Academic journal article Journal of the Association for Information Systems

Managing Flexibility in Outsourcing1

Academic journal article Journal of the Association for Information Systems

Managing Flexibility in Outsourcing1

Article excerpt

Abstract

In recent years, outsourcing has gained considerable management attention. However, the benefits of outsourcing are not without concessions. One major risk is losing the flexibility to change the extent, nature, or scope of the outsourced business services, and such flexibility is strategically imperative in today's dynamic business environment. This paper seeks to clarify the multi-dimensional notion of flexibility in outsourcing by examining robustness, modifiability, new capability, and ease of exit. Adapting from Evans (1991), we also develop a framework to classify existing practices in managing outsourcing flexibility. We go beyond contractual provision to surface a portfolio of pre-emptive, protective, exploitive, and corrective maneuvers. These strategic maneuvers map well to traditional notions in coordination theory, both in advanced structuring through loose coupling and dependency diversification, and in dynamic adjustment through proactive sensing and reactive adapting. We put forward a set of propositions hypothesizing the relationships between the various strategic maneuvers and the different dimensions of outsourcing flexibility, and discuss the moderating impact of such maneuvers on outsourcing success. We hope the greater conceptual clarity will not only contribute to the effectiveness of outsourcing management but also spawn a new research agenda on outsourcing flexibility.

Key words: flexibility, outsourcing, coordination theory, outsourcing success

Introduction

Outsourcing has gained considerable management attention since the 1980s. Traditionally, many non-core, information technology (IT) activities, such as desktop support, call centers, network operations, and application development have been relegated to external service vendors (see Cross, 1995; Clark et al., 1995; Lee et al., 2003). Recent years have seen burgeoning business process outsourcing (BPO), which involves farming out non-core yet mission-critical business processes such as finance and accounting, human resources, and customer support to third-party service providers, often in offshore locations (Linder, 2004). IT largely enables the provision of such services, through web-based interfaces, extensive application support with commercial package software, such as SAP, and reliable network connections. With the promise of reduced cost, improved time to delivery, process streamlining, and strategic repositioning, many organizations have jumped onto the outsourcing bandwagon (Ang and Cummings, 1997). British Petroleum's outsourcing of finance and accounting to Accenture, for example, helped to speed up its post-merger integration of Amoco and Arco. Forecasts by the Gartner Group project strong growth in worldwide outsourcing spending. The IT outsourcing market continues to rise and is expected to hit $260 billion in 2009. Similarly, the current BPO market is estimated to climb from $111.3 billion in 2004 to $172 billion in 2009, growing at a per-annum rate of close to 10%.

However, the benefits of outsourcing are not without concessions. One major issue is the loss of flexibility, the ability to change the extent, nature, or scope of the business services that outsourcing delivers. Such flexibility in an outsourcing relationship is crucial to respond to uncertainty or to changing needs or requirements outside the provisions of the original outsourcing agreement. This is particularly pertinent in today's competitive and dynamic environment, as flexibility is increasingly becoming a strategic imperative for business survival (Suarez et al., 1995).

Traditionally, outsourcing flexibility is managed primarily through careful contracting, as management is often advised to craft short-term, airtight contracts to control for anticipated changes (Lacity, Willcocks, and Feeny, 1995; Fitzgerald and Willcocks, 1994; Saunder et al., 1997). Much of the literature dealing with flexibility in outsourcing arrangements emphasizes careful upfront contractual provisions. …

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