to the outsourcer should take into account the extra cost of the high attrition rates in India (80%-100%) compared to Egypt (Datamonitor, 2005). Given the mentioned industry profile, it is important to note that at the time this case was developed, Xceed was not the sole player in the local marketplace; there were three local competitors, namely: •

•

C-3 provided a variety of multilingual services to both domestic and global customers, serving callers in Europe and the United States. Languages serviced at C-3 included Arabic, English, and French. Both inbound and outbound calls were handled at C-3 offices which were located in Cairo. Global customers include Wall Street Journal Europe, Tele-2, and Banque de Poste Belge. Raya Contact Center was established in 2000. Raya contact center belonged to Raya holdings, one of the leading local IT companies in Egypt. The contact center provided outsourcing services to both domestic and global firms. Located in Cairo, Raya agents handled both inbound and outbound services in Arabic, English, French, and German.

•

Raya operated to serve manufacturing, logistics, and petroleum production. Ecco was established in 2000 as a subsidiary of the National Telecommunications Corporation (NTC), an Egyptian IT and Telco firm. The company is located in the cyber center commercial zone. Ecco serviced domestic and international customers in a variety of languages including Arabic, Italian, and English. Key vertical markets served included financial services, telecoms, and the public sector. Both inbound and outbound services were available.

Egypt, as a resourceful nation, was competitive in terms of providing well-educated potential contact center agents. This was due to the 250,000+ university graduates each year. Such a large number was accentuated by the focus on IT within these institutions, with an increasing percentage of students graduating in this discipline annually reaching close to 1.5%. The labor force is also known for its proficiency in western languages, because the university instruction is carried out predominantly in English, with some institutions also focusing on French and German. In addition, there were several very large postsecondary institutions located in Egypt, funded by foreign governments, including the United States, UK, Canada, France, and Germany, each of which produce many multilingual graduates annually (Moheeb, 2006). Being a top tourism destination for decades helped in creating a multilingual, customer service oriented workforce.

CASE DESCRIPTION Xceed began its operation of the contact center business around mid-2003 as the pioneers of outsourcing in Egypt in the call center industry, with an array of state-of-the-art inbound and outbound services that were customized to meet their customers’ needs (Bossone, 2006). In ad-

1303

Xceed

dition to customized service solutions, Xceed provided customer relationship management services and Internet-based customer care and technical support services. Xceed depends on five pillars in conducting their business including high performance and quality assurance, cross cultural management, business continuity plans, ultimate business solutions, and multilingual capabilities.

The Business Model Through global sourcing, Xceed had extended an offshore arm to offer its portfolio of services to customers around the globe. Xceed’s ultimate business formula was to realize a business ratio of 60% local and 40% offshore by the end of 2005. This formula would shift to 20% local and 80% offshore by the end of 2008. Xceed identified its target market in terms of two essential factors: its recruitment capacity and the availability of resources, in addition to the existence of outsourceability culture in different markets reflecting the readiness of different human capacities to deal with different cultures, values, and attitudes and cater for their needs. Addressing the local market,

Xceed identified multinationals as the sector most prone to outsourcing in 2005. At the international level, Xceed decided to maintain a wider span of customers and include several possible sectors. Figure 1 depicts the strategic vision of Xceed. The Xceed team was aware that as processes became more complex, quality improvement in services would become a key driver for growth. There would be a move from low-end and back-office work to high value-added services. Outsourcers would increasingly be looking for one-stop solutions, whereby they could retain cost advantages while adding value in terms of service and quality. Cost arbitrage would stay but suppliers would have to scale up to extend benefits beyond cost. Xceed management considered themselves as key players of the contact center business in Egypt and recognized that they functioned as a pulling force for the whole contact center industry. Exhibit 4 demonstrates a SWOT analysis developed by the Xceed business development unit. With one targeted visionary goal, Xceed aimed to place Egypt alongside India and the Philippines in the contact center industry. In order to achieve that vision, acquiring the business of multinationals residing in Egypt, as well as acquiring small and

Figure 1. Xceed strategic vision Possible End State Peer to India and the Philippines with broad capabilities and substantial customers relationships

Possible End State Another call center with high scale but limited breadth of offering

Scale

Offshoring customer care, transaction processing and IT support for Fortune 1000 firms Outbound offshoring for SME in Europe/US

Possible End State Moderate sized Middle Eastern BPO player with broad functionality

Customer care and transaction processing for Customer care for Egyptian and Arab multinational firms in the region Egyptian firms Breadth of Offering

1304

Xceed

medium-sized enterprises (SME) outbound business from Europe and the U.S., would ultimately position Xceed as a capable contact center with a record of accomplishments that would be ready for Fortune 500 company business acquisition. As for the local market for 2006, as shown in exhibits 5 and 6, Xceed forecasts revenues for newly acquired local businesses at 2% of the total projected new business revenues.

•

The Product Xceed did not exclusively serve its parent company, TE. Rather, it served an array of customers and for that reason it had to be flexible and adaptable as an intermediary between different customers and where the specialization of services depended on each customer. The product was defined based on the needs of each customer, and each agent responsible for an account was trained accordingly. Xceed offered a number of products and services to customers, including (but not limited to) the following: •

Complaints management: fast response and catering to customers changing needs is an important factor that needs to be well addressed rather than focusing on specific problems faced that leads to customer dissatisfaction. Xceed management believed that the prime purpose of designing and developing robust and effective complaint management systems was to deliver enhanced profits by increasing revenues and reducing costs. In order to turn every complaint into a profit, a specialized, personalized team was made available to support a complaint line that was dedicated to receiving and replying to all customers complaints. Xceed agents were trained to make the situation right when handling both live and virtual complaints, including fax, Web chat, or e-mails. Xceed management were proud that the two major attributes that set them apart were the quality

