Origins of Outsourcing
Roman Empire (approx. 150 B.C.)
Tax farmers (Publicani) were used to collect taxes from the provincials. Rome, in eliminating its own burden for this process, would put the collection of taxes up for auction every few years. The Publicani would bid for the right to collect in particular regions, and pay the state in advance of this collection. These payments were, in effect, loans to the state and Rome was required to pay interest back to the Publicani. As an offset, the Publicani had the individual responsibility of converting properties and goods collected into coinage, alleviating this hardship from the treasury. In the end, the collectors would keep anything in excess of what they bid plus the interest due from the treasury; with the risk being that they might not collect as much as they originally bid.

Origins of Outsourcing
Early American History
The production of wagon covers
Was outsourced to
Scottish
Manufacturers
Who used raw material imported from
India

Origins of Outsourcing
Manufacturing Organizations
• Outsourcing remained popular in manufacturing with part of the assembling being subcontracted to other organizations and locations where the work could be done more efficiently and cheaply
• Pastin and Harrison (1974) wrote that such outsourcing was creating a new form of organization which the termed the “Hollow Corporation”
(An organization that designs and distributes, but does not produce anything)
• Now : Virtual Organizations
The world’s largest supplier of telecommunications product; manufacturer of none

Origins of Outsourcing
IS/IT Outsourcing
• In the early 1960’s Electronic Data Systems (EDS) in
Dallas, Texas, approached large corporations to get them to outsource their data processing services. for his data processing services.
• Perot was refused 77 times before he got his first contract
• EDS received lucrative contracts from the U.S. government in 1963, computerizing Medicare records.
• EDS went public in 1968 and the stock price shot up from $16 a share to $160 within days.
• In 1984 General Motors bought controlling interest in EDS for $2.4 billion.
• In 1996, GM spun off EDS as an independent company and became one of its largest clients.
• In 2008, Hewlett-Packard acquired EDS for $13.9 billion.
• In 2009, EDS (renamed HP Enterprise Services), employed 139,000 people in 64 countries, the largest locations being the United States, India and the UK. It was ranked as one of the largest service companies on the Fortune 500 list with around 2,000 clients..

Origins of Outsourcing
IS/IT Outsourcing
• On Oct 2, 1989, Eastman Kodak announced that it was outsourcing its information systems (IS) function 1989 to
IBM (IBM Global Services' first customer)
• That year, the head of IT at KODAK was named information chief of the year by CIO Magazine.
Katherine M. Hudson
• Eastman Kodak’s decision to outsource the information technology systems that undergird its business was considered revolutionary in 1989, but it was actually the result of rethinking what their business was about.
• "She led Kodak to what was a counterintuitive move for the time: She showed that running data centers was no more a core competency of Kodak's than running a power plant would be," says F. Warren McFarlan, senior associate dean and professor in the Advanced Management Program at the Harvard Business School.
• While Kodak signed on with IBM to outsource its mainframe data management,
Kodak chose to outsource the provisioning of its PC purchases to desktop systems-integration firm Businessland Inc. and its network operations to Digital
Equipment Corp.
• IBM has since taken over Digital's role and now provides direct PC sales to
Kodak as well.

Outsourcing Today (These figures are dated)
• 2003: $178 Billion
• 2007: $235 Billion
• 2008: $261 Billion
• IT outsourcing is estimated to be 67% of all outsourcing deals

Areas for IS/IT Outsourcing
• Programming, Software testing, and software maintenance;
• IT research and development;
• High-end jobs such as software architecture, product design, project management, IT consulting, and business strategy;
• Physical product manufacturing—semiconductors, computer components, computers;
• Business process outsourcing/IT Enabled Services—insurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial analysis and reading of X-rays
• Call centers and telemarketing.

Drivers of outsourcing/offshoring*
• Rapid expansion of telecommunications system; ample, low-cost broadband availability at attractive rates.
• Standardization of Software platforms(e.g., IBM or Oracle for database management, SAP for supply chain management)
• Companies are able to use inexpensive commodity software packages instead of customized software
• The increased pace of technological change and software investments which quickly became obsolete persuaded companies to chose to outsourcing rather than invest in technology and people that would soon have to be replaced or retrained
• Companies felt a competitive need to offshore as their competition began to do so
• Influential members from industry, such as Jack Welch from
General Electric, became champions of offshoring.
* Taken mostly from Aspray, W., Mayadas, F., and Vardi, M.Y. Globalization and Offshoring of Software , 2006

Drivers of outsourcing/offshoring
• Venture capitalists pushed entrepreneurial startups to use offshoring as a means to reduce the burn rate of capital.
• New firms emerged to serve as intermediaries, to make it easier for small and medium-sized firms to send their work offshore.
• Work processes were digitalized, made routine, and broken into separable tasks by skill set
• The increased pace of technological change and software investments which quickly became obsolete persuaded companies to chose to outsourcing rather than invest in technology and people that would soon have to be replaced or retrained
• Education became more globally available with model curricula provided by the professional computing societies, low capital barriers to establishing computer laboratories in the era of personal computers and package software, national plans to build up undergraduate education as a competitive advantage, and access to Western graduate education as immigration restrictions were eased.

Drivers of outsourcing/offshoring
• Citizens of India and China, who had gone to the US or Western
Europe for graduate educations and remained there to work, began to return home in larger numbers, creating a reverse Diaspora that provided highly educated and experienced workers and managers
• India has a large population familiar with the English language, the language of global business and law.
• India has accounting and legal systems that were similar to those in the United Kingdom and the United States
• Global trade is becoming more prevalent, with individual countries such as India and China liberalizing their economies, the fall of
Communism lowering trade barriers, and many more countries participating in international trade organizations.

