Wednesday, November 30, 2011

Governance Factors Related to the Outsourcing Organization

Attention to IT within Business Units

The outsourcing objectives are not always equally clear to everyone involved within the outsourcing organization (KPMG Impact, 1995). This doesn't enable achieving governance in IT outsourcing partnerships. It is therefore the task of the CIO, as well as senior management, to communicate these internally. The outsourcing objectives of outsourcing organizations are often focused on cost savings (Morgan & Chambers, 2001; Outsourcingproject, 2002). This is not necessarily in line with the information needs of the business units of the outsourcing organization.


Expert 5: "there needs to be awareness within the organization <the outsourcing organization>, of what the objectives are, and probably not only by the CIO, but also by corporate management."


Building on this, business units should no longer judge IT on the basis of costs, but on the basis of its added value. A shift must take place from the minimization of costs to the maximization of business impact (Kotwica & Field, 1999). Lacity and Willcocks (2001) support this transformation, albeit with a somewhat different nuance. This transformation is related to the changing role of IT. The role of IT is shifting from the support of non-primary processes to IT that forms part of the products or services that are provided by the outsourcing organization, such as in-product software. Another example is provided by Willcocks and Plant (2001): UPS has a track and trace Internet application which allows clients to track their shipments during transport. When business management pays proper attention to IT, the organization is able to anticipate needs in a timely fashion. In view of the ever-decreasing time-to-market, it is not an excessive luxury to involve IT proactively in the development of new products and services. This line of thought fits into the observations made by Gerrity and Rockart, who already in the mid-80s concluded that line managers feel themselves to be increasingly responsible for IT (Gerrity & Rockart, 1986). It also fits in with the suggestion made by Earl that IT can be used "to develop new business" (Earl, 1987).

Business Manager, Firm 5: "We specifically involve our information managers in our product creation process. This helps us to prevent IT from becoming a bottleneck when we are ready to introduce new products."


The management of the outsourcing relationship is the responsibility of the CIO and IM. This concept is further developed. However, it is important for business management to devote proper attention to the outsourcing relationship (Willcocks & Fitzgerald, 1994; Klepper & Jones, 1998). Attention to the outsourcing relationship on the part of business management has a positive influence on the management of outsourcing relationships (Quinn & Hilmer, 1995). Gartner supports this position and adds: [business management] "must actively manage their side of the partnership" (Terdiman, 1991). To retain business management's attention, the type of reporting about the IT services delivered is very important and must be consistent with the type of reporting units that business management is familiar with (Katz & Katz, 1966; Feeny, Willcocks, & Core, 1998).


A Clear IT Strategy

IT strategy is defined as the strategy of the outsourcing organization in relation to its information technology and IT services, and the role these play, or will play, within the outsourcing organization. This is consistent with the definitions put forth by Zani (1970), McLean and Soden (1977) and King (1978). The development and implementation of the IT strategy is the responsibility of the Chief Information Officer (CIO). An IT strategy is essential because organizations are able to implement new technologies within their organization on the basis of this strategy, and will subsequently be able to derive strategic benefits from this (Porter & Millar, 1985; Earl, 1987). From a governance perspective it is important to create alignment between the business and IT. The IT strategy can be a facilitating factor in accomplishing this (Henderson & Venkatraman, 1993). Furthermore, organizations are well advised to incorporate their sourcing strategy into the IT strategy: how does the organization intend to deliver the required IT services in support of business operations (Currie & Willcocks, 1998)? This issue requires continuous attention from the CIO (Grigg & Block, 2002).


The development and implementation of an IT strategy is not easy. Through the development of different scenarios it is possible to reduce uncertainty (Emery & Trist, 1965; van der Heijden, 1996). Scenarios can also be used for the development of an IT strategy (Rosser, 1998; van der Zee & van Wijngaarden, 1999). Among others, Gartner and IDC also work with scenarios.

It is important to emphasize that responsibility for the development of the IT strategy lies with the outsourcing organization itself (KPMG Impact, 1995). The capacity for executing this responsibility is denoted as IT/IS leadership by Feeny and Willcocks (1997c). Gartner also views the transfer of responsibility for developing an IT strategy to someone else as a high risk: "retain control of, or be able to influence, strategic technology issues and directions" (Terdiman, 1991). It is possible, however, to involve external consultants in the formulation of an IT strategy. The use of external consultants may be considered as a means of supplementing a shortage in required capacity and for hiring specific knowledge that the organization is not able to develop and/or maintain itself.