•

•

•

•

of training their agents received and their reporting accuracy. Customer retention programs: customer retention was vital for all companies because the cost of acquiring new customers was far greater than the cost of maintaining current customers. Xceed supported its customers in launching a retention program by conducting outbound phone surveys that capture specific data. Such data was then analyzed using distinctive software to determine which customers the firm was most interested in retaining, along with their needs, interests, and perceptions of the product. Xceed would help evaluate the customers’ retention program using a similar strategy. Order handling: according to the New York Times, the Internet research firm Jupiter Media Metrix stated that response times measured from 250 Web sites indicated that only 30% of the retailers surveyed responded to online customer service requests within hours. More than 30% took longer than 3 days or did not respond at all. Xceed could guarantee that requests do not slip through. Agents were available 24/7 on all channels (phone, Web, e-mail, and fax) if needed, to take orders from customers, answer product inquiries, and process them directly. Tele-survey services: the challenge was not obtaining information about customers, but obtaining the right information by reaching the right people in order to serve the following purposes: customer-related opinion surveys, customer satisfaction measurement, and general surveys. Telemarketing services: agents acted as the marketing arm of the customer’s organization and reached potential customers. The scope includes lead generation and lead qualification. Welcome calls: the outbound service was initiated by the agents on behalf of the customers to welcome new members to the

1305

Xceed

•

•

services offered. New member welcome calls aimed to build customer loyalty straight away. Technical support: Xceed’s contact center team were technology savvy agents who were available around the clock to support incoming calls, faxes, and e-mails in one or more of the following areas: hardware, software publishers, original equipment manufacturers, and Internet service providers. Database cleansing and enhancement: an outbound service performed by agents to maintain up-to-date prospect lists and customer databases for customers.

Commitment to Quality Commitment to quality and customer satisfaction was the essence of Xceed contact center operations. Xceed addressed quality in all aspects of its operations and considered it an entity-wide responsibility. Processes were designed according to customer requirements and with customer satisfaction in mind. Full process documentation and detailed work instructions were made available to ensure the consistency and effectiveness of operations. Processes were regularly audited to ensure that they were being performed as intended and in a consistent manner. The key performance indicators (KPI) were examined regularly to maintain control over processes and initiating process improvements took place whenever required. Transaction monitoring was essential and ensured that all customer contacts adhered to specific standards. Therefore, Xceed deployed a quality monitoring system that catered for a quantified and statistically valid representation of accounts’ overall quality down to the individual agent’s performance. To ensure the objectivity of the monitoring process conducted, Xceed deployed several layers of calibration. These calibrations ensured consistency among monitors. Furthermore, quality scores were calibrated with

1306

customer satisfaction data to obtain a complete picture of the customer contact experience. In order to balance its internal controls, Xceed established various feedback mechanisms to ensure that customers and end users’ feedback remained a key input and business driver. Xceed’s voice of the customer (VoC) program catered to the measurement of both customer and customer satisfaction through regular surveys; it catered to response management to both customer and customer complaints. This commitment to quality was manifested in Xceed adherence to the world class standards. Xceed is an ISO 9001:2000 certified company. Additionally, Xceed aimed to be the first contact center in Africa and the Middle East to be certified against the rigorous customer operations performance center (COPC) standards. The certification was completed in December 2005 and Danish was all praise to his team, and he attributed the achievement wholly to them (Bossone, 2006).

The Team Danish was very proud of the expansion of the team at Xceed. On December 31, 2005, there were 1,000 employees, 140 of whom were working in management and support. Exhibit 7 depicts the current organizational chart. Xceed was a pioneer at succeeding with managing public money using a private sector mentality; a model example replicating a number of successful models already in place in the UK public sector (Cronk & Sharp, 1998), but leading the pack in the developing countries context. The management style was invaluable in making the model so successful, magnified by the fact that the company drew on local experience and management expertise. Xceed was managed by two extremely high caliber vice presidents and a visionary chief executive officer (CEO). Adel Danish was the chairman and CEO responsible for directing and controlling the operations. He guided the company’s strategic objectives and kept the financial targets in line with those agreed upon

Xceed

with the board of directors. Danish coordinated with TE and its subsidiaries in seeking business opportunities to ensure continuous growth. Appointed to the Board of TE in late 2000, Danish brought over 30 years of unique business experience from the IT and telecommunications sectors in France, Egypt, and the United States. He had fulfilled the role of founder, co-founder, and managing director of several corporations throughout the world. Danish began his career as a researcher at the IBM Scientific Center in Paris, France. He then held several technical and marketing positions within IBM before starting Standardata SA, a hardware and software services provider in France, in 1978. Danish is a member of the U.S.-Egypt Business Council, a bilateral organization created by both governments to facilitate private sector business growth in Egypt and to strengthen trade and investment ties between the U.S. and Egypt. Ahmed Ref ky, Xceed’s VP for strategy and business development, holds a bachelor of science degree in computer and automatic control. He has over 20 years experience in the IT industry. Refky’s career included a number of senior management positions, corporate business development, business and IT consulting, project management and planning, systems analysis and design, programming, customer support, and enterprise resource planning implementation. Prior to joining Xceed, Refky was the Middle East regional IS director for ABB, a leader in power and automation technologies. Alaa El-Shafei, Xceed’s VP for operations holds a bachelor of science degree in electronics and communication. During the course of 19 years, El-Shafei held technical, managerial, and consulting positions in which he managed and oversaw the development of software applications, data and voice networking, and data centers’ infrastructure. Prior to his senior role at Xceed, El-Shafei founded Bayanet, a systems integrator and software provider. Prior to that, El-Shafei was the general manager of Standardata SA, an implementer of enterprise

resource planning (ERP) applications in Egypt and the Middle East. Finally, special attention was given to the selection process of the middle management team to whom all contact agents report. Danish always refers to them as “my dream team.” One major rule that Danish never breaks is “each manager is the only one responsible for hiring people reporting to him/her. I never ever forced a manager to hire someone in specific. I do have the right of veto for some key positions. Fortunately, I have never used it. It is a blessing and a delight to know everyday, when I am heading to my office in the smart village that I will be interacting with such a wonderful, talented, and motivated team.” The 700 contact center agents vary in age between 20 and 26, with 60% female. On average, agents work between 7 to 8 hours per day. In the contact center business, the attrition rate is quite high, meaning that enormous human resources capacities are required in order to handle the turnover. The recruitment and selection cycle for Xceed ensures a strong and balanced approach to hire the best talents in the market. The initial forecasted time-span for the start-up human resources cycle of selection, testing, hiring, and training is usually 2 months.