Offshorers (Clients) → Vendors
• Clients are typically developed countries:
• (1) US (2) UK
• Notable others include Germany, other countries in Western Europe,
Japan, Korea, Australia
• Preferred vendor attributes:
• Countries with available large workforces of highly educated workers and Low wage rates (e.g., India and China)
• Countries with special/Bi-Trligingual language skills (e.g., the
Philippines can serve the English and Spanish customer service needs of the United States
• Countries that have geographically close (“nearsourcing”); e.g.,
Canada and the US; Czech Republic and Germany.
• special high-end skills (e.g., Israeli strength in security and anti-virus software).
* Taken mostly from Aspray, W., Mayadas, F., and Vardi, M.Y. Globalization and Offshoring of Software , 2006

Offshorers (Clients) → Vendors
• Clients are typically developed countries:
• (1) US (2) UK
• Notable others include Germany, other countries in Western Europe,
Japan, Korea, Australia
• Preferred vendor attributes:
• Countries with available large workforces of highly educated workers and Low wage rates (e.g., India and China)
• Countries with special/Bi-Trligingual language skills (e.g., the
Philippines can serve the English and Spanish customer service needs of the United States
• Countries that have geographically close (“nearsourcing”); e.g.,
Canada and the US; Czech Republic and Germany.
• special high-end skills (e.g., Israeli strength in security and anti-virus software).
* Taken mostly from Aspray, W., Mayadas, F., and Vardi, M.Y. Globalization and Offshoring of Software , 2006

Changing Times
• Tata Consultancy Services (Mumbai) had a turnover of $8B in 2011. They employ more than 200,000 worldwide with a significant number of those, believed to be around 15,000 based as outsourced jobs in the U.S.
• Aegis Communications (Mumbai) is part of the Essar group based in with an annual revenue of $15B. Aegis employs 9,000 in the U.S. at offices throughout the country
• Wipro an IT specialist firm (Bangalore) employs around 4,000 people in jobs that have been outsourced to the U.S.
• Genpac t (formerly GE Capital International Services) operates from India, China,
Guatemala, Hungary, México, Morocco, the Philippines, Poland, the Netherlands,
Romania, Spain, South Africa, Australia, Brazil and the United States. Currently it employs over 53,600 people, including 1,500 people in the U.S. but that is expected to triple over the next two years as bosses find it cheaper than employing
Indian staff at home.
• Infosys (Bangalore), with an annual revenue of $100M, has 130,000 employees worldwide
* From Daily Mail On-Line. Is this a taste of the future? Outsourcing goes full circle as
Indian firms look to the U.S. for cheap labour. 23rd May 2011

Basic Terminology
•
Outsourcing:
• Delegation of non-core operations from internal production to an external entity.
Sharing organizational control.
•
Offshoring:
• Transferring Activities to another country by hiring local subcontractors or by building a facility in an area where labor is cheap(er).
The globalization of outsourcing operating models has resulted in new terms
•
Nearsourcing:
• Offshore to a nearby country where language and cultural differences are smaller
• Rightsourcing:
• Restructuring a company's workforce to find the optimum mix of jobs performed locally and jobs moved to foreign countries
Related terms
• Insourcing:
• Keeping Operations in-house
• Backsourcing:
• Returning outsourced operation to in-house operations
•
Best Sourcing:
• Associating with the ‘best of the best’ (Tom Peters)
•
Multisourcing:
• large outsourcing agreements

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Reasons for Outsourcing
African Proverb

Reasons for Outsourcing*
•
Cost savings . The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost restructuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.
•
Focus on Core Business. Resources (e.g., investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their
IT support to specialized IT services companies.
•
Cost restructuring . Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
•
Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
•
Knowledge. Access to intellectual property and wider experience and knowledge.
•
Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services
•
Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
* Some of this is taken from Wikipedia
–
NOT necessarily reliable

Reasons for Outsourcing*
•
Capacity management . An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
•
Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
•
Enhance capacity for innovation . Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation
•
Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
•
Commodification . The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations
•
Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.

Reasons for Outsourcing*
•
Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation
•
Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.
•
Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
•
Scalability. The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
•
Access to talent . Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
• India has over 2,100,000 English-speaking graduates added annually and
460,000 of them are IT grads.
• China has over 200,000 IT professionals and 50,000 new graduates are added to the pool every year.
• China produces 52% of all Science and Engineering graduates
•
Work Attitudes “ In China today, Bill Gates is Britney Spears.
In America today, Britney Spears is Britney Spears and that is our problem.”
Thomas Friedman

Criticisms of outsourcing
Loss of Jobs
• A University of California Study that estimates 14 million
U.S. white collar jobs - one in nine - are at risk.
• A 2004 report by Forrester Research suggests that a total of
3.4 million U.S. white collar jobs will move overseas by
2015, with 830,000 jobs leaving by the end of 2005.
• A Progressive Policy Institute report claims 12 million jobs are vulnerable, with most paying more than the U.S. median wage.

Criticisms of outsourcing
Loss of Control
• "I've had people approach me and offer to save us money by consolidating our technical support," said Monad.net President George
Scott. "But I think technical support is a major competitive advantage. I therefore want control of that -- I don't want to give it away."
• "Everyone knows that differentiation is the key in the ISP business, and this also goes for dealing with the pressures of handling technical support," said the operations manager of a Massachusetts ISP. "No ISP is happy with the fact that they have to handle so many calls from customers who are not adept with their PCs, but we understand that handing them over to a third party is the wrong business move."

Criticisms of outsourcing *
Quality Risks
• Quality Risk is the propensity for a product or service to be defective, due to operationsrelated issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability.
Quality of service
• Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price.
There are a number of stakeholders who are affected and there is no single view of quality.
The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better.

