At an industry event recently, a colleague was relating to me a conversation she’d had with a senior executive about their organisation’s decision to outsource a certain part of their IT support requirements, and the unsatisfactory results of that decision. When my colleague asked the executive why they had chosen to outsource that function, he replied, “well, I just thought it would be better that way, I thought they were the experts”.
It occurs to me that this is a not an uncommon scenario: stories of unsatisfactory outcomes from outsourcing IT abound. Indeed, in our own Northern Territory there was recently a Parliamentary enquiry into the spectacular failure of a major IT project.
But there are also many successful stories: Dialog, a local IT company, has been providing outsourced IT support services to a major Government department for 17 years. The firm I work for, Simient, built a core system for a major Government department and has continued to support it with excellent levels of customer satisfaction for over ten years. Another company, SRA, was able to capitalize on and develop the IP for a system it developed for a major client through an outsourcing arrangement, and has exported that system nationally and across the globe.
So how do executives know what to outsource, and when, and how? What can they use to inform their decision to outsource or not, and what model of outsourcing to choose? It occurs to me that it would be beneficial for executives to have more empirical decision framework to reference and inform their outsourcing decisions.
And it turns out there is one.
A “Review of 23 Years of Empirical Research on Information Technology Outsourcing Decisions and Outcomes” published in January 2017 identifies specific and tangible determinants of IT outsourcing outcomes: in short, the authors identify, based on 23 years of empirical evidence, what works, and what doesn’t, and provide guidance on when to outsource, and when not to.
They identify 29 factors that will reliably predict the success or otherwise of an IT outsourcing decision. The determinants of IT outsourcing outcomes are grouped into seven main themes of:
– Relational Governance
– Contractual Governance
– Provider Firm Capabilities
– Client Firm Capabilities
– Client Firm Characteristics
– Decision Characteristics
– Transaction Attributes
Whilst there has in the past been a tendency to ‘blame’ failed initiatives on the outsourced service provider, importantly this research identifies that there are clear and important attributes in the client firm as well as in the outsourced provider firm that impact on whether an outsourcing initiative will be successful.
The most significant factors on the client side are:
– Top management commitment / support (100%)
– Provider management capability (100%)
– Contract management capability (100%)
– Client outsourcing readiness (100%)
– Transition management capability (100%)
The most significant factors on the service provider side are:
– Client management capability (100%)
– Technical and methodological capability (88%)
Interestingly, on the provider side, domain understanding (that is, knowledge of the specific domain or sector the client works in) is not significantly important.
Across the studies, clients struggled to get good sourcing outcomes under conditions of high uncertainty, high measurement difficulty, and for IT services that were highly complex; but these factors were less important than the relationship factors.
Contracts and measurement are important but relationships, it seems, are even more so. Turns out the two single biggest predictors of success (100% hit rate) are
– Knowledge sharing – “the degree to which clients and providers share and transfer knowledge”; and
– Communication – “the degree to which parties are willing to openly discuss their expectations, directions for the future, their capabilities, and/or their strengths and weaknesses”
and closely followed by
– Trust – “the confidence in the other party’s benevolence”;
– Partnership view – “a client organization’s consideration of a provider as a trusted partner rather than as an opportunistic vendor”; and
Organisations entering an outsourced arrangement – either on the client or the service provider side – that do not embody, or do not have a culture that supports knowledge sharing, communication, trust, and a partnership view are almost certain to fail whilst those that do, such as the company I work for, are almost certain to succeed.