The Recruitment Process Xceed had access to good caliber agents; their selection process ensured that the best talents were chosen. Because Xceed was aware that the attrition rate was usually high in the contact center business, they developed motivational programs to complement their induction and provided onthe-job training programs. In addition, fringe benefit plans and a relaxing working environment ensured that lower turnover rates in the industry were maintained. The recruitment and selection process for the call center agents is designed to assess both the candidates’ skills and attitude as demonstrated in Figure 2. Based on the competency profile of each job, the assessment process

1307

Xceed

Figure 2. Recruitment process Manpower Planning

Sourcing

Selection

provides an objective way of measuring critical inbound and outbound call center skills before the hiring decision is made. The prospective agents undergo a rigorous selection process designed to match their qualifications with the required position. The process includes a basic skills test that taps into IQ, simulation, customer service attitude, and spelling. Each agent is required to sit for a language and accent test carried out by two reputable international language institutes in Egypt. The final stage is a one-on-one interview with the human resources department personnel. The contact center ratio of supervisors, including team leaders, to customer service representatives was 1 to 10. The ratio of trainers to customer service representatives was 1 to 40. The layout of the contact center is very conducive to the maintenance of agent/leader relationship. Every group of agents is seated in a cluster, and their leader was positioned in the outer shell so that they could provide immediate support. Based on the level of complexity of the customers’ product, each employee had to complete stipulated training hours through a combination of classroom and computer/technology-based training, and was required to pass very stringent evaluative tests. Xceed’s training program consists of five primary phases to ensure optimal knowledge transfer to the staff, which is demonstrated as follows. 1.

1308

Induction Training: a 2-day session that introduces the candidates for recruitment to the contact center industry in general and familiarized them with the organizational culture.

2.

3.

4.

5.

Contracting

Induction

Behavioral Training Program: the program develops and emphasizes the appropriate attitudes and behavioral skills that all contact center agents are required to possess to exceed customer satisfaction. The inbound-program is a 3-day session for all agents. Team leaders and supervisors normally require an additional leadership program. Product and Service Training Program: the program is a combined effort between Xceed and the respective customer, whereby each customer delivers their specific trainthe-trainer (TTT) program for selected trainers, which is disseminated to all concerned personnel. On-the-Job Training: agents work in a controlled environment under supervision before being allowed on to the floor to work on their own. Language and Culture Training: the program is designed to integrate specific language and cultural differences between Xceed agents and the prospective customer.

The Technology Xceed was built to accommodate the highest levels of technology in both telecom architecture and the physical facilities provided. The total of 16,000 square meters surface area were spread out over four acoustically engineered stories, accommodating a flexible, modular partition system, which allowed for the reconfiguration of agents’ work space, depending on customer requirements. The 20,000 square-meter underground basement

Xceed

hosted the data center, equipment room, and garage. Exhibit 8 gives a descriptive analysis of the technology platform. The building façade was constructed with double-glazing and a structural-curtain-wall to ensure a high degree of sound insulation, with raised floors and high ceilings throughout the entire building. The central security room was connected to an all-digital CCTV system and an access-card control system was installed throughout the building. The building had been designed to be earthquake resistant. All Xceed front-end servers ran on Windows 2000 with an MS-ISA firewall, MS-Exchange server, and Norton Antivirus and MS-Web servers. The back-end servers ran on Microsoft and UNIX platforms with MS-SQL and Oracle databases, while connected to network-appliance storage units. Xceed LAN was based on AMP cabling and CISCO routers, switches, and an intrusion detection system. Xceed’s first line support team included certified professionals in Windows 2000/ XP, MS-Office suite 2000/XP/2003, MS-servers including MS-Exchange, MS-ISA, MS-SQL, and MS-Web server, in addition to other communications facilities including hardware, connectivity, facsimile, e-mail, telephony, and networking systems. It is important to note that Xceed collaborated with major vendors including Microsoft, IBM, Cisco, and Fujitsu Siemens, amongst others for the development and deployment of the ICT infrastructure of the contact center. Xceed takes security concerns seriously. Consolidated with other vendors security solutions, Microsoft and Cisco capabilities were heavily used to maximize network and data security, including central antivirus protection with automatic updates (servers and workstations), group policy, strict policy for user rights, patch management (SUS and SMS), hardware firewall between all network segments, and IDS systems in all segments. Xceed’s entire facility and infrastructure strategy was built to mitigate risk and ensure business continuity. In addition to Xceed’s hot

site located at El-Shorouk city, which serves as a disaster recovery location, Xceed will continue to deploy this strategy and add more facilities over the next 3 years to ensure comprehensive support for its customers. Xceed’s Cairo site was connected through TE carrier with two connection types—Microwave: STM-1 connection terminated at a STM-4 multiplexer that provided 63 E1 links and copper cables: 50 pairs of copper cables connected to Xceed MDF, of which 16 E1 links were provided via HDSL rack termination. Exhibits 9 and 10 are graphical representations of the topology. Moreover, Xceed contracted with TE to provide optical fiber connectivity while the STM-4 will be upgraded to STM-16. To ensure no traffic congestion would occur (even on the carrier level), ISDN PRI lines were provided by TE tandem exchanges. Both voice and data connectivity links were distributed on the microwave, copper cables, and fiber link to ensure redundancy and no single point of failure. Partnerships with a number of telecommunication providers, including EsatBT, Deutsche Telecom, Cable and Wireless, MCI, and Arcor have been consigned for international connectivity.

The Xceed-Microsoft Partnership On December 5, 2003, Danish called Refky and El-Shafei into his office. He closed the door and told them that he had big news to share. Danish told them that the Microsoft European operation center in Ireland was looking to outsource a big contact center operation to cover Europe, the Middle East, and Africa. The contact center would be responsible for Microsoft product activations. All three had mixed feelings of happiness and fear. As a company, Xceed was still too small to respond to such an extensive request for proposal (RfP), especially that the major contact centers all over the world were participating. However, the challenge seemed interesting and motivating. Their collective final decision was to participate

