Factors considered
when outsourcing a DSS
Bjarne Berg
Ph.D. Research Seminar
UNCC-Charlotte
3/2/2007
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
2
Limitations, Assumptions, Risks
The study is limited to organizations engaged in SAP activities such as running,
implementing or managing SAP resources i.e. R/3, NetWeaver, or BW (SAP data
warehouses).
Reliability was tested for consistency in 4 separate samples of sizes ranging from 230 to
802.
Validity was tested within a construct using Cronbach alphas on the instrument. Not all
constructs has multiple questions, so not all measures were validated (i.e. labor costs,
overall costs). However, measures used in this study was separately validated by other
published studies.
I.e. Our supplier factors had 11 questions and an average inter-item
correlation of 0.83 (equivalent to an average of only 69% shared variance
between items) have a reliability coefficient of .964
3
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
4
Theoretical Rational
In the IT sense, the cost advantage has recently been sought through
outsourcing of transactional processing and the challenge has been to decide
how far to take outsourcing of supplementary systems.
A good example is the Decision Support Systems (DSS). A DSS provides
intelligence about operations, increases alternative exploration and leads to
increased choices for the organization (Simon, 1960). In short, the benefit of a
DSS is to provide managers with an opportunity to anticipate, identify, and
creatively respond to changing consumer demands.
The challenge is that good DSS are very expensive to implement and that a
general approach to outsourcing can “depress industry profitability if
companies outsource to the same providers and their solutions become more
alike” (Porter, 2000).
5
Background
Companies that outsource their DSS and focuses on cost as the main
source of competitive advantage may experience significant risks to their
future ability to differentiate their products and services. In short, in
organization’s that has outsourced IT, inflexibilities to market changes may
also be a risk to business performance (Earl, 1996).
The risks may be disproportional to larger companies, as outsourced
systems can be used on an economy of scale, where small companies can
effectively compete with larger companies (Rayport & Sviokla, 1994).
6
Our research questions
A recent survey of 357 firms, suggested that total outsourcing can be a very dangerous
strategy, due to the inflexibility it creates and managers should be very selective in what IT
functions are outsourced (Gonzales et. al, 2005). We propose that DSS are at the heart of
the firm’s ability to become aware of new opportunities, and therefore these systems must
have a very high degree of flexibility. Our research questions are therefore:
1. Are organizations that employ a niche or a differentiating strategy less likely to consider
overall costs, or labor costs, than organizations that are primarily competing using a low
cost strategy.
2. Is an organization’s competitive advantage strategy a factor in the current, and planned,
IT spending on OLTP and DSS.
3. Are larger organizations more likely than smaller organizations to consider factors
related to their service providers when considering outsourcing DSS.
4. Are smaller organizations more likely to consider technology factors when deciding to
outsource decision support systems.
7
Measures
Research on measures associated with risk factors for information
technology outsourcing (Bahli & Rivard, 2002), has examined three sources
of risks known as transactional risks, client risks and supplier risks.
Since the service provider’s value proposition of outsourcing (Levina &
Ross, 2003) may be different from that those of the organization doing the
outsourcing we examined the established measures from a follow-up study
that examined this divergent value proposition (Djavanshir, 2005).
In this study, a survey 114 senior IT manager demonstrated that labor cost
reduction, access to host country's skilled workforce and talents, ability to
take advantage of host country's universities, providing continuous
operations, improved flexibility and agility were the main reasons given by
managers for moving IT functions to an outside provider.
8
Measures
Access to the expertise of the employees of the service provider may also be a
factor. In a research effort to build a success model prediction model, a set of
measures given by management for deciding who to outsource to gain access to
expertise was examined (Gable, 1996).