Criticisms of outsourcing *
Language skills
• In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or miscommunications
Public opinion
• There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union.
Staff turnover
• The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company. In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center. This inhibits the buildup of employee knowledge and keeps quality at a low level.

Criticisms of outsourcing *
Social responsibility
• Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work.
Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation.
• On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.
• Social responsibility is also reflected in the costs of benefits provided to workers.
Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labor for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.

Criticisms of outsourcing *
Company knowledge
• Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.
Qualifications of outsourcers
• The outsourcer may replace staff with less qualified people or with people with different nonequivalent qualifications. In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537)
Failure to deliver business transformation
• Business transformation promised by outsourcing suppliers often fails to materialize. In a commoditised market where many service providers can offer savings of time and money, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” While failure is sometimes attributed to vendors overstating their capabilities, Couto points out that clients are sometimes unwilling to invest in transformation once an outsourcing contract is in place

Criticisms of outsourcing *
Productivity
• Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars. In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.
Security
• Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.

Criticisms of outsourcing *
Security (continued)
• Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning.
In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.
Standpoint of labor
• From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization. While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree include rising wages or increasing standards of living - these benefits are not secure.
Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river."

Criticisms of outsourcing *
Hidden Costs
•
• "There's a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded," explains DHL's Kifer.
"We have as many as 100 projects a year, all with an offshore component, so you can imagine the number of invoices and time sheets that have to be audited on any given day."
• We knew there would be invoicing and auditing," he says.
"But we didn't fully appreciate the due diligence and time it would require."
• Bottom line: Expect to pay an additional 6 percent to 10 percent on managing your offshore contract

Criticisms of outsourcing
Hidden Costs
•
• "There's a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded," explains DHL's Kifer.
"We have as many as 100 projects a year, all with an offshore component, so you can imagine the number of invoices and time sheets that have to be audited on any given day."
• We knew there would be invoicing and auditing," he says.
"But we didn't fully appreciate the due diligence and time it would require."
• Bottom line: Expect to pay an additional 6 percent to 10 percent on managing your offshore contract

Criticisms of outsourcing
Hidden Costs
•
• “With any outsourced service, the expense of selecting a service provider can cost from .2 percent to 2 percent in addition to the annual cost of the deal. In other words, if you're sending $10 million worth of work to India, selecting a vendor could cost you anywhere from $20,000 to $200,000 each year”.
• “Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship”.
• “Bottom line: Expect to spend an additional 1 percent to 10 percent on vendor selection and initial travel costs”.
•
Source: The Hidden Costs of Offshore Outsourcing. Sep. 1, 2003 Issue of CIO Magazine

Criticisms of outsourcing
Hidden Costs
•
• “The transition period is perhaps the most expensive stage of an offshore endeavor. It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren't aware that there will be no savings—but rather significant expenses—during this period, they are in for a nasty surprise.”.
• “It took an awful lot of time to bridge the Pacific and getting that to work correctly," remembers Textron Financial's Raspallo, who spent six months and $100,000 to set up a transoceanic data line with Infosys in 1998, It also cost an extra $10,000 a month to keep that network functional.”.
• Bottom Line: Expect to spend an additional 2 percent to 3 percent on transition costs”.
•
Source: The Hidden Costs of Offshore Outsourcing. Sep. 1, 2003 Issue of CIO Magazine

Criticisms of outsourcing
Hidden Costs
•
• “To begin with, you have to pay workers severance and retention bonuses. You need to keep employees there long enough to share their knowledge with their Indian replacements. People think if they give generous retention bonuses it will destroy the business proposition.
They cut corners because they want quick payback. But then they lose the people that can help with the transition and incur the even bigger cost of not doing the transition right.".”.
• Bottom line: Expect to pay an extra 3 percent to 5 percent on layoffs and related costs.
•
Source: The Hidden Costs of Offshore Outsourcing. Sep. 1, 2003 Issue of CIO Magazine

Criticisms of outsourcing
Hidden Costs
•
• “You simply cannot take a person sitting here in America and replace them with one offshore worker," GE Real Estate's Zupnick says.
"Whether they're in India or Ireland or Israel”
• “a project that's common sense for a U.S. worker—like creating an automation system for consumer credit cards—may be a foreign concept offshore.”
• Bottom line: Expect to spend an extra 3 percent to 27 percent on productivity lags.
•
Source: The Hidden Costs of Offshore Outsourcing. Sep. 1, 2003 Issue of CIO Magazine

Critical areas for a successful outsourcing program
• Understanding company goals and objectives
• A strategic vision and plan
• Selecting the right vendor
• Ongoing management of the relationships
• A properly structured contract
• Open communication with affected individual/groups
• Senior executive support and involvement
• Careful attention to personnel issues
• Short-term financial justification

The Pre-Outsourcing Process
Program Initiation
• At the start of any outsourcing program, there are a variety of ideas and opinions about the purpose and scope of the program, what the final result of the program will be, and how the program will be carried out. The Program Initiation Stage is concerned with taking these ideas and intentions and documenting them to form the basis of a draft contract.
Service Implementation
• Service Implementation covers the activities required to take these ideas and intentions and develop them into a formal, planned outsourcing program and to make the transition to the outsourced service.
• Specifically these activities are:
• Defining the transition project
• Transferring staff
• Defining the Service Level Agreement (SLA)
• Defining service reporting
• Implementing and handing over the service
• Implementing service management procedures
• During the hand–over phase it is imperative that continuity of service is maintained at all times, that there is no reduction in the quality of the delivery and that timescales and deadlines are not compromised.

