Academic journal article Communications of the IIMA

A Combined Model of IT Outsourcing Partnerships and Success

Academic journal article Communications of the IIMA

A Combined Model of IT Outsourcing Partnerships and Success

Article excerpt


Globalization provides organizations with more options than ever before. Business leaders are continuously encouraged to adapt, reevaluate, and strategically improve processes and approaches. Best practices are reinvented rapidly in an attempt to keep up with market trends. The quest to recognize new methods for increasing revenue has become the inspiration for exploring new management techniques and strategies. Outsourcing is a trend that continues to rise, especially in global markets. Common purposes for outsourcing include improvements to performance, cycle time, cost-savings, market share, productivity, customer service, and quality (Elmuti & Kathawala, 2000) in industries such as information systems/technology, human resource, logistics and administrations, real estate, transportation, marketing, sales and finance (Logan, Faught, & Ganster, 2004). Outsourcing benefits are publicized and cited in business journals and among professional management circles, leading to the commonly held perception that outsourcing holds the key to cutting costs and maximizing productivity. What is less commonly understood, however, are the underlying relationships that exist between outsourcing partners and how the quality of this relationship impacts outsourcing success.

Outsourcing is a strategy whereby companies decide to utilize outside resources for activities that were previously accomplished using internal staff and resources (Elmuti, 2003). As global supply markets have continued to increase, businesses now have the opportunity to reassess which functions are best to remain in-house and those that are suited best for outsourcing (Barthelemy & Adsit, 2003). Most often, the purpose of such a decision is a strategy to reduce cost, improve service, and allow management more time to commit to activities more directly tied to the firm's core strategic goals (Logan et al., 2004).

Outsourcing, however, is not without its challenges. In fact, 75% of U.S. managers admitted that "outsourcing initiatives do not necessarily fulfill all their expectations" (Barthelemy & Adsit, 2003, p. 87). Furthermore, 55% of outsourcing relationships fail within the first five years of implementation and, of the remaining 45%, 12% are unhappy and regret the decision to outsource in the first place (Elmuti, 2003). To add to these bleak statistics, it is often the case that customers express dissatisfaction with the outsourcing decisions as well. Inevitably, a host of factors plays into the lack of success in outsourcing endeavors. Many IT companies consider outsourcing as a quick fix budget cut and select offshore vendors on the basis of cost alone. Although savings can be made by outsourcing, it takes a great deal of effort to have a quality relationship and a successful outcome. Many companies often fail to realize that offshore outsourcing encompasses much more than just the hope to reduce operating costs. Despite the potential benefits, reductions in costs are often unmet and a growing trend toward backsourcing is taking place despite the penalties and costs associated with bringing a process back in-house (Benaroch, Webster, & Kazaz, 2012).

According to project statistics from Aberdeen Group (Drodenbaugh, 2010, paras. 8-10):

  Reducing IT costs is the primary driver behind outsourcing for
  82% of companies in the U.S. But, as Aberdeen continues,

  * Nearly 50% of outsourced projects fail outright, or fail to
  Meet expectations

  * 76% of companies said that vendor management effort and
  costs were much higher than expected

  * 30% reported ongoing issues with outsourcer management
  processes (e.g., inadequate governance and conflict resolution

  * 51% reported that outsourcer was not performing to

  In the end, the average cost savings for projects was a mere 26%.

With outsourcing strategies on the verge of becoming saturated and a continued pressure on profit margins, outsourcing service providers are building even more innovative and often riskier engagement models, including joint ventures, business-outcome based pricing, revenue-sharing arrangements, and dedicated centers of excellence. …

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