Outsourcing and why relationships need to be managed and
how trust becomes an important contributor to outsourcing
relationships
Brian Sugrue
Supervisor: Dr. Pamela Abbott
Subject Area: Outsourcing
University: UCD Michael Smurfit School of Business
August 2007
“A research paper submitted in partial fulfilment of the requirements for the Masters of
Business Studies Degree in Management Information Systems”
Table of Contents
Introduction
- Background
Page
3
3
Purpose of Research Essay
Research Questions
5
5
Literature Review
7
7
8
9
- Overview
- Evolution of Outsourcing
- Shift to Relationship Management
I.T. Outsourcing: Relationship Management
- McFarlan and Nolan
10
10
Important Factors to consider when outsourcing
12
1) Cultural Issues
- Cross-cultural Management Practices
2) Distance/Time Zone Issue
- Negative Effects
- 75/25 Rule of Thumb
- Synchronous Communication
3) Mutual Understanding Issue
- Relationship Managers
4) Virtual Teams and Trust Issue
- Managing Virtual Teams
12
12
13
14
15
15
16
17
17
18
5) Psychological Contract Issue
19
Cases
21
21
22
23
BP Exploration
Campbell Soup and IBM
Accenture
Conclusion
24
Bibliography
25
Introduction
“For some time there has been widespread acknowledgement that information technology
(IT) has become the engine that drives the modern organisation. Over the last decade,
one of the more widespread developments in meeting an organisation’s IT needs is the
growth in the practise of outsourcing.” (Dibbern et al., 2004)
There is no doubting that IT Outsourcing has become extremely prevalent over the past
decade and a half with big multinationals and also smaller companies across the globe
willing to build a relationship and trust a vendor domestically or in a foreign country with
their IT functionalities. IT outsourcing has become one of the popular strategies adopted
by modern day businesses to manage their information systems (Gonzalez et al. 2006).
An outsourcing strategy developed by a company coincides with a company’s ebusiness
strategy as it is upping the ante of their ebusiness competitiveness (Lee et al., 2003).
I am going to examine the numerous different areas which I feel should be dealt with
when making the outsourcing decision. These areas include, the relationships that are
developed when dealing with the vendor, the cultural issues that must be dealt with when
outsourcing to another country and the distance and time zone issues which are important
when working with a vendor in another country. Additionally I will discuss how
developing a mutual understanding is important in the relationship with the vendor, and
that the management of virtual teams hinges on developing trust between the vendor and
the client.
Finally I will deal with the psychological contract and how it can be as important as the
written formal contract. I will then come to the conclusion that once the outsourcing
decision is made, managing the different issues requires a relationship to develop and I
will also show that trust becomes an important contributor to a successful relationship.
Background
Outsourcing has become a new innovation as it is a new way of governing a company’s
IT systems. It involves the transfer of property or decision rights over the IT
infrastructure by a client to an external organisation such as a technology vendor or a
systems integrator (Loh, L. and Venkatraman, N. 1992)
The first example of an IT outsourcing arrangement was Kodak’s 1989 outsourcing deal
with IBM which was worth nearly $250 million, where IBM took over the work carried
out by four Kodak centres and simultaneously three hundred Kodak workers became
IBM employees (Loh, L. and Venkatraman, N. 1992). As a result of this agreement the
number of outsourcing contracts surged as it provided a major impetus for managers in
other companies to seriously evaluate outsourcing as a business option (Loh, L. and
Venkatraman, N. 1992).
Ever since Kodak’s strategic decision to outsource such a fundamental part of its
business, outsourcing has become a worldwide phenomenon. As a result of this,
companies across the globe have extended their boundaries in order to search for the ideal
partner to help them design, develop and maintain their information systems.
But why do firms have to outsource? The rationale for outsourcing stems primarily from
a requirement to reduce costs but also to make more efficient use of a company’s human
resources, and improved access to more advanced technologies (Lee et al., 2003).
Furthermore an improvement in telecommunications infrastructure, coupled with a lower
cost base in developing countries, has resulted in numerous companies outsourcing their
IT needs to centres outside their home country (Rao, M. 2004).
This strategy of outsourcing a company’s IT capabilities leads to numerous issues which
each individual company has to deal with. If companies are outsourcing to another
country cultural issues become important as do distance and time zone differences and
these issues will be dealt with throughout this paper.
When companies decide that they are not going to perform their IT functions in-house
developing a relationship with a vendor can help in overcoming these issues. These
relationships can take the form of a co-operative partnership which is an important
element in information technology outsourcing or the client can enter into a strategic
alliance because as more major decisions and areas are outsourced, a client organisation
will need to develop long-term trust relationships with its vendor (Willcocks, L. and
Choi, C.J. 1995).
Purpose of Research Essay
The purpose of this research essay is to explore why relationships need to be developed
and to demonstrate that trust can be an important contributor to an outsourcing
agreement.
I feel that the research that has been done on this subject has been limited in content due
to the fact that the majority of the initial literature dealt with best practices in outsourcing
and it is only in the past decade or so that relationship issues have become prevalent.
Trust in any relationship is vital. Lack of trust has been cited as one of the reasons for the
failure of a number of outsourcing relationships (Sabherwal, R. 1999).
The sociologist Anthony Giddens defines trust as: “…confidence in the reliability of a
person or system, regarding a given set of outcomes or events, when that confidence
expresses a faith in the probity or love of another, or in the correctness of abstract
principles.” (Giddens 1990: 34) Thus, if the client has the confidence and faith in the
integrity of the vendor, they will trust the vendor to carry out the outsourced IT activities.
Trust is important in any relationship, especially when one company is outsourcing a
substantial proportion of its IT capabilities to another company it may have just got to
know. I will show how trust can become an important contributor to an outsourcing
relationship particularly when dealing with distance between client and vendor and also
when trying to manage virtual teams (Ross, J. 2006).
Research Questions
The two main questions that this research essay will attempt to answer are:
1) Why does the management of a relationship become important between client
and vendor?
2) How does trust become an important contributor to a successful relationship?
I will try to answer these questions throughout this research essay from analysing
outsourcing literature that varies in its coverage of the relationship issues from very
tangential to very in-depth. Additionally, having developed these questions, I believe that
the area of relationship management and outsourcing needs to be viewed from a different
angle than it has been, looking at how the important contributors such as trust help
develop a successful relationship. This research essay attempts to demonstrate how
important trust is between clients and vendors in an outsourcing contract. Increasingly
organisations must realise that if they are going to outsource some or all of their IT
functionalities to an external vendor, they must try and develop a mutual understanding
with the vendor in order for the relationship to be a success (McFarlan, F.W. and Nolan,
R.L. 1995).