The Pre-Outsourcing Process
Final Agreement
• The draft contract produced at the Initiation stage is generally amended during negotiations and the final Contract is produced on completion of the negotiation cycle.
Program Closure
• In order to gain maximum benefit, the program should go through a formal close down.
There is no point in continuing to argue lost causes once irrevocable decisions have been taken. Staff and companies alike need to accept the new situation and move forward.
However, there will be a lot of information generated during the life of the program, and this will have been stored with varying degrees of formality by the team members. This information needs to be formally filed away for future reference.

Types of Sourcing Arrangements
• There are four fundamental parameters that determine the kind of outsourcing arrangement that a firm may enter into: degree (total, selective, and none); mode (single vendor/client or multiple vendors/clients); ownership (totally owned by the company, partially owned, externally owned); and time frame
(short term or long term). The combination of specific instances of these parameters yields different types of sourcing arrangements such as joint ventures, facilities sharing, and spin-offs.
Degree of
Outsourcing
Total
Selective
None
Internal
Spin-offs
(Wholly Owned
Subsidiary)
Insourcing /
Backsourcing
Ownership
Partial External
Joint
Venture
Facilities Sharing among multiple clients
Traditional
Outsourcing
Selective
Outsourcing
N/A
* Dibbern, J. and Goles, T. and Hirschheim, R. and Jayatilaka, B. (2004) "Information Systems Outsourcing: A Survey and
Analysis of the Literature“ In: The DATA BASE for Advances in Information Systems, Volume 34, Issue Number 4, pp 6-102

Stage model of IS outsourcing
Simon’s Decision
Making Model
Outsourcing Stages
Intelligence Why
Design
Choice
Implementation
What
Which
How
Outcome
Application of Outsourcing
Stages
• Determinants
• Advantages/Disadvantages
Outsourcing Alternatives:
• Degree of Ownership
• Degree of Outsourcing
Guidelines, Procedures, stakeholders of decision initiation,
Evaluation
• Vendor Selection
• Relationship buildings
• Relationship Management
• Experiences/Learning
• Types of Success
• Determinants of Success

Theories of Outsourcing
• A well-substantiated explanation of some aspect of the natural world; an organized system of accepted knowledge that applies in a variety of circumstances to explain a specific set of phenomena "theories can incorporate facts and laws and tested hypotheses"; "true in fact and theory"
• A tentative insight into the natural world; a concept that is not yet verified but that if true would explain certain facts or phenomena) "a scientific hypothesis that survives experimental testing becomes a scientific theory"; "he proposed a fresh theory of alkalis that later was accepted in chemical practices"
• An unproven conjecture “ I have a theory about who broke into the school last night, but I have no proof to back it up.
• An expectation of what should happen, barring unforeseen circumstances. “ So we’ll be there in three hours?
— That’s the theory.

Theories of Outsourcing
• Krumboltz and Nichols (1990) argue that theories are developed to inform guidance practice are generally based on research evidence which can be scrutinized and judged independently by others.
• They propose that theory for research purposes should help:
• understand a complex phenomenon,
• make predictions about future outcomes and
• decide on courses of action.
Krumboltz, J.D. & Nichols, C. W. (1990) ‘Integrating the social learning theory of career decision making’, in Walsh, W.B. & Osipow, S.H. (Eds)
Career Counseling: contemporary topics in vocational psychology, New Jersey, Lawrence Erlbaum Associates, pp.159-192.

Theories of Outsourcing
• They also identify characteristics that can be used to identify a theory, which include the following:
• Represents reality - theory represents various aspects of reality in an understandable way.
• Omits non-essentials - theory simplifies reality by ignoring a large number of variables (like a map).
• Emphasis - to make features clear, theories often stress the importance of certain variables (e.g. by giving them special names, stressing their importance in words, figures or formulas).
• Abstracts - a theory may include unobservable constructs and ideas believed to be important which are abstractions.
• Practically useful - a good theory enables people to derive answers to innumerable questions (e.g. how are preferences for occupations developed?
What interventions are needed to help clients make sound career decisions, etc.).
Krumboltz, J.D. & Nichols, C. W. (1990) ‘Integrating the social learning theory of career decision making’, in Walsh, W.B. & Osipow, S.H. (Eds)
Career Counseling: contemporary topics in vocational psychology, New Jersey, Lawrence Erlbaum Associates, pp.159-192.

Theories of Outsourcing
Academic research consists of three main interdependent elements that together form “the triad network of justification” (Laudan, 1984, p.63):
• Aims
• the research problem/ question or objectives being addressed.
• Problem Importance
• Why addressing the problem is important
• Theories
• the conceptual underpinnings used to address the particular problem area.
• Methods
• The techniques used to collect, analyze, and interpret the data (for empirical research), or the construction and use of a mathematical/model/system/ application (in non-empirical research).
Laudan, L. (1984). Science and Values: An Essay on the Aims of Science and Their
Role in Scientific Debate , Berkely, CA: University of California Press.

Theories of Outsourcing
• There is neither a single research question nor a single method nor theory that all researchers have adopted (Dibbern et al., 2004).
• Even single papers address more than one research objective, and draw on several different theories.
• For example, Loh (1994) looked at why organizations outsource, and the resulting outcomes, through the twin theoretical lenses of transaction cost economics and agency theory.
Loh, L. (1994). "An Organizational-Economic Blueprint for Information Technology Outsourcing:
Concepts and Evidence," Proceedings of the 15th International Conference on Information Systems ,
Vancouver, Canada, pp. 73-89.

