From the Vendor's Perspective: Exploring the Value Proposition in Information Technology Outsourcing

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. AbstractTo date, most research on information technology (IT) outsourcing concludes that firms decide to outsource IT services because they believe that outside vendors possess production cost advantages. Yet it is not clear whether vendors can provide production cost advantages, particularly to large firms who may be able to replicate vendors' production cost advantages in-house. Mixed outsourcing success in the past decade calls for a closer examination of the IT outsourcing vendor's value proposition. While the client's sourcing decisions and the client-vendor relationship have been examined in IT outsourcing literature, the vendor's perspective has hardly been explored. In this paper, we conduct a close examination of vendor strategy and practices in one long-term successful applications management outsourcing engagement. Our analysis indicates that the vendor's efficiency was based on the economic benefits derived from the ability to develop a complementary set of core competencies. This ability, in turn, was based on the centralization of decision rights from a variety and multitude of IT projects controlled by the vendor. The vendor was enticed to share the value with the client through formal and informal relationship management structures. We use the economic concept of Levina & Ross/The Vendor's Value Proposition in IT Outsourcing complementarity in organizational design, along with prior findings from studies of client-vendor relationships, to explain the IT vendors' value proposition. We further explain how vendors can offer benefits that cannot be readily replicated internally by client firms.Keywords: Outsourcing of IS, case study, complementarity in organizational design, IS core competencies, management of computing and IS, systems maintenance, IS staffing issues, IS project management Introduction Outsourcing is a phenomenon in which a user organization (client) transfers property or decision rights over information technology (IT) infrastructure to an external (vendor) organization (Loh and Venkatraman 1992b). The brief history of IT outsourcing includes episodes of both high hopes and bitter disappointment. Since Eastman Kodak's landmark outsourcing of its IT services (Applegateand Montealegre 1991), the outsourcing industry has been growing at a staggering rate of about 20 percent a year (Caldwell and McGee 1997). Worldwide spending on IT outsourcing services reached almost $64 billion in 2001; in 2000, IT outsourcing represented about 30 percent of IT budgets (Mason 2000). Despite these numbers, both vendors and their clients are struggling to understand the outsourcing value proposition: can vendors deliver economic and management benefits to their clients th...

Software-as-a-Service Model: Elaborating Client-Side Adoption Factors

“…IT outsourcing is often seen as a result of client's desire to access vendors' economies of scale and scope (McFarlan & Nolan 1995;Ang and Straub 1998;Levina & Ross 2003). At the same time, many large organizations are able to utilize their economies of scale and scope internally (McFarlan & Nolan 1995).…”

“…At the time when business and technical environments are uncertain, IT outsourcing becomes a way of dealing with this uncertainty in both labor and asset ownership as the vendor can deal with demand uncertainty in more efficient fashion (Slaughter & Ang, 1996;Levina and Ross, 2003).…”

“…RBV also implies that if internal IT function of an organization is strong -large, well managed, and strategically aligned with the rest of the organization -then the firm benefits less from accessing vendors' generalized IT competencies (McFarlan and Nolan 1995;Levina and Ross 2003).…”

“…In comparison, work grounded in RBV and production cost economics argue that firms facing higher environmental uncertainty should disintegrate to increase flexibility to adept to change by tapping into vendors' more flexible capacity (Balakrishnan and Wernerfelt 1986;Slaughter and Ang 1996;Levina and Ross 2003). Vendors have comparative advantage in achieving flexibility in response to environmental uncertainty by aggregating demands of multiple clients and by using their specialized agile capabilities (Poppo and Zenger 1998;Quinn and Hilmer 1994).…”

“…When clients' functionality requirements are generic, according to the production cost economics, external service providers can be more efficient in handling these changes as they can pool demand from a number of clients and develop a set of complementary core competencies, such as personnel and methodology development, to handle the environmental turbulence (Levina and Ross 2003;Slaughter and Ang 1996). The cost of such development is justified because of the vendor ability to resell functionality to many clients (Alchian and Allen 1969).…”