Critical success factors from IT outsourcing theories: an empirical study
| DOI | https://doi.org/10.1108/02635570510606941 |
| Pages | 685-702 |
| Published date | 01 August 2005 |
| Date | 01 August 2005 |
| Author | Petter Gottschalk,Hans Solli‐Sæther |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Critical success factors
from IT outsourcing theories:
an empirical study
Petter Gottschalk and Hans Solli-Sæther
Norwegian School of Management, Oslo, Norway
Abstract
Purpose – This research paper aims to identify and rank critical issues in IT outsourcing
relationships.
Design/methodology/approach – A total of 11 management theories were applied in this research:
theory of core competencies, resource-based theory, neo-classical economic theory, transaction cost
theory, contractual theory, agency theory, partnership and alliance theory, relational exchange theory,
stakeholder theory, social exchange theory and theory of firm boundaries. The main method used is
case studies and survey. Case studies were conducted in three IT outsourcing relationships: ABB-IBM,
SAS-CSC, and RR-EDS.
Findings – Core competence management and stakeholder management were found to be the most
critical success factors. Future research should focus on one or two theories, explicitly laying out
expectations with respect to the theories, and organizing rich data to test expectations.
Originality/value – This paper demonstrates that a holistic approach to IT outsourcing is needed
that recognizes and emphasizes the combination of several critical success factors. The theory-based
factors have both divergent and convergent implications for management.
Keywords Critical success factor, Communication technologies, Outsourcing, Case studies, Research work
Paper type Research paper
Introduction
Information technology (IT) outsourcing is the practice of turning over all or part of an
organization’s IT functions to an outside vendor. Although IT functions never have
been more important to business success, outsourcing is developing in an
unprecedented rate. To understand this trend, we have conducted an extensive
literature review. We have identified a total of 11 theories that help explain why IT
outsourcing is occurring worldwide. These theories are presented first in this paper.
Based on these theories, we developed 11 critical success factors in IT outsourcing, one
for each theory. These factors are presented next in this paper. We developed the
following research question:
RQ1. How do practitioners rank critical success factors based on outsourcing
theories?
To study this research question, we developed a survey instrument and conducted a
survey among business organizations. Results from this survey and discussion of the
results are presented in this paper.
IT outsourcing theories
The 11 theoretical perspectives presented may help to understand IT outsourcing
practices in different settings.
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factors
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pp. 685-702
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DOI 10.1108/02635570510606941
Theory of core competencies
Core competencies theory suggests activities should be performed either in house or by
suppliers. Activities, which are not core competencies, should be considered for
outsourcing with best-in-the-world suppliers. Some non-core activities may have to be
retained in houseif they are part of a defensive posture to protect competitiveadvantage.
Although some authors indicate characteristics of core competencies, most of the
literature on this subjectseems tautological – core equals key or critical or fundamental.
Employees in non-core functions (even if not facing outsourcing) may feel excluded by
the organization because they are a non-dominant discipline. For example, information
technology employees working on web based legal services in a law firm may feel
excluded by lawyersin the firm. In the public sector, there may be particularuncertainty
about what is core; and it has been suggested that government may aim to discover its
core competencies via a residualisation process – outsourcing until and unless the shoe
pinches, or a political backlash is triggered (Hancox and Hackney, 2000).
An organization may view IT itself as a core competence. It seems tha t most
successful companies have a good understanding of IT’s potential. However, som e
organizations outsource IT even though they see it as core and delivering competiti ve
advantage. This may be because IT can be considered core at the corporate level, but
some of its aspects, at lower levels, might be commodities. Thus, the complexity of IT,
and it’s (at least in part) core nature, may make the contracting out of IT a particularly
challenging exercise. The ability to define IT requirements and to monitor their
delivery by third parties may be some of the core IT competencies that any
organization must have if it is to outsource IT successfully. It can even be argued that
the very acts of specifying and managing supply contracts can themselves give
competitive advantage (Hancox and Hackney, 2000). Outsourcing of non-core
competencies will continue to be important, as such arrangements place
responsibilities, e.g. for IT, logistics or production functions, in the hands of the
constituent most capable of performing these successfully (Chandra and Kumar, 2000).
Resource-based theory
According to the resource-based theory of the firm, outsourcing is a strategic decision,
which can be used to fill gaps in the firm’s resources and capabilities (Grover et al., 1998).
Firms develop firm-specific resources and then renew these to respond to shifts in the
business environment. Firms develop dynamic capabilities to adapt to changing
environments. According to Pettus (2001), the term dynamic refers to the capacity to renew
resource positions to achieve congruence with changing environmental conditions. A
capability refers to the key role of strategic management in appropriately adapting,
integrating, and reconfiguring internal and external organizational skills, resources, and
functional capabilities to match the requirements of a changing environment.
The essence of the resource-based theory of the firm lies in its emphasis on the
internal resources available to the firm, rather than on the external opportunities and
threats dictated by indus try conditions. Firms are considered t o be highly
heterogeneous, and the bundles of resources available to each firm are different.
This is both because firms have different initial resource endowments and because
managerial decisions affect resource accumulation and the direction of firm growth as
well as resource utilization (Løwendahl, 2000). The resource-based theory of the firm
holds that, in order to generate sustainable competitive advantage, a resource must
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