Theories of Outsourcing
Theoretical
Foundation
Level of
Analysis
Basic Assumptions Main Variables/ focus
Key Authors
Agency theory
Organizational Asymmetry of information, differences in perceptions of risk and uncertainty
Agent costs, optimal
Contractual relationships
Jensen and
Meckling
(1976)
Game theory
Innovation theories
Power and
Politics theories
Relationship theories
Organizational, individual
Individual, organizational
Individual, organizational
Every player under the same conditions, make rational decisions to maximize profit
Decisions under certain situations
Organizational Parties in a relationship assume that the outcome of a relationship is greater than achieved by individual parties separately (Synergy)
Cooperation, interactions, social and economic exchanges
Kreps et al. (1982);
Nash (1953);
Fudenberg & Tirole
(1990)
Innovation occurs in stages, some models not based on stages
Power, idiosyncratic interests, and politics play major roles in Organi-zational decisionmaking
Adoption, and diffusion Daft (1978) ; Rogers
(1983); Zaltman et al. (1973)
Different degrees of power, organizational politics
Pfeffer, (1981; 1982)
Markus (1983)
Klepper (1995);
Kern (1997)
Dibbern, J. and Goles, T. and Hirschheim, R. and Jayatilaka, B. (2004) "Information Systems Outsourcing: A
Survey and Analysis of the Literature“ In: The DATA BASE for Advances in Information Systems, Volume
34, Issue Number 4, pp. 6-102

Theories of Outsourcing
Theoretical
Foundation
Resource theories
Social
Exchange theory
Strategic
Management theories
Transaction
Cost theory
Level of
Analysis
Basic Assumptions Main Variables/ focus
Key Authors
Organizational A firm is a collection of
Individual, organizational
Participation in exchange occurs with the assumption of rewards and obligation to return rewards
Exchange of activities, benefits/costs, reciprocity, balance, cohesion, and power in
Exchanges
Organizational Firms have long-term goals, Strategic advantage, and they plan and allocate resources to achieve these goals strategies, choice of individuals
Transaction resources, and resources are central to a firm’s strategy
Limited rationality, opportunism
Internal resources, resources in the task environment
Transaction costs, production costs
Barney (1991);
Penrose (1959);
Pfeffer & Salancik,
(1978); Thompson,
(1967)
Blau (1964) ;
Emerson (1972);
Homans (1961)
Chandler, (1962);
Miles & Snow
(1978); Porter
(1985); Quinn,
(1980)
Coase (1937);
Williamson (1975;
1981; 1985)
Dibbern, J. and Goles, T. and Hirschheim, R. and Jayatilaka, B. (2004) "Information Systems Outsourcing: A
Survey and Analysis of the Literature“ In: The DATA BASE for Advances in Information Systems, Volume
34, Issue Number 4, pp. 6-102

Theories of Outsourcing
Theoretical
Foundation
Resource theories
Social
Exchange theory
Strategic
Management theories
Transaction
Cost theory
Level of
Analysis
Basic Assumptions Main Variables/ focus
Key Authors
Organizational A firm is a collection of
Individual, organizational
Participation in exchange occurs with the assumption of rewards and obligation to return rewards
Exchange of activities, benefits/costs, reciprocity, balance, cohesion, and power in
Exchanges
Organizational Firms have long-term goals, Strategic advantage, and they plan and allocate resources to achieve these goals strategies, choice of individuals
Transaction resources, and resources are central to a firm’s strategy
Limited rationality, opportunism
Internal resources, resources in the task environment
Transaction costs, production costs
Barney (1991);
Penrose (1959);
Pfeffer & Salancik,
(1978); Thompson,
(1967)
Blau (1964) ;
Emerson (1972);
Homans (1961)
Chandler, (1962);
Miles & Snow
(1978); Porter
(1985); Quinn,
(1980)
Coase (1937);
Williamson (1975;
1981; 1985)
Dibbern, J. and Goles, T. and Hirschheim, R. and Jayatilaka, B. (2004) "Information Systems Outsourcing: A
Survey and Analysis of the Literature“ In: The DATA BASE for Advances in Information Systems, Volume
34, Issue Number 4, pp. 6-102

Agency Theory
• Agency Theory is based on the conceptualization of the firm as a a connected series or group of contracts between principals or stakeholders and agents.
• The stakeholders are represented by different groups or persons within the firm as well as outside the firm, such as customers, suppliers or shareholders (Jensen &
Meckling, 1976, p. 310-311).
• The basic argument is that the principal transfers decision rights to the agent.
• The principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent.
• To make sure that the agent behaves in the principal’s best interest the latter sets incentives and controls. When calculating the magnitude of these incentives the anticipated costs of controlling the agent are considered. The total cost is the sum of monitoring and bonding including issues such as residual loss.
• Various mechanisms may be used to try to align the interests of the agent with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, the agent posting a bond, or fear of firing.
• The principal-agent problem is found in most employer/employee relationships, for example, when stockholders hire top executives of corporations.
Jensen, M. C. and Meckling, W. H. (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure," Journal of Financial Economics, Vol. 3, pp. 305-360.

Game Theory
The Prisoner’s dilemma:
“Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects from the other) for the prosecution against the other and the other remains silent
(cooperates with the other), the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence.
Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?”

Game Theory
The Prisoner’s dilemma:
• If we assume that each player cares only about minimizing his or her own time in jail, then the prisoner's dilemma forms a non-zero-sum game in which two players may each cooperate with or defect from (betray) the other player.
• In this game, as in most game theory, the only concern of each individual player (prisoner) is maximizing his or her own payoff, without any concern for the other player's payoff.
• The unique equilibrium for this game is a Pareto*-suboptimal solution, that is, rational choice leads the two players to both play defect, even though each player's individual reward would be greater if they both played cooperatively.
* Pareto efficient situations are those in which it is impossible to make one person better off without necessarily making someone else worse off

Game Theory
• Game theory (Kreps, et al., 1982; Nash, 1953; Spence, 1976) attempts to explain the strategic behavior of players or actors (e.g., companies) in particular game situations.
• These situations are characterized by specific assumptions concerning the production function of a company, the environment and informational structures.
• It is assumed that all players work under the same conditions and make rationale and intelligent decisions to maximize their profits.
• The only determinant for these decisions is the perception of the expected actions of the antagonist, i.e. other player (Fudenberg & Tirole,
1990).