Where
Our Construct
Bahli & Rivard (2002) Supplier factor
Predictive model of Supplier factor
success
Supplier factor
Technology factor
Internal factor
Supplier factor
Technology factor
Internal factor
Internal factor
Supplier factor
Supplier factor
Gable (1996)
Supplier factor
Outsourcing IT advise Supplier factor
Supplier factor
Djavanshir (2005) Why Cost
outsource
Overall costs
Supplier factor
Supplier factor
Internal factor
Internal factor
Literature Measures
Supplier's investment
Human Resources specificity
Small number of suppliers
Uncertainty
Internal relatedness
External relatedness
Task complexity
Expertise of the client with the IT operations
Expertise of client with outsourcing
Expertise of this supplier with the IT operations
Expertise of the supplier with the outsourcing
Consultant's demonstrated understanding of client needs
Apparent trustworthiness of consultant
The consulting company's prior experience
Labor cost reduction
Access to host country's skilled workforce and talents
Taking advantage of host country's universities
24/7 operations
Improved flexibility and agility
9
Survey development
As measures of company size, published revenues and number of
employees for the world’s largest 1000 organizations were used (Fortune,
2005). Based on these measures, a survey was created in March 2006. The
instrument was reviewed by a group of five information technology
professors from two institutions as well as a set of graduate students.
Based on this input, a test sample was made (n=23) of a preliminary
instrument to examine it for clarity, terminology, and organization.
We obtained UNC-C human subject research approval in April, and
conducted survey’s at 4 major SAP conferences (convenience sampling)
through out April – November in Florida, California and Nevada.
The survey had 47 questions.
10
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
11
Sample Size and Response Rates
The study is limited to organizations engaged in SAP activities such as
running, implementing or managing SAP resources i.e. R/3, NetWeaver, or
BW (SAP data warehouses).
Over a period of 8 months we sampled a total of 1,889 individuals using a
written survey. The anonymous convenience samples were taken at four
different SAP national conferences with a combined attendance of over
15,800 individuals
Responses
Survey 1
Survey 2
Survey 3
Survey 4
Organization Size
Number for surveys Response Fortune- FortuneSmaller
No
Issued vs. returned
rates
500
1000
organizations answer
220
65
173
8
623 / 466
75%
(47%)
(14%)
(37%)
(2%)
400
108
274
20
968 / 802
83%
(50%)
(13%)
(34%)
(2%)
234
36
108
13
492 / 391
79%
(59%)
(9%)
(28%)
(3%)
125
19
83
3
298 / 230
77%
(54%)
(8%)
(36%)
(1%)
2381 / 1889
79%
979
228
638
44
12
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
13
Most important factors for OLTP outsourcing
The service provider's prior experience with the transaction system
The service provider's expertise with outsourcing in general
The trustworthiness of the service provider's employees
The service provider's employees' understanding of our needs
The service provider's experience with performing similar activities as us
The service provider's current overall investments in transaction systems
To take advantage of the skilled workforce of our service partner
To improve our transactional flexibility and agility
To reduce labor costs
To reduce overall costs
To provide 24 hour transactional operations
The complexity of the transaction system
The service provider working in a similar industry as our organization
Our unfamiliarity with outsourcing in general
The number of available outsourcing service providers
Knowing the service provider's employees
Uncertainty in our long-term transactional system technology choice
To take advantage of different education systems at our service partner's location
Our unfamiliarity with OLTP technology
1.00
1.50
2.00
2.50
3.00
3.50
14
Most Important factors for DSS outsourcing
The service provider's expertise with outsourcing in general
The trustworthiness of the service provider's employees
The service provider's employees' understanding of our needs
The service provider's prior experience with the DSS technology
To reduce labor costs
Our unfamiliarity with DSS technology
The service provider's current overall investments in DSS
The service provider's experience with performing similar activities as us
To take advantage of the skilled workforce of our service partner
To improve our DSS flexibility and agility
To reduce overall costs
To provide 24 hour DSS operations
The service provider working in a similar industry as our organization
Knowing the service provider's employees
The complexity of DSS
The number of available outsourcing service providers
To take advantage of different education systems at our service partner's location
Our unfamiliarity with outsourcing in general
Uncertainty in our long-term DSS technology choice
1.00
1.50
2.00
2.50
3.00
3.50
15
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
16
Questions and average scores
Our unfamiliarity with OLTP/DSS technology
To reduce labor costs
Knowing the service provider's employees
The service provider's expertise with outsourcing in general
The trustworthiness of the service provider's employees
The service provider's current overall investments in OLTP/DSS
The service provider's employees' understanding of our needs
To take advantage of different education systems at our service partner's location
The service provider working in a similar industry as our organization
The complexity of OLTP/DSS
To improve our OLTP/DSS flexibility and agility
The service provider's prior experience with the OLTP/DSS technology
To take advantage of the skilled workforce of our service partner
The service provider's experience with performing similar activities as us
The number of available outsourcing service providers
To reduce overall costs
Uncertainty in our long-term OLTP/DSS technology choice
To provide 24 hour OLTP/DSS operations
Unfamiliarity with outsourcing in general
OLTP
2.06
3.07
2.42
3.56
3.50
3.18
3.44
2.18
2.68
2.70
3.08
3.57
3.18
3.38
2.59
3.05
2.23
3.03
2.65
DSS Differences
3.39
1.32*
Factor that are
3.41
0.34*
more important to
2.74
0.32*
a DSS outsourcing
3.77
0.21*
effort
3.66
0.15*
3.30
0.12*
3.53
0.09***
2.27
0.09***
2.76
0.08
No major
2.73
0.03
differences
3.05
0.02
3.50
0.07
3.08
0.09***
3.27
0.11**
Factor that are
2.44
0.15*
more important to
2.89
0.16*
an OLTP
2.05
0.19*
outsourcing
effort
2.77
0.26*
2.11
0.54*
* Significant at 99% confidence level, two-tailed matched pair t-test of sample means assuming
equal variance.** Significant at 95% confidence level. *** Significant at 90% confidence level.
