Managing Information Technology Outsourcing

Erik Beulen, Pieter M. Ribbers

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000469721
• Edition: 3
• Topic: Business
• Subtopic: Information Management
• Index: Business

For decades, outsourcing has been a major international phenomenon in business. The areas of Technology, Information Technology and Management represent a unique case for outsourcing both in terms of benefits and potential interorganisational problems.

This fully updated text has been brought up to date with this new landscape, including discussion of Robotic Process Automation, Internet of Things, cloud computing, low code and DevOps and agile. With a range of new global case studies in manufacturing, logistics, chemical industry and cloud services, this textbook offers a strong grounding in real-world industrial experience that effectively combines theory with practice. Uniquely, this book focuses on both sides of the outsourcing relationship, providing a balanced exploration of the ways in which these partnerships can be managed successfully.

Accessible and cutting-edge, the third edition of Managing Information Technology Outsourcing provides an in-depth, practical perspective on this important and far-reaching challenge in information technology management. It is an ideal text for students, academics and practitioners alike.

1 Market trends in Information Technology outsourcing

DOI: 10.4324/9781003223788-1

The Information Technology (IT) outsourcing timeline, starting in the 1960s, provides the foundation for this chapter. To shed some light on market trends, historic landmark deals are detailed, such as Eastman Kodak (1989) and British Petroleum (1993), as well as market collaborations, including General Motors and EDS (1984–1996) and Philips and Atos (1989–2005), at that time BSO followed by Origin in 2000. The market trends in IT outsourcing are dictated by digital transformations requirements – basically, an unprecedented need for innovation and speed. What can be learned from these great case studies?

1.1 Introduction

In essence, there are three components in Information Technology (IT): services, hardware and software. The boundaries between these components have never been very clear, and they have and will change over time. What will not change is the shortage of skilled professionals and constant innovation. This sets up the context for IT outsourcing. The below timeline is far from complete but paints a picture over the decades of this still young industry.

1960–1970s. IT outsourcing started in the 1960s by time-sharing of processing power, predominantly consumed by large corporates. Also, universities were early adopters as processing power increased the efficiency of their research, besides IT being a research object. Electronic Data Systems (EDS), founded in 1962, was one of the leading suppliers together with IBM, which was also the dominant hardware and software provider. The IT outsourcing market continued to grow steadily, predominantly regionally and nationally.

1980s. Due to their international presence and scale, IBM and to a lesser degree EDS started to expand in the 1980s in providing mainframe data centre services to clients across multiple countries. The international presence of EDS started in the Middle East in 1976 with King Abdulaziz University in Saudi Arabia and the government of Iran. In Europe, Hoskyns, founded in 1968 and acquired in 1990 by Capgemini, signed a large IT outsourcing agreement with the Greater London Council in 1986. In 1989, IBM and Eastman Kodak signed an IT outsourcing contract including the building of a dedicated data centre.

1990s. Meanwhile, the reputation of outsourcing was crumbling, due to job insecurity and quality of service concerns. The dominant reason to outsource was the belief that IT is not part of the core competencies of organisations. All IT outsourcing contracts were first-generation contracts. The transfer of staff was an important topic in negotiating and closing deals. Most deals were contracted “as-is” – the supplier continued to provide the service. Contracting “as-is” fuelled the debate about the desirability of IT outsourcing.

2000s. In this decade, transformational IT outsourcing contract began to emerge. Improving the services by a pre-agreed transition plan and adjusting the contracted services over time became easier.

The rise of Indian suppliers was very apparent, e.g. Infosys, Tata Consultancy Services (TCS) and Wipro. Labour arbitrage was the name of the game. In parallel, the traditional suppliers are also ramping up delivery centres in low-cost locations, including the Philippines, Central America and Eastern Europe. Large organisations also began setting up their captive centres, which for the non-IT organisations was an intermediate step towards outsourcing, e.g. Bayer Business Services’ captive IT service centre in Mumbai, India, with around 550 employees was transferred to 2012, and Cognizant acquired UBS India Service Centre, including 2,000 associates for $75m in 2009/2010. Most shared service centres lacked scale, except for the shared service centres from technology companies, and faced high attrition and recruiting challenges.

An increasing number of IT outsourcing contracts were second generation, and changing suppliers was perceived as risky. At the end of the initial IT outsourcing, contracts are renegotiated; this included adjusted services, including service levels and pricing. Also, the terms and conditions were discussed as part of these renegotiations.

2010s. Traditional suppliers continue to grow, some predominantly by autonomous growth, e.g. Accenture from 204,000 employees in 2010 to 492,000 employees in 2019, and others by acquisitions, e.g. Atos acquiring Siemens IT Solutions and Services (2011) followed by Siemens Convergence Creators (2018) and CGI acquiring Logica in 2012. The Indian services also continue to grow and in some cases merge, e.g. Satyam and Tech Mahindra, due to Satyam fraud followed by public auction of 46% of Satyam in 2009 and a merger in 2013. TCS grew from 160,000 employees in 2010 to 446,000 employees in 2019, whereas Wipro grew from 120,000 employees in 2010 to 170,000 employees in 2019.