Innovation Theories
• Innovation Components:
• Adoption . The decision to use the innovation
• Diffusion . The process by which an innovation spreads out into social systems (e.g., in organizations, industries, countries).
• A number of different models - stage based as well as models without stages – are used in explaining the innovation process (Schroeder et al.,
1989; Zaltman et al., 1973).
• Diffusion of Innovation (DOI) theory sees innovations as being communicated through certain channels over time and within a particular social system (Rogers, 1995). Individuals are seen as possessing different degrees of willingness to adopt innovations and thus it is generally observed that the portion of the population adopting an innovation is approximately normally distributed over time (Rogers, 1995).

Innovation Theories
• Breaking this normal distribution into segments leads to the segregation of individuals into the following five categories of individual innovativeness (from earliest to latest adopters):
• Innovators venturesome, educated, multiple info sources
• Early adopters social leaders, popular, educated
• Early majority deliberate, many informal social contacts
• Late majority skeptical, traditional, lower socio-economic status
• Laggards neighbors and friends are main info sources, fear of debt
• When the adoption curve is converted to a cumulative percent curve a characteristic S curve is generated that represents the rate of adoption of the innovation within the population
(Rogers, 1995).

Innovation Theories
• The rate of adoption of innovations is impacted by five factors (Rogers, 1995). The first four factors are generally positively correlated with rate of adoption while the last factor, complexity, is generally negatively correlated with rate of adoption (Rogers,
1995).
• Relative advantage may be economic or non-economic, and is the degree to which an innovation is seen as superior to prior innovations fulfilling the same needs.
• Compatibility is the degree to which an innovation appears consistent with existing values, past experiences, habits and needs to the potential adopter.
• Observability is the perceived degree to which results of innovating are visible to others
• Trialability is the perceived degree to which an innovation may be tried on a limited basis, and is positively related to acceptance. Trialability can accelerate acceptance because small-scale testing reduces risk.
• Complexity is the degree to which an innovation appears difficult to understand and use; the more complex an innovation, the slower its acceptance.

Diffusion of Innovation Theory in IS
• Moore and Benbasat (1991), working in an IS context, expanded upon the five factors impacting the adoption of innovations presented by Rogers, generating eight factors
(voluntariness, relative advantage, compatibility, image, ease of use, result demonstrability, visibility, and trialability) that impact the adoption of IT. Scales used to operationalize these factors were also validated in the study.
• Since the early applications of DOI to IS research the theory has been applied and adapted in numerous ways. Research has, however, consistently found that technical compatibility, technical complexity, and relative advantage (perceived need) are important antecedents to the adoption of innovations (Bradford and Florin, 2003;
Crum et. al., 1996) leading to the generalized model presented below (see figure on right).

Power and Politics theories
• These theories assume that power, idiosyncratic* interests, and politics play major roles in organizational decision-making (Pfeffer, 1981; Pfeffer, 1982).
• According to this perspective organizations are political entities and people within organizations have different degrees of power.
• Power is often defined as the basic energy to initiate and sustain action to translate intentions into reality
• As attempts are made to implement idiosyncratic objectives and decisions of people with power, organizational politics transpire.
• Power and politics can play an important role in decisions on IS in general (Markus,
1983) and in outsourcing decisions (Lacity & Hirschheim, 1993b).
* idiosyncrasy:
1.
a characteristic, habit, mannerism, or the like, that is peculiar to an individual.
2.
the physical constitution peculiar to an individual.
3.
a peculiarity of the physical or the mental constitution, esp.

Relationship theories
• Relationship theories focus on cooperation, interactions, and social and economic exchanges as major factors in interorganizational relationships.
• they focus on interactions between parties that are geared towards the joint accomplishment of the individual party's objectives.
• Relationship theories often appear in the strategic management and marketing literature, addressing topics such as alliances and partnerships, competitive advantage, supply chain management, and supplier-buyer relationships.
• As Klepper (1995) and Kern (1997) have pointed out, underlying this work is the notion that at the root of all relationships is some type of exchange.
• In this view, parties to an exchange are in mutual agreement that the resulting outcomes of the exchange are greater than those that could be attained through other forms of exchange, or from exchange with a different partner.
• This motivates the parties to consider the relationship important in and of itself, and to devote resources towards its development and maintenance.

Resource Theories
There are two types of resource theories:
• resource-based theory
• resource-dependency Theory
Both note the centrality of a firm’s resources as being the foundation for a firm’s strategy.
The difference is:
• resource-based theory focuses on a firm’s internal resources and capabilities
• resource-dependency focuses on resources in the external environment.

Resource Based Theory
According to classical economics, the capacity of a company to obtain a profit margin higher than its cost of capital depends on two principal factors
• the attraction of the industry in which it operates, and the establishment of a competitive advantage over its rivals (Porter and Millar, 1985).
• the establishment of a competitive advantage over its rivals (Porter and Millar,
1985).
This approach rests on the premise that the source of competing advantage derives mainly from the positioning of the company inside a given industry.
Moreover, it assumes that the companies have free access, at least in the medium term, to the resources required to offset or influence the market forces.
Resourcebased thinking considers that a company’s resources include all assets, organizational characteristics, processes, aptitudes, information and knowledge controlled by that company and its employees (Barney, 1991).
A firm’s competencies stem from its ability to reconfigure and exploit its assets in such a way as to attain a competitive advantage.