1309

Xceed

and win the project. Danish told Refky and ElShafei “you have a free hand, do whatever you want to do, partner with whomever you want to partner with, just win this project.” Refky and El-Shafei left Danish’s office with an enormous challenge. After deliberation, they decided to collaborate with Arvato, a large German company that had experience in running the business of contact centers. They thought that by working with Arvato, they had a better chance of winning, especially that they could offer a new low-cost, high quality destination like Xceed. They managed to secure an appointment with Arvato 5 days later. At the same time, negotiations with Merkur Systemhaus AG, a subsidiary of Deutsche Post Worldnet, had been ongoing since late August 2003, for the development of a strategic alliance between the two organizations. It is important to note that identifying a partner was crucial since the portfolio of 19 languages required by the project was quite large for Xceed to handle on its own. Moreover, Xceed wanted to offer different locations for service provision, in order to ensure ultimate business continuity. Refky left for Germany after many discussions with El-Shafei, regarding the choice of partner. Refky planned open meetings with both companies: Arvato and Merkur Systemhaus AG. One morning on his trip, as Refky sat in a coffee shop in Gottingen (Germany), he sipped his hot cup of coffee and a million thoughts were going through his mind. Having not slept well the night, he knew that he could not make this decision based only on the rational of calculating the risks and benefits. He needed to follow his business intuition. He picked up the phone, called El-Shafei and told him that he decided not to go to Arvato. He asked him to call for a meeting with Merkur Systemhaus AG the following day. El-Shafei agreed and they planned to inform Danish of their decision and to proceed accordingly. Refky called Danish to explain the reason for the decision. Refky could not find a good justification except that it was a gut feeling and he knew it was the right way to

1310

go, building on the previous experiences and track records of both companies. The following morning, Refky had the meeting with Merkur Systemhaus AG. He explained the business opportunity at hand and that Xceed was interested in having them on board this project. At the end of the meeting, Merkur Systemhaus AG was interested in collaborating with Xceed to respond to the RfP. The next day, a cross-country telephone meeting took place; one team was in a conference room at the Sheraton Frankfurt Hotel, including Refky, three Merkur Systemhaus AG representatives from Germany, and a fourth from a subsidiary of Merkur Systemhaus AG in Ireland. The other team was in a conference room on the third floor of the Xceed premises in Cairo, including El-Shafei and a large team from Xceed. Both teams spent the whole day discussing the project details and the roles and responsibilities of each team. Working teams from the three companies were created, each responsible for separate tasks. The teams planned to work remotely, with the option of face-to-face meetings if needed. A steering committee was formed and they agreed to communicate on a weekly basis, through conference calls. A meeting was planned in Cairo, prior to the submission of the proposal near the end of January 2004. The teams worked very hard and they felt they were on the right track for a job well done. The proposal was submitted on time. By midFebruary, Xceed was informed that they were short-listed, and were invited to present their proposal at the Microsoft Corporation premises in Ireland. The whole team gathered in Dublin, five Xceed representatives, two Merkur Systemhaus AG representatives from Germany, and one from their subsidiary in Ireland. They rehearsed the presentation, agreed on the scenario, and set the plan. The presentation was perfect and represented just another piece of instrumental teamwork. A week later, Microsoft Corporation informed Xceed that they would like to send out a team to visit the Xceed premises. The visit took place during the

Xceed

period of March 10-11, 2004. During the following month, on April 7, Xceed was invited back to present the proposal to Microsoft’s higher management. This meeting was followed by a series of conference calls and discussions to reach the best plan of action and pricing strategy. On April 30, the decision was conveyed to Xceed that they won the biggest portion of the project, the portion that Xceed had primarily promised to deliver in the proposal. The portion to be delivered by Merkur Systemhaus AG was not awarded to them. The Xceed team celebrated their achievement putting forward the bigger challenge of delivering what they promised to deliver. The kickoff meeting was planned in Dublin on May 21, 2004. The project started with a number of difficulties, however, all team members were completely dedicated. Emphasis had to be put in place by both Refky and El-Shafei to facilitate the communication with Microsoft Corporation, which appeared to make or break the success of this offshoring project. Delays in meeting deadlines by global telecom vendors put more burdens on the project team. The customer service team lacked the experience to deal with a new relationship with a new vendor in a new country, on a big project. A demanding customer like Microsoft Corporation put pressure on the project. Xceed was supposed to go live on the third week of August. This date was not met. Microsoft Corporation asked for a conference call with Xceed’s senior management. Refky started the meeting with a full analysis of the situation and the solution proposed by Xceed. Microsoft Corporation felt that Xceed was aware of the problems they faced, and accordingly, both entities put together a concrete plan to deliver the project. An extension of the go live date was granted to Xceed. It is important to note that Xceed’s senior management later discovered that the conference call was a go/no go decision. The project started on the agreed date, full-fledged go live was achieved in a shorter period than promised, and Microsoft Corporation was satisfied with the achievement. The contact center

was later inaugurated by Bill Gates in January 2005. Due to the successful performance of the project, Xceed was awarded extra languages to its portfolio near the end of 2005. Exhibit 11 demonstrates an e-mail sent from John Garett, the Microsoft vendor account manager at EOC, to Xceed, on September 9, 2004.

CURRENT CHALLENGES/ PROBLEMS FACING THE ORGANIzATION This case might give the impression that things were on the right track for Xceed. In a way, they were, but the company was facing a number of challenges that had to be addressed in order to maintain the quality of the product they were planning to provide. Contact center performance was measured using the annual uptime percentage. The standards that govern the technology were extremely high, with annual uptime set at 99.9%. This meant that contact centers were only allowed a maximum of 2 hours downtime a year. For that reason, continual investment in ICT was required as well as regular human capital capacity building. The contact center business—and particularly an operation of that magnitude—was relatively new to Egypt. Accordingly, the management team needed to be constantly assured that the technical support of local companies would be sufficient during times of crisis, being identified as one of the critical success factors in the overall performance of the contact center. Egypt was misrepresented and misperceived in western countries, and contact center customers have low expectations when they were approached by an Egyptian firm. This made it more difficult for Xceed to market its products on the global level. However, the situation differed significantly when customers visited the premises and were in direct contact with the management and contact center agents. Xceed then became a success story. The company represents a suc-

1311

Xceed

cessful business model for call centers that have been designed and managed by local capacities in the context of developing nations with world class vision, business intuition, entrepreneurial skills, management capacities, and a committed and competitive human capital. In general, the re-emergence and explosive growth of a thriving information services industry has changed today’s information services landscape dramatically and portends even more sustainable changes in the future (Clark, Zmud, & McGray, 1998). Respectively, it is important to note that Xceed plans to have a more active role in the contact center industry in Egypt and the region, with an eye to a global outreach. There are many options available with diversified challenges to overcome and turn into opportunities. Therefore, it is vital for Xceed management to decide where to go from here.