Business Director, Firm 1: "You do the following <when developing an IT strategy>, you throw out some ad hoc questions and you ask for some research to be conducted. In some instances a project manager from the consultancy firm may be involved. You use this person to test your ideas. However, the situation must not be such that the external consultant jointly determines your IT strategy."


Information Management as the Link between Business Units and IT Suppliers

The information manager is responsible for the alignment of the demand for IT services by the outsourcing organization's business units with the services provided by the IT suppliers (Quinn, Doorley, & Paquette, 1990). The information manager is furthermore responsible for the IT outsourcing partnership and supports the Chief Information Office (CIO) in the implementation of the IT strategy (Corbett, 1994; McFarland & Nolan, 1995). The effort required on the part of outsourcing organizations to manage the IT outsourcing partnership is substantial. The cost of the effort expended by the information management function is between 2% and 10% of the contract value (Aylott, 2002).


In order to be able to properly carry out these tasks, information managers require knowledge of the business operations, as well as IT (Willcocks & Fitzgerald, 1994; Kitzis, 1998). Many outsourcing organizations have difficulty finding qualified candidates to carry out these functions (Heckmann, 1999).

Expert 3: Three months ago <2000> I was doinga presentation at a conferenceand resourcing the information management office was one of the major discussions that took place. There were a lot of vendors <IT suppliers> and major user organizations <outsourcing organizations>. What most of the user organizations came up with, they were saying it's so hard. To find people who have experience or expertise with this supplier management model, that are able to manage multiple suppliers in particular."


It is important to ensure there exists a strong information management function that can provide a counterbalance to business unit management. Lacity and Hirschheim (1995a) refer to this as "senior management must empower IS <meaning information management> to implement changes."


A Properly Functioning Chief Information Officer

The Chief Information Officer (CIO) is responsible for the development and implementation of the IT strategy and carries final responsibility for the IT outsourcing partnership relationships (Earl & Feeny, 1997a; Kotwica & Fields, 1999; Lacity & Willcocks, 2001).


In order to be able to provide proper direction to their responsibilities, which includes safeguarding the governance of the IT outsourcing partnership, it is important that in addition to their knowledge of information technologies, both the CIO and the information managers also understand the business operations and developments in the markets in which the outsourcing organization is active or intends to become active (Willcocks & Fitzgerald, 1994; de Looff, 1996; Kitzis, 1998). A CIO could also play an important role in the alignment of business operations with IT. Many organizations set up an IT Board for this purpose. Gartner refers to these boards as coordinating committees: the business-IT strategy committee (Dreyfuss, 2002). This is an organization-wide steering committee in which all business units and information management is represented and which is chaired by the CIO. The IT Board is able to explore the political field of influence and decisions concerning the IT services to be provided can be prepared and discussed here. All case studies analyzed included the use of some kind of IT Board.

Account Manager IT Supplier, Firm 2: "My customer has an IT Board that functions as kind of an awareness club for different business functions, including purchasing, sales and transportation. Due to the fact that all divisions are represented, there exists strong support for preparing decisions about the IT services to be provided."


To ensure that the CIO is able to function properly, it is also essential that the CIO function be positioned at the proper level within the organization. Outsourcing organizations are ill advised to place the CIO on the Board of Directors. Responsibility for providing IT services is an integral responsibility of the entire Board of Directors. The CIO should therefore report to one of the members of the Board of Directors (Earl & Feeny, 2000). A trend is being observed in this regard which shows that an increasing number of CIOs are directly reporting to the Chief Executive Officer instead of to the Chief Financial Officer or to the Chief Operating Officer (Kotwica & Fields, 1998).

Expert 1: "Anyone who'd like to play the role of an entrepreneur, and this should include all members of the Board of Directors, must simply possess understanding and knowledge <about the IT function> and maybe then you can simply turn over the service aspects to the CIO. But the understanding of technology, what that <technology> can do for the business, I think that this will become an integral part of entrepreneurship."

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