Mean Mean Differenc St. dev var
n
Pooled
t=
Degrees of
OLTP DSS
es
variance
Freedom
2.064 3.387
1.32
1.094 1.196 1380
1.055
-30.496
2323
3.072 3.412
0.34
1.282 1.643 1565
1.599
-6.402
2449
2.423 2.741
0.32
1.140 1.300 1428
0.886
-7.865
2299
3.557 3.767
0.21
1.181 1.394 1335
1.248
-4.322
2206
3.505 3.659
0.15
1.389 1.928 1430
1.436
-2.987
2301
3.180 3.299
0.12
0.920 0.847 1359
0.966
-2.801
2230
3.443 3.530
0.09
1.198 1.435 1430
1.254
-1.809
2301
2.181 2.268
0.09
1.006 1.011 1378
1.127
-1.854
2192
2.682 2.763
0.08
1.202 1.445 1397
1.409
-1.577
2249
2.704 2.734
0.03
1.301 1.692 1433
1.436
-0.603
2376
3.078 3.053
0.02
0.947 0.897 1416
0.750
0.690
2447
3.568 3.496
0.07
1.168 1.364 1464
1.195
1.547
2335
3.175 3.082
0.09
1.329 1.767 1426
1.440
1.803
2298
3.384 3.271
0.11
1.110 1.232 1391
1.410
2.200
2263
2.585 2.437
0.15
1.166 1.359 1391
1.467
2.847
2283
3.050 2.888
0.16
1.441 2.076 1335
2.077
2.882
2631
2.232 2.046
0.19
1.007 1.015 1333
0.980
4.420
2284
3.031 2.770
0.26
1.322 1.749 1440
1.798
4.596
2350
2.651 2.106
0.54
1.286 1.654 1320
1.317
11.169
2271
Critical Significant critical Significant critical Significant
t=
alpha = 0.05
t=
alpha = 0.10
t=
alpha = 0.01
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
NO
1.645
SIG
2.576
NO
1.960
NO
1.645
SIG
2.576
NO
1.960
NO
1.645
NO
2.576
NO
1.960
NO
1.645
NO
2.576
NO
1.960
NO
1.645
NO
2.576
NO
1.960
NO
1.645
NO
2.576
NO
1.960
NO
1.645
SIG
2.576
NO
1.960
SIG
1.645
SIG
2.576
NO
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
1.960
SIG
1.645
SIG
2.576
SIG
17
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
18
Determining Strategies
Clustering of responses to three different survey questions regarding
competitive strategies was performed using group average and Minikowski as a
distance measure (p=3). The WPGMC method (Lance & Williams, 1967) yielded 3
useful clusters, each representing a niche, a low cost, and a differentiating
strategy, using a 5 point Likert scale. As the cluster centroids were established,
each response was classified based on their Minikowski distance.
K-means Manhattan distance
Minekowski distance
The intra-cluster correlation coefficient (ICC) aka choptic-r was calculated for the
significance of the 3 forced clusters (Donner, Birkett, Buck, 1981). All clusters were
found to be significant at a alpha=0.05 level.