What is Next? In the meantime, Xceed is considering what it should do next, considering the growing local and global competition in the contact center industry. Xceed’s management is faced with a number of challenges that need to be addressed. These challenges are demonstrated in the following questions. •

•

•

•

1312

Based on the information provided in the case, would it be a strategic advantage if Xceed brands and/or franchises its operation? Should Xceed continue to perform horizontally its CRM services or would it rather function as a provider to a specific vertical given the growing market outreach? Would it be an advantage if Xceed establishes partnerships with large global contact centers? Would it be better if Xceed focuses on specialized and more sophisticated customer contact services like technical support or

•

•

•

perform the whole spectrum of call center services? Should Xceed diversify its services by adding insourcing and/or back office services model? Is it feasible if Xceed focuses on consultancy services for the design and development of building call centers? In terms of exit strategy, should Xceed seek a buy out by a major global outsourcer?

Xceed’s management would be willing to hear alternative suggestions and ideas. One thing that they are focused on and determined to do is to lead continuously the call center industry in Egypt and the region and to expand it way beyond the current status due to the availability of the required building blocks that exist in the nation and more importantly to the potentials the industry has to put Egypt on the global map of contact center outsourcing destinations.

ACKNOWLEDGMENT The authors would like to thank Adel Danish, CEO and chairman of Xceed; Ahmed Refky, vice president for strategy and business development; Alaa El-Shafei, vice president for operations, and Ossama Nazmi Hanna, business eevelopment manager, for their continuous support and cooperation throughput the development of this case study.

REFERENCES Bossone, A. (2006). Seal of approval. Business Today, April, 48-50 Clark, T., Zmud, R., & McGray, G. (1998). The outsourcing of information services: Transforming the nature of business in the information industry. In L. P. Willcocks & M. C. Lacity (Eds.),

Xceed

The strategic sourcing of information systems perspectives and practices (pp. 45-78). Chichester: John Wiley and Sons. Cronk, J., & Sharp, J. (1998). A framework for IS outsourcing strategy in private and public sector contexts. In L. P. Willcocks & M. C. Lacity (Eds.), The strategic sourcing of information systems perspectives and practices (pp. 163-186). Chichester: John Wiley and Sons. Datamonitor. (2005, February). Emerging opportunities—offshore outsourcing in Egypt, a growing contact center market looks to build global business. White Paper. Friedman, T. (2005a, June 3). A race to the top. New York Times Friedman, T. (2005b, June 8). Bangalore: hot and hotter. New York Times Gilson, K. A., & Khandelwal, D. K. (2005). Getting more from call centers. Retrieved on April 7, 2007, from www.mckinseyquarterly.com Kamel, S. (2005a). The evolution of information and communication technology infrastructure. In G. Hunter & A. Wenn (Eds.), Egypt in information systems in an e-world (pp. 117-135). The Information Institute.

Kamel, S. (2005b, May 15-18). Assessing the impacts of establishing an Internet cafe in the context of a developing nation. In Proceedings of the 16th Information Resources Management Association International Conference on Managing Modern Organizations with Information Technology (pp. 176-181). San Diego, California: Kamel, T. (2006). Egypt reforms: An update from the ICT sector, June Ministry of Communications and Information Technology-MCIT (2005) Building Digital Bridges: Egypt’s Vision of the Information Society Moheeb, H. (2006, July). Long distance— language and computer skills and geographic proximity are making Egypt a hub for offshore outsourcing. Business Today, July, Nazif, A. (2004). Government programs, the American Chamber of Commerce in Egypt. Retrieved on September 28, from www.amcham. org.eg Pietraszek, W. E., & Ramchandran, A. (2006). Using IT to boost call-center performance. McKinsey on IT, Spring, Xceed Contact Center (2007). Retreived March 20, 2007, from www. xceedcc.com

1313

Xceed

EXHIBITS Exhibit 1. Key offshore motivators for customer care investors (Datamonitor, 2005) cost of labor

4.0 3.0 access to multilingual workforce

educated/skilled workforce

2.0 1.0 0.0

Government subsidies

“follow the sun” call center

Exhibit 2. Agent cost analysis: Type of agent and cost per hour (Source: Datamonitor, 2005) U.S. Dollars

1314

Canada

Hungary

India

Poland

Egypt

USA

Collections (Outbound)

25.7

16.2

14.6

16.4

15.3

29.7

Direct response (Inbound)

25.3

15.9

14.35

16.1

14.9

29.2

Telemarketing/telesales (Outbound)

25.7

16.2

14.6

16.4

15.1

29.7

Voice-based customer care (inbound/outbound)

24.0

14.7

13.3

16.4

14.5

27.0

Multi-media customer care (inbound/outbound)

24.0

14.7

13.3

16.4

14.7

27.0

Technical support/ help desk (inbound)

26.2

16.5

14.85

16.6

15.5

30.2

% US price for voice-based customer care agent

89%

54%

49%

61%

54%

100%

Xceed

Exhibit 3. Offshore outsourced agent positions in Egypt (2004 – 2009) (Source: Datamonitor, 2005) 4000

70%

3500

60%

3000

50%

2500

40%

2000 30%

1500

20%

1000

10%

500 0

0% 2004

2005

2006

2007

2008

2009

Offshore Outsourced Agent Positions in Egypt (2004 – 2009)

Agent positions (000s)

2004

2005

2006

2007

2008

2009

CAGR

450

665

965

1,455

2,300

3,775

50.4%

46%

47%

51%

58%

64%

Annual growth

Exhibit 4. SWOT Analysis for Xceed Contact Center Strengths  Being owned by Telecom Egypt  People caliber/ homogeneous  Having a strong reference  Work environment  Top management as a support system  Infrastructure  Location  Quality culture belief  Government support

Opportunities  ITO Consulting  Strategic alliance  Arab region market  Self service trend adoption  Government/ aid funds  Buy out/ Joint venture  Deregulation of telco sector

Weaknesses  Lack of delegation / empowerment  Low readiness/ time to market  Lack of succession plans  Misconception of Egypt  Telecom Egypt monopoly

Threats  Lack of favorable telco rates in the Arab region  Attrition  Political stability  Lack of industry data  Currency fluctuation  New entrants with similar value proposition

1315

Xceed

Exhibit 5. Xceed forecasts for 2006 Revenue Streams

%

Offshore seats (IB, OB, BO)