Resource Based Theory
• The resource-based view (RBV) argues that firms possess resources, a subset of which enable them to achieve competitive advantage, and a subset of those that lead to superior long-term performance. Resources that are valuable and rare can lead to the creation of competitive advantage. That advantage can be sustained over longer time periods to the extent that the firm is able to protect against resource imitation, transfer, or substitution. In general, empirical studies using the theory have strongly supported the resource-based view.
• RBV defines resources as inputs required for performing a firm’s tasks. competitive advantage can occur only when there is heterogeneity and immobility of the firm’s resources (Barney, 1991;
Penrose, 1959).

Resource Dependency Theory (RDT)
• RDT in general states that all organizations are dependent on some elements of their external environments to varying degrees due to the control these external environments have on the resources (Pfeffer & Salancik, 1978; Thompson, 1967).
• Organizational success in RDT is defined as organizations maximizing their power
(Pfeffer 1981). RDT characterizes the links among organizations as a set of power relations based on exchange resources.
• RDT proposes that actors lacking in essential resources will seek to establish relationships with (i.e., be dependent upon) others in order to obtain needed resources. Also, organizations attempt to alter their dependence relationships by minimizing their own dependence or by increasing the dependence of other organizations on them. Within this perspective, organizations are viewed as coalitions alerting their structure and patterns of behaviour to acquire and maintain needed external resources. Acquiring the external resources needed by an organization comes by decreasing the organization’s dependence on others and/or by increasing other’s dependency on it, that is, modifying an organization’s power with other organizations.

Resource Dependency Theory (RDT)
• RDT rests on three underlying assumptions:
• Organizations are assumed to be comprised of internal and external coalitions which emerge from social exchanges that are formed to influence and control behavior
• The environment is assumed to contain scarce and valued resources essential to organizational survival. As such, the environment poses the problem of organizations facing uncertainty in resource acquisition.
• Organizations are assumed to work toward two related objectives: acquiring control over resources that minimize their dependence on other organizations and control over resources that maximize the dependence of other organizations on themselves. Attaining either objective is thought to affect the exchange between organizations, thereby affecting an organization’s power.
• Although RDT was originally formulated to discuss relationships between organizations, the theory is applicable to relationships among units within organizations. RDT is consistent with ecological and institutional theories of organizations where organizations are seen as persistent structures of order under constant reinterpretation and negotiation, interacting with an indeterminate environment of turbulence and a multitude of competing interests

Social Exchange theory
• Early sociologists conceptualized social associations as exchanges of activities between two or more persons (Homans, 1961).
• These activities can be tangible or intangible and rewarding or costly.
• Fundamentally, the individual who supplies rewarding services to another obligates the second. In order to discharge this obligation the second must furnish benefits to the first in return.
• Several attributes are important in an exchange:
• Reciprocity . The need to reciprocate the benefits received acts to reinforce the characteristics of the exchange.
• Balance . Balance refers to the balance of dependence of one actor in the exchange over the other and vice versa.
• Cohesion . Cohesion occurs when one or both actors in the exchange encounters conflict involving the exchange.
• Power . Emerson (1972) defines power as the level of cost one actor can induce over the other.
• NOTE: RDT incorporates many of the concepts found in Social Exchange Theory

Strategic Management theories
• Theories that explain the strategic activities of a firm
• According to Chandler’s definition, strategy is the determinant of the basic long term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals
(Chandler, 1962; Quinn, 1980).
• Porter’s (1985) theories of Strategic Advantage

Transaction Cost theory
This theory maintains that making use of the market is costly (Coase, 1937) and that economic efficiency can be achieved through comparative analysis of production costs and transaction costs (Williamson, 1975; Williamson, 1981;
Williamson, 1985).
The theory is built on two fundamental behavioral assumptions:
• limited rationality (Simon, 1957). The assumption is that it is only possible to enter into incomplete contracts. This would, however, be irrelevant if both parties to the contract were completely trustworthy ("stewardship behavior,“ Williamson,
1975, p. 26).
• opportunistic behavior . Because both parties can not be assumed to be completely trustworthy, the parties behave opportunistically, i.e., they cunningly take advantage of opportunities at the expense of others ("...self-interest seeking with guile,“ Williamson, 1981, p. 554).

Transaction Cost theory
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. A number of different kinds of transaction costs exist.
• Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc
• Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract, etc.
• Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

Transaction Cost Approach
Transaction costs are incurred when an efficiency-enhancing transaction is not realized due to various coordination and incentive problems.
Under market mechanism, there are ex ante costs of finding trading parties and prices, foreseeing relevant contingencies, and negotiating and drafting contracts.
These costs make any real contract inevitably incomplete
Ex post adaptation is thus necessary, where ex post transaction costs matter, such as those of monitoring and enforcing agreements
The ex post adaptation is in particular costly when investments specific to a current relationship are involved. (A factory located next to a trading partner’s warehouse and a machine specialized to manufacturing customized products for a particular buyer are examples of relation-specific physical assets.)
The parties to a transaction develop relation-specific assets when the value of the assets is substantially higher in their relationships than in the next-best alternative use.

Additional theories
• From: Itoh, H. “The Theories of International Outsourcing and Integration: A
Theoretical rerview from the Perspective of Organizational Economics”. 2006.
Available at: http://www.jcer.or.jp/eng/pdf/discussion96.pdf
• What determines the scope of the firm, or the firm boundaries, has continued to be a fundamental and central question in the field of organizational economics. The question is of practical significance, too, because of its relevance to the strategic decisions to the firm. First, the firm must determine its horizontal boundaries —the products it offers and the markets it serves. Whether to diversify into related products or focus on a few narrow businesses is a typical question. Second, the firm must determine its vertical boundaries for each product/market —those activities in the vertical chain (research, product development, material, parts, assembly, marketing, and so on) the firm does inhouse (make) and those it does not (buy).