Differentiator Low Cost
Final centroid location- Differentiator
2.8963
1.8532
Final centroid location- Low cost
1.3093
2.9965
Final centroid location- Niche
1.7677
1.5835
Niche
2.2300
1.4421
3.5547
19
Determining Strategies
Of the 1,899 respondents, 44 did not identify company size, and 36
did not identify a strategy (response = ‘n/a’). This yielded a sample
size of 1,809 for further study,
Employer's
organization size
Fortune 500
Fortune 1000
Smaller organizations
Total
Niche
strategy
279
68
182
529
Differentiation Low cost No stated Total number of
strategy strategy
respondents
361
327
12
979
135
13
12
228
365
79
12
638
861
419
36
1845
20
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
21
Findings
When examining each organization size and the factors considered for overall OLTP and DSS
outsourcing, we found that Fortune-500 organizations would rate cost factors (labor and overall
costs) as most important, regardless of competitive strategies. Fortune-1000 organizations would
rate internal factors (improved flexibility, agility, familiarity with outsourcing, 24hrs operations) a
most important, while smaller organizations would rate supplier factors (skilled work force,
number of providers, investments, prior experience, similar activities, similar industry, knowledge
of provider’s employees, trust, general expertise, understanding of needs, education system at
provider location) as the most important factors.
Factors considered when outsourcing IT
Niche strategy - Fortune-500
Niche strategy - Fortune-1000
Niche strategy - Smaller org
Niche strategy average
Differentiator - Fortune-500
Differentiator - Fortune-1000
Differentiator - Smaller org
Differentiator average
Low cost - Fortune-500
Low cost - Fortune-1000
Low cost - Smaller org
Low cost strategy average
Supplier
factors
2.90
2.69
3.20
2.93
2.78
3.41
3.15
3.11
3.24
2.38
2.73
2.78
Internal Technology
factors
factors
2.33
2.38
3.20
2.57
2.88
2.35
2.80
2.43
2.56
2.31
3.64
2.78
3.05
2.81
3.08
2.63
2.98
2.60
3.41
2.17
2.69
2.28
3.03
2.35
Costs
3.33
2.89
2.72
2.98
2.96
2.87
3.09
2.98
3.39
2.79
2.38
2.85
Significant differences found within strategy groups (single factor ANOVA), and within system (two-factor ANOVA without replication) using alpha
= 0.05 (p ranging from 5.93E-05 and 2.63E-55). Note: 270 respondents did not engage in any form of outsourcing and was not planning to do so
either (within 3 years) or had no responses to factors considered. Overall sample size is therefore 1,575.
22
Findings
While the factors considered were uniform
across the various strategies, we did find
that the magnitude was different based on
organizational size. As expected, low cost
Fortune-500 organizations had the highest
emphasis on costs when outsourcing,
while smaller niche players had a
significantly higher emphasis on supplier
factors.
Factors considered when outsourcing IT
3.75
3.50
3.25
Supplier factors
Internal factors
3.00
A surprising finding was that Fortune-1000
organizations engaged in a differentiation
strategy placed a statistically significantly
higher emphasis on internal factors when
compared to other same size niche or low
costs organizations. Further research
would be needed to establish why this may
be the case.
T echnology factors
Costs
2.75
2.50
2.25
Fortune-500
Fortune-1000
Smaller org
23
What We’ll Cover…
•
Introductions
•
Literature and Research Questions
•
Population Definitions & Sampling methods
•
Findings

The most important factors for OLTP and DSS outsourcing overall

Divergent factors for OLTP and DSS outsourcing

Determining Strategies

Factors considered in outsourcing by competitive strategies

Outsourcing trends and expectations 2007-2009
24
Expected Outsourcing trends by Organization Size
Status and expectations (%)
Size
% of IT budget
% of IT budget
Expected % of IT
Expected % of IT
spent on OLTP
spent on DSS
budget spent on OLTP budget spent on
outsourcing today outsourcing today outsourcing within 3 DSS outsourcing
yrs
within 3 yrs
Fortune-500
6.9%
5.5%
15.1%
12.6%
Fortune-1000
6.4%
4.1%
11.4%
8.6%
Small organization
7.0%
5.5%
10.1%
7.8%
6.8%
5.1%
12.2%
9.7%
Average
The respondents reported that an average of 6.8% of IT budgets were spent on
outsourced OLTP efforts. There were no significant differences between the
organization sizes. As expected, the respondents also reported slightly less
spending on DSS outsourcing initiatives.