EGP 5,232,500

Local seats (IB, OB)

42%

EGP 400,000

3%

Existing Accounts Expansions

EGP 5,070,000

41%

Consulting (Local, Arab region)

EGP 1,750,000

14%

EGP 12,452,500

100%

Total Expected New Business Income Breakdown of Total Income 2006

Existing Business

EGP 68,270,000

Existing Business Expansions

EGP 5,070,000

New Business

EGP 5,632,500

Consulting (Local, Arab region)

EGP 1,750,000

Total Income

EGP 80,722,500

Budget Extrapolation (Type of Service)

%

Outbound

EGP 1,782,500

34%

Inbound

EGP 3,105,000

59%

EGP 345,000

7%

EGP 5,232,500

100%

BO Total

To convert Egyptian Pounds to U.S. Dollars, $1 U.S. = 5.75 LE

Amount

Revenue Streams 2006 EGP EGP EGP EGP EGP EGP

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 EGP 0 Offshore seats (IB, OB, BO)

Local seats (IB, OB)

Existing Accounts Expansions

Stream

1316

Consulting (Local, Arab region)

Xceed

Exhibit 5. continued Breakdown Total Income 2006

7%

2%

6%

Existing Business Existing Business Expansions New Business Consulting (Local, Arab region) 85%

Services - New Business 7%

34%

59%

Outbound

Inbound

BO

1317

1318 U.S.$910,000

Total Offshore U.S.$

Local seats (IB, OB) X

X

7

10

May

Jun

Jul

Aug

X

Projected Accounts

6

IB/OB*

10

BO—UK/U.S./FR Months live

4

XX

Apr

50

9

10

Mar

Months live

11

Feb

IB—UK/U.S./FR

10

Jan

Months live

EGP 5,632,500

Total Acquired New Business

100%

7%

59%

34%

OB—UK/U.S./FR

EGP 400,000

Total Local EGP

Offshore seats (IB, OB, BO)

EGP 5,232,500

Total Offshore EGP

5.75

U.S.$60,000

BO—UK/US/FR

Exchange Rate U.S.$ to EGP

U.S.$540,000

IB—UK/US/FR

U.S.$1,000

Seat average monthly income BO U.S.$310,000

U.S.$2,700

Seat average monthly income IB

OB—UK/US/FR

U.S.$1,000

Seat average monthly income OB

Acquired New Business 2006

3

10

Sep

X

Oct

1

10

Nov

X

Dec

10

50

50

Seats

EGP 400,000

US$60,000

US$540,000

US$310,000

Revenues

Xceed

Exhibit 6. Xceed Forecasts for 2006

Maintenance Manager

Security Manager

Administration Manager

Procurement Manager

Procurement and Administration Director

Operational Support Systems Manager

Data Center Manager

Communication Manager

Office Automation Manager

Information Technology Director

Contact Center Managers

Planning and Decision Support

National Account Manager

Deputy Contact Center Director

Contact Center Director

Vice President Operations

Key Accounts Manager

Programs Manager

Chairman and Managing Director

Marketing Manager

Sales Manager

Quality Assurance Manager

Financial Planning and Control Manager

Research and Development Manager

Organizational Development Manager

Training Manager

Personnel Manager

Recruitment Manager

Business Development Manager

Financial Manager

Human Resource Director

Sales and Marketing Director

Financial Director

Vice President Strategy & Business Development

Xceed

Exhibit 7. Xceed organization chart

1319

Xceed

Exhibit 8. Technology platform - high availability The Xceed site holds the data center that is 200 square meters, equipped with a redundant power source, redundant generators, redundant UPS, redundant network backbone, redundant air conditioners, fire suppression system (gaseous system), and highly secure physical access. The system is occupied by the CRM application (E-point) based on N-Tier to reach the maximum availability architecture: •    

• 

• 

•

Back-end tier Network appliance cluster storage system Redundant SAN network Fujitsu Siemens Cluster UNIX servers Oracle 9i RAC Database (real application cluster) Business logic tier Redundant and load balance application server Front-end tier Redundant and load balance web server farm High speed backup system

From a different perspective, the high availability and serviceability introduced can be seen:

Servers • • •

Servers are connected to intranet through redundant network cards. Servers are supplied with redundant power sources "2 DPU in each rack" Servers operate as minimum on RAID1 disk structure

Power • • •

Two power sources Two generators for supplying electricity incase of failure Two UPS systems to recover any failure

Clustering • • •

Unix server are clustered for highly serviceability Oracle 9i RAC database (Real application Clusters) Exchange

Backup • •

1320

Storage Tek L80 tape library is designed to provide ultra-reliable backup and recovery for distributed Windows & UNIX environments VERITAS NetBackup, a leading enterprise data protection solution, providing centralized tape

Xceed

•

library control from a single management interface NetApp storage for robust and highly available data service for business-critical environments, Vendor adopted NetApp Clustered Failover to store customers data, installed on a pair of NetApp filers.

Storage System •

Cluster failover

Clustered failover ensures data availability by transferring the data service of an unavailable storage to storage in the cluster. The transfer is transparent to end users and applications, and the data service is automatically resumed with no visible interruption to business operation. •

Snapshot

Snapshot creates a virtual read-only copy of a file system. A snapshot copy of the complete Oracle database file system can be taken in less than 5 seconds with no discernible impact on the performance of the E-point application. A similar copy function is executed to a tape library. •

Snaprestore

Snaprestore enables an entire file system to be restored to the status of a specific Snapshot. The Snaprestore takes less than 10 seconds to restore the data that reduce the backup window. This architecture ensures that the application requests are always serviceable, even in the event of a failure. If the failure occurs in the primary system back-end tier, the production oracle DB (using RAC) protects from host and instance failure, and the load balance in the business logic tier and front-end tier protect from the host failure.