The argument to provide services from nearshore or offshore locations has changed from cost-efficiency to access to capabilities. Furthermore, significant investments are made in certification (think ISO and CMMi for individuals) to ensure quality and bridge time zone, language and cultural barriers.¹

Also, the deal size is reduced. Currently, there are fewer global 5+-year full outsourcing deals. Shorter tower deals by region came into fashion. However, suppliers lock-in reduces complexity and management effort required is increasing.

In addition, cloud services are an integral part of the offerings, including Infrastructure as a Service, Platform as a Service and Software as a Service. The services are pay-as-you-go, which is aligned with the increasing need for flexibility in digital transformations. Many organisations are in jeopardy. The threat from start-ups and platform companies triggers the need for digital transformations. The ecosystem, including technology partners, needs to be built and is based on an added value instead of straightforward client–supplier relationships.

1.1.1 Software

Cloud services are dominant in software. All software providers transform their transaction models to subscription models. Despite offering full flexibility, this also helps outsourcing organisations to avoid incompliance, e.g. using unlicenced software.

There is constant consolation of software providers, and start-ups and scale-ups are acquired to incorporate their functionality. Larger acquisitions result in increased market shares. Let us take a closer look at Oracle’s acquisition of Peoplesoft (2005), Siebel (2006), BEA Systems (2008), Sun Microsystems (2010), Taleo (2012), MICROS Systems (2014), NetSuite (2016) and CrowdTwist (2019) and many more. It is an integral part of their strategy²:

Through our acquisition activities, Oracle seeks to strengthen its product offerings, accelerate innovation, meet customer demand more rapidly, and expand partner opportunities. An integral part of Oracle’s Mergers and Acquisitions philosophy is our consistent commitment to customer service and product support while achieving our financial return objectives and creating value for our shareholders.

1.1.2 Hardware

Manufacturing of hardware is capital-intensive and must deal with shortage of raw materials, such as silica sand, iron ore, gold and bauxite. Recycling hardware is therefore essential. The manufacturers include Apple, Cisco Systems, Dell, Fujitsu, HP, Hitachi, IBM and Toshiba and many more. The demand for “as a service” has significantly increased. Because of this increase, the hardware manufacturers’ position in the value chain is downgraded. This increase for “as a service” demand has started with processing, storage, network and printing devices but is currently also entering into the area of office devices. Underneath, there are many component manufacturers – think CPUs, dynamic random-access memory, fans, hard disk drives, network cards and video cards. These entire ecosystems and the value chains are not visible for outsourcing organisations entering in or engaged in IT outsourcing contracts.

1.1.3 Market size

Many analyst companies estimate the market size and IT spending for decades. Definitions and data collection are not an exact science, and cost allocation by outsourcing organisations is not straightforward, as IT costs are not only in the central IT unit.

The current size of IT spending was in total $3.7 trillion in 2019 – 1% growth.³ Due to COVID-19, Gartner expects an 8% decline in 2020; this includes increases in cloud-based telephony and messaging (+8.9%) and cloud-based conferencing (+24.3%).⁴ Also, external spending is increasing. IT services market grew 7.2% in 2019.⁵ Gartner’s market analyses are in line with other analyst companies such as Everest, Forrester and ISG.

1.2 Historic landmark deals and collaborations

To understand the IT outsourcing market better, this section details first the Eastman Kodak 1989 contract and subsequent developments, second the British Petroleum (BP) 1993 contract and third the EDS–General Motors (GM) and BSO/Origin (Atos)–Philips collaboration. The objectives and deal constructs are then detailed.

1.2.1 Eastman Kodak

Eastman Kodak signed in 1989 a landmark outsourcing deal with IBM.⁶ The deal was, as with any outsourcing deals at that time, infrastructure-centric. The deal included the building and maintenance of data centres and the transfer of Eastman Kodak staff to IBM’s Integrated Systems Solution Corporation (ISSC). The Eastman Kodak requirements are detailed in the contract. IBM set up dedicated service delivery teams to provide the services to their client. The dominant motive of Eastman Kodak was cost reduction, as IT was perceived as non-core. The cost savings were backed in over the contract duration. IBM fully benefits from efficiencies. At that time, IT was not about service (quality) or about security,⁷ or compliance. There was also no concern about job losses in the US.⁸ All the transferred Eastman Kodak employees became IBM employees, with no transfer of service to low-cost countries.

This landmark deal initiated an IT outsourcing snowball effect; many companies followed the strategy of Eastman Kodak and outsourced their infrastructure services.⁹ The dominant suppliers at that time were Anderson Consulting, CSC, DEC, EDS and IBM.¹⁰ This deal was also for IBM an important win against EDS, the market leader at the time. It was also the continuation of a long-term relationship. In 2005, Eastman Kodak signed a five-year agreement to provide a broad range of business support services. IBM will operate a broad range of business support functions for Eastman Kodak, including payroll services and credit and collections management. The objectives are a combination of cost reduction and increased business flexibility and responsiveness.¹¹

The industry has changed, and so has Kodak: “The Kodak name is recognized around the world for its long he...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• 1 Market trends in Information Technology outsourcing
• 2 Theoretical foundation
• 3 Changing business models
• 4 IT strategy and IT outsourcing
• 5 IT services: demand and supply
• 6 Information Technology innovation and outsourcing
• 7 Transitions and contracts
• 8 Governance of IT outsourcing
• 9 Governance factors
• 10 Contracting and managing agile software development and DevOps
• 11 Compliance
• 12 Looking forward
• Index