The major differences were in the expectation levels, where respondents from
Fortune-500 companies reported the highest growth in both OLTP and DSS
outsourcing over the next 3 years. Overall, the expected annualized growth rate
in spending on OLTP outsourcing (2007-2009) was 21.6% and 12.6% for DSS
systems.
25
Next steps
1. Need a volunteer (faculty?) who want to work
with me to complete this paper and put the
findings back into context.
2. Submission
– where?
3. Deadline – when?
26
Core work reviewed
Bahli, B. and Rivard, R (2003) “A Validation of Measures associated with risk factors in information
technology outsourcing”., Proceedings of the 36th Hawaii International Conference on System
Sciences, IEEE.
Donner A, Birkett N, Buck C (1981) Randomization by cluster. Sample size requirements and
analysis. Am J Epidemiol 1981, 114:906-914.
Djavanshir, G.R. (2005) “Surveying the risks and benefits of IT outsourcing”., IT Professional
Volume 7, Issue 6, Nov.-Dec. 2005 Page(s):32 - 37
Engineering Management Journal (2005), “Outsourcing is a failure, claims survey”, Volume 6, Dec.
2004-Jan. 2005 Page(s):7 - 7
Bahli, B.; Rivard, S. (2003), “A validation of measures associated with the risk factors in technology
outsourcing”, System Sciences, 2003. Proceedings of the 36th Annual Hawaii International
Conference on 6-9 Jan 2003 Page(s):10 pp.
Fortune (2005). “The Fortune-1000 list of the largest companies”, April 18, 2005.
Gable, G.G.; Sharp, J.A. (1992), “Outsourcing assistance with computer system selection: a success
factors model” System Sciences, Proceedings of the Twenty-Fifth Hawaii International
Conference on Volume iii, 7-10 Jan. 1992 Page(s):566 - 577 vol.3
27
Core work reviewed
Gable, G.G. (1996). “Outsourcing IT advice: a success prediction model”, Information Systems
Conference of New Zealand, Proceedings 30-31 Oct. 1996 Page(s):143 - 153
Gonzalez, R., Gasco, J. and Liopis, J. (2005) “Information systems outsourcing risks: a study of large
firms”. Industrial Management & Data Systems; 2005, Vol. 105 Issue 1, p45-61, 17p
Internet Center for Management and Business Administration Inc. (ICMBAI)
http://www.quickmba.com/strategy/competitive-advantage/ (accessed Feb. 2nd, 2006).
Lance, G., Williams, T. (1967)., “A General Theory of Classificatory Sorting Strategies: II”., Computer
Journal 10, pp 271-277.
Levina, N., Ross, J. (2003)., “Vendor’s perspectives: Exploring the value proposition in information
technology outsourcing”., MIS Quarterly, Sept.
Porter, M. E. (1980) “Competitive Strategy”, Free Press, NY
Porter, M. E. (1985) “Competitive Advantage”, Free Press, NY
Porter, M. E. (1998)., “Competitive Advantage : Creating and Sustaining Superior Performance”., Free
Press; 1st P edition (June 1, 1998) ISBN: 0684841460
Porter, M. E. (2001) “Strategy and the Internet”, Harvard Business Review, March pp. 63-78.
28
Core work reviewed
Rayport, J. and Sviokla J. (1994) “Managing the marketplace”, Harvard Business Rewvis, Nov-Dec. 1994.,
pp. 141-150.
Rayport, J. and Sviokla J. (1995) “Exploiting the virtual value chain”, Harvard Business Rewvis, Nov-Dec.
1995., pp. 75-85.
Simon, H, (1960) “The New Science of Management Decisions”., New York: Harper and Row
Webster, M., Muhlemann, A. P. and Alder, C. (2000). „Decision support for the scheduling of subcontract
manufacture.
Wilcocks, L., Fitzgerald G., and Feeny D. (1995), “Outsourcing IT: the strategic implications”, Long Range
Planning, Vol. 28. No 5, pp 59-70.
29