1321

Xceed

Exhibit 9. Cairo: Egypt site security logical topology

Exhibit 10. Cairo: Egypt site network logical topology

1322

Xceed

Exhibit 11. John Garett (Microsoft Vendor Account Manager at EOC) e-mail sent to Xceed on September 9, 2004 Well done, You are now in full live operation, Xceed are taking 100% of calls, we will continue to route 100% of calls to Xceed from now on. We have some contingency still in place in Arvato, we can call on this contingency if the need arises, please contact me immediately if you feel we need to activate the contingency. Well done to all involved, a lot of very hard and good work has been done to get to this stage. It is a very impressive achievement to get to this stage within thirteen days of switching in the first calls, especially for a brand new vendor. All indicators are green, healthy PSL, very good feedback from live Csat survey, very good feedback in the IVR Csat survey, no negative feedback from customers through the subsidiaries, no negative impact apparent on CPE, all performance reports checked and accurate, excellent analytical and quality in daily performance report, robust telephony solution via IPLC. All you need to do now is to continue with the excellent work you have all done so far. I am sure you will all be glad that I am returning home on Friday, you will be able to concentrate on your work without me interfering and always asking questions, you might even get home a bit earlier. Well done and the very best of luck for the future, somebody once described luck as being when “ readiness and quality coincides with opportunity”, I am not sure who said it but I think it’s very true. Very Best Regards John

This work was previously published in the Journal of Cases on Information Technology, Vol. 10, Issue 1, edited by M. KhosrowPour, pp. 67-91, copyright 2008 by IGI Publishing (an imprint of IGI Global).

1323

1324

Chapter 4.23

IT Outsourcing Practices in Australia and Taiwan Chad Lin Curtin University of Technology, Australia Koong Lin National University of Tainan, Taiwan

INTRODUCTION Globally, information technology (IT) outsourcing has spread quickly in many countries and spending by organizations in IT outsourcing is increasing rapidly each year. According to Gartner (Blackmore, De Souza, Young, Goodness, and Silliman, 2005), total spending on IT outsourcing worldwide is likely to rise from US $184 billion in 2003 to US $256 billion in 2008. However, defining IT outsourcing is not an easy task as it can mean different things to different organizations. Hirschheim and Lacity (2000) define IT outsourcing as the “practice of transferring IT assets, leases, staff, and management responsibility for delivery of services from internal IT functions to third-party vendors.” Willcocks and Lester (1997) define outsourcing as the “commissioning of thirdparty management of IT assets or activities to deliver required results.” The scope and range of outsourcing services have also increased as well,

as evidenced by the promotion of BPO (business process outsourcing), ASP (applications service providers), global outsourcing, R&D (research and development) outsourcing, and web and e-business outsourcing (Gonzales Gascon and Llopis, 2005; Huang, Lin, and Lin, 2005). While there is already much research on the economics of IT outsourcing, critical success factors for IT outsourcing decision-making and for outsourcing vendor management (Barthelemy and Geyer, 2004; Hirschheim and Lacity, 2000), there is very little literature on the actual linkage between IT outsourcing and the use of evaluation methodologies in organizations, especially in how these organizations evaluate their IT outsourcing contracts and ensure that the benefits expected from these contracts are delivered eventually. The aim of this paper is to examine issues surrounding the evaluation and benefits realization processes in Australian and Taiwanese organizations undertaking IT outsourcing. The paper

Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.

IT Outsourcing Practices in Australia and Taiwan

first reviews relevant literature with respect to IT outsourcing, the evaluation of IT outsourcing, and IT benefits realization. Key findings from a survey of the top 2000 Australian organizations, as well as a survey to top 3000 Taiwanese organizations, will then be presented. The paper examines these findings and issues in light of these large organizations’ evaluation practices.

BACKGROUND IT Outsourcing Whatever the objective, the possibility of IT outsourcing tends to generate strong emotions among the senior executives and external contractors. There are many reasons contributing to the growth of the outsourcing. A review of relevant IT outsourcing literature reveals the following organizational goals for their IT outsourcing projects: lower costs, access to world class expertise, economies of scale, risk sharing, increased efficiency/service level, elimination of internal irritants, higher quality of goods and services, greater focus on core functions, increased flexibility, and reduction in technological obsolescence risk (Aubert, Rivard, and Patry, 2003; Barthelemy, 2003; Kakabadse and Kakabadse, 2001). There are several important factors that govern successful and less successful outsourcing decisions. These include: differentiation of the business from the competitors, strategic direction of the business, degree of uncertainty of the business environment, scope of outsourcing services, quality of outsourcing contract, technology maturity, level of IT integration, in-house capabilities, and trust (Barthelemy, 2003; Hormozi, Hostetler, and Middleton, 2003). In addition, there are other factors that are more critical for offshore outsourcing than for domestic outsourcing. According to Adelakun (2004), the following critical success factors are very important for offshore outsourcing: people factors (e.g., language skill and project

management skill), technical factors (e.g., workers technical skill), business infrastructure factors (e.g., service level agreement details), regulatory factors (e.g., travel and visa restrictions), and client interface factors (e.g., security and trusting relationship). In particular, the traditional approaches to security are failing as we move to open networks and business models due to IT outsourcing (Grimshaw, Vincent, and Willmott, 2002; Wright, 2001). In addition, IT outsourcing also forces organizations to extend the boundaries of trust outside of their former closed spheres (Wright, 2001). According to Khalfan (2004), these two issues are the most prominent risk factors that would affect the attitudes of organizations to IT outsourcing. Furthermore, despite the promised savings from the IT outsourcing contracts, there have been problems. These include constant budget blowouts, dubious savings claims, deep dissatisfaction, and non-delivery of service levels (Aubert, et al., 2003; Sullivan and Ngwenyama, 2005). Reasons for this include failing to properly monitor and evaluate IT outsourcing contracts and projects, especially the performance of contractors (Lin, Pervan, and McDermid, 2005; Perrin and Pervan, 2004).

IT Investment Evaluation in IT Outsourcing Complexity and scope are often the major constraints and difficulties in IT investment evaluation and benefits realization processes (Tallon, Kraemer, and Gurbaxani, 2000; Ward and Daniel, 2006). Many IT projects fail to deliver what is expected of them because organizations focus on implementing the technology rather than tracking and measuring the performance of IT projects (Lin and Pervan, 2003). One reason for this is that most organizations fail to properly monitor and evaluate their IT outsourcing projects (Perrin and Pervan, 2004; Willcocks and Lester, 1997). According to Kakabadse and Kakabadse (2001),

1325

IT Outsourcing Practices in Australia and Taiwan

the development of suitable methodologies for IT outsourcing has been very slow. For example, McIvor (2000) found that most organizations had no formal process to evaluate their IT outsourcing decision and, instead, relied on limited cost analysis associated with the outsourcing decision. Beaumont and Costa (2002) found that evaluating all costs relevant to outsourcing was a very difficult task. According to Hsu, Wu, and Hsu (2005), most large organizations (52.4%) in Taiwan do not perform evaluation on a regular basis and those organizations which do evaluate tend to do so irregularly. In fact, 15.1% of organizations surveyed did not evaluate at all (Hsu, et al., 2005). Organizations that make extensive use of IT evaluation methodologies or measures have higher perceived payoffs from IT (Tallon, et al., 2000). Misra (2004) found that outsourcing organizations need to choose the evaluation methodologies which: (a) lead to the desired behavior by both outsourcers and outsourcing contractors; (b) are within the outsourcing contractors’ control; (c) can be easily measured by both the outsourcers and outsourcing contractors; (d) can be evaluated by objective criteria rather than subjective criteria; and (e) can be aligned with business objectives.