Additional theories
Contract theory
• The main theoretical tool relevant to the theories of firm boundaries is contract theory that studies various contractual arrangements between sellers and buyers or in general principal-agent relationships. A benefit of this approach is that both inter-firm and intra-firm transactions can be analyzed in an integrated fashion. The standard tool in Industrial organization and international trade has been oligopoly theory, in which integration is usually defined as a unified firm maximizing the joint profits of the previously separate parties. There is then no tradeoff in the sense that integration always outperforms outsourcing: Costs of integration must be explained in the same framework, and to this purpose, opening the black box of the firm is a must. ( Itoh,
2006)

Additional theories
Contract theory
• In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information.
Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics. One prominent application of it is the design of optimal schemes of managerial compensation. In the field of economics, the first formal treatment of this topic was given by Kenneth Arrow in the
1960s.
• A standard practice in the microeconomics of contract theory is to represent under certain numerical utility structure the behavior of a decision maker, and then find her optimal choices by applying an optimization algorithm. Such a procedure has been used in the contract theory framework to several typical situations, labeled moral hazard, adverse selection and signaling. The spirit of these models lies in finding theoretical ways to motivate agents to take appropriate actions, even under an insurance contract. The main results achieved through this family of models may involve: mathematical properties of the utility structure of the principal and the agent, relaxation of assumptions, and variations of the time structure of the contract relationship, among others. It is customary to model people as maximizers of some von Neumann-Morgenstern utility functions, as stated by Expected utility theory.

Additional theories
Contingency theory
• There are many forms of contingency theory. In a general sense, contingency theories are a class of behavioral theory that contend that there is no one best way of organizing / leading and that an organizational / leadership style that is effective in some situations may not be successful in others (Fiedler, 1964). In other words: The optimal organization / leadership style is contingent upon various internal and external constraints.
• Four important ideas of Contingency Theory are:
• There is no universal or one best way to manage
• The design of an organization and its subsystems must 'fit' with the environment
• Effective organizations not only have a proper 'fit' with the environment but also between its subsystems
• The needs of an organization are better satisfied when it is properly designed and the management style is appropriate both to the tasks undertaken and the nature of the work group.

Additional theories
Contingency theory
• There are also contingency theories that relate to decision making (Vroom and Yetton,
1973). According to these models, the effectiveness of a decision procedure depends upon a number of aspects of the situation: the importance of the decision quality and acceptance; the amount of relevant information possessed by the leader and subordinates; the likelihood that subordinates will accept an autocratic decision or cooperate in trying to make a good decision if allowed to participate; the amount of disagreement among subordinates with respect to their preferred alternatives.
• It is worth noting that since the mid 1980s contingency theory has been fairly dead within the originating field of organization theory. Apart from Lex Donaldson, professor at Australian Graduate School of Management, and a few other people, nobody within the field attempt to contribute to a further development of contingency theory, foremost because of what can be perceived as the lacking explanatory power of the theory.

Additional theories
Theory of Reasoned Action
• TRA posits that individual behavior is driven by behavioral intentions where behavioural intentions are a function of an individual's attitude toward the behaviour and subjective norms surrounding the performance of the behavior. Attitude toward the behavior is defined as the individual's positive or negative feelings about performing a behaviour. It is determined through an assessment of one's beliefs regarding the consequences arising from a behavior and an evaluation of the desirability of these consequences. Formally, overall attitude can be assessed as the sum of the individual consequence x desirability assessments for all expected consequences of the behavior. Subjective norm is defined as an individual's perception of whether people important to the individual think the behavior should be performed. The contribution of the opinion of any given referent is weighted by the motivation that an individual has to comply with the wishes of that referent. Hence, overall subjective norm can be expressed as the sum of the individual perception x motivation assessments for all relevant referents. Algebraically TRA can be represented as B ≈ BI = w1AB + w2SN where B is behavior, BI is behavioral intention,
AB is attitude toward behavior, SN is subjective norm, and w1 and w2 are weights representing the importance of each term.

Additional theories
Knowledge management organizations need and possess knowledge, and need to manage this knowledge effectively (Davenport & Prusak, 1997). Knowledge is typically divided into two types: explicit knowledge, which can be expressed in numbers and words and shared formally and systematically in the form of data, specifications, and documents; and tacit knowledge, which includes insights, intuitions, and hunches, is difficult to express and formalize, and therefore difficult to share (Polanyi, 1958).
Psychological contract theory linkages or psychological contracts exist between employers and employees
(Morrison & Robinson, 1997; Rousseau, 1995).
Risk management there could be undesirable outcomes or risks in organizational/managerial actions and it is necessary to manage these risks properly (MacCrimmon &
Wehrung, 1986);

Course Organization: 2 nd Edition
Basic IT Outsourcing Life Cycle
Outsourcing
Decision
Determinant
Outsourcing
Experiences and
Outcomes
Outsourcing
Relationships:
Arrangement and
Management
Perspectives
Individual View Vendor View
Global Challenges
Application
Service Providing
(ASP) and
Business Process
Outsourcing
(BSO)
Offshoring and
Global
Outsourcing

Course Organization: 3 rd Edition
Part II: Traditional IT
Outsourcing
Outsourcing Relationship
Management
Outsourcing Capability
Management
Outsourcing Outcomes
Innovation through Outsourcing
Part III: IT Offshoring
Offshoring Trends
Knowledge Sharing in
Outsourcing
Dynamics in Offshoring
Determinants of Offshoring
Success
Part IV: Business Process Outsourcing