IT Benefits Realization While IT investment evaluation is important, it does not guarantee that the benefits identified and expected by organizations are realized (Lin, et al., 2005). This is because IT is just one enabler of process change and it only enables or creates a capability to derive benefits. The essence of benefits realization is to organize and manage so that the potential benefits arising from the use of IT can actually be realized (Changchit, Joshi, and Lederer, 1998). The identification of expected benefits of a proposed IT outsourcing project is a challenging task. According to Lin and Pervan (2003), very few organizations have a benefits realization approach. Ironically, much attention is paid to ways

1326

of justifying investments with little effort being expended in ensuring that the benefits expected are realized. As benefits are frequently long term, uncertain and intangible future benefits are too wide-ranging to be estimated with any accuracy. After all, the critical role of benefits realization depends on external IT outsourcing contractors’ ability to not just deliver excellent service, but also to turn this service into organizational consequences such as control of costs, meeting organizational goals, flexibility, and focusing on core functions (Rouse, Corbitt and Aubert, 2001). While there is a clear indication in the literature of a greater reliance on IT outsourcing by organizations, the importance of outsourcing evaluation and benefits processes has received limited attention, as has the linkage between IT outsourcing and the use of IT investment evaluation and benefits realization methodologies.

RESEARCH METHODOLOGY AND FINDINGS Research Objectives and Methodology Corporate spending on IT outsourcing is increasing at a rapid rate. In Australia, there is an increasing push by businesses for offshore IT outsourcing (to India, in particular), although many industry executives believe that Australia can also become an offshore destination as it is at least 25% cheaper to run a commercial undertaking in Australia than in the US or Western Europe (Hollands, 2004). In Taiwan, foreign companies spent a total of US $66 billion on IT outsourcing to Taiwan in 2005 and over 70% of Taiwan’s IT output was actually outsourced to China (Burns, 2006). However, no research has been carried out to obtain an overview of IT investments and benefits management processes and practices in these two economies. The research aims to provide new empirical evidence comparing Australia (a developed economy) and

IT Outsourcing Practices in Australia and Taiwan

Taiwan (a newly industrialized economy) on their IT outsourcing investment evaluation and benefits realization practices. The survey approach was chosen as it has the advantage of being able to focus on problem solving and pursue a step-by-step logical, organized, and rigorous method to identify problems, gather data, analyze the data, and draw valid conclusions (Sekaran, 1984). Specifically, the survey sought to: 1.

2.

establish current practices and norms in managing IT outsourcing benefits and evaluation by organizations in Australia and Taiwan; and investigate the usage of the IT outsourcing investment evaluation and benefits realization methodologies or approaches by organizations in Australia and Taiwan.

The sample for the Australian study was obtained by mailing questionnaires in 2005 to the IT managers and CIOs of 900 Australian organizations randomly selected from the top 2000 Australian organizations (Dun and Bradstreet mailing list). Prior to determining the sample size for the survey, a pilot survey of IT managers/ CIOs of ten companies in Australia and Taiwan was conducted. Comments about the pilot questionnaire were all positive and so no significant changes were made to the questionnaire. The survey elicited a total of 176 responses and a response rate of 19.6%. The sample in Taiwan was selected from a list published by a semi-governmental organization, the Institute for Information Industry (III, 2005). Questionnaires were sent to top 3000 organizations in Taiwan in 2005 and 889 questionnaires were returned (a response rate of 29.6%). In the absence of objective data on the organizations’ evaluation practices, the IT executives’ perceptions were used. Although there has been some debate regarding the legitimacy of perceptual measures as a proxy for objective measures, re-

search has succeeded in alleviating some of the concerns by showing that perceptual measures of organizational performance has a strong positive relationship with more traditional objective measures (Tallon, et al., 2000). For example, a study by Venkatraman and Ramanujam (1987) showed that there was a high degree of correlation between perceptual and objective performance measures in the process of measuring performance of several competing organizations. Chi-squared Goodness of Fit tests, on industry sector, net revenue, and total number of employees, showed that the sample respondents were statistically similar (at the 1% significance level) to the target population. Late returns were compared with other response received earlier in order to check for non-response bias. No significant differences were detected between two samples (Armstrong and Overton, 1977). Therefore, the respondents can be considered representative of the population as a whole. Most of the information presented below is based on descriptive statistics (i.e., frequencies) but some comparisons between groups were made using crosstabs, ANOVA, and correlation statistics. In the following discussion of results the percentages referred to normally represented the proportion of valid (answered) cases only and did not indicate missing values. A statistical software package, SPSS (v11.05), was deployed to analyze the quantitative data collected through the survey.

Survey Findings and Discussion In the following discussion of results the percentages referred to normally represented the proportion of valid (answered) cases only and did not indicate missing values. Additionally, most of the information presented below was based on descriptive statistics. Overall, the responding Australian organizations were large in revenue and number of employees, typical of the large corporate sector with

1327

IT Outsourcing Practices in Australia and Taiwan

Table 1. Background information of the respondent organizations – industries & IT budget Australia Percent (%)

Taiwan Percent (%)

(a) Industries Wholesale and retail Government and utilities Construction, mining & engineering Health and pharmaceutical services Manufacturing Financial and Insurance Services IT and communication Education Transportation Other Total

18.2 15.3 11.9 11.4 9.7 6.9 6.8 5.1 4.5 10.2 100

25.3 2.1 0.7 1.2 31.7 3.6 20.2 6.6 7.1 1.5 100

(b) IT budget (A$m)