Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Michael R. Weeks
David Feeny
D
uring the past few years, innovation has become a headline
agenda item for many firms1 and for their CIOs.2 Can CIOs who
have outsourced most of their information technology (IT) meet
the challenge, or is outsourcing incompatible with innovation?
Certainly, losing innovative capabilities is recognized as a potential risk of out-
sourcing in these environments.3
IT outsourcing is now twenty years old and many large organizations
have a decade or more of experience in large-scale IT outsourcing relationships.
For these firms, the success of their relationships is critical, since switching sup-
pliers is extremely costly and painful, and a large-scale return to in-sourced
alternatives is seen to be almost impossible. “Success” is a multi-dimensional
concept: the most obvious goals are to achieve high-quality IT services at low
levels of cost; but the rhetoric of IT outsourcing has included an expectation that
a “world-class strategic partner” will also be a source of new ideas and practices,
leading to increased business value over time.4 It is in these dimensions of inno-
vation and “added value” that firms have most commonly been disappointed.
Consequently, our research has focused on how improved innovation outcomes
can be achieved.
Interpretation of prior research work does not suggest definitive conclu-
sions about the effect of IT outsourcing on innovation.5 Clearly, external per-
spectives and skills may contribute to innovation potential. However, increased
coordination complexities and a lack of alignment of risks and incentives may
make achievement of the potential more difficult. Our expectation was that IT
outsourcing in itself neither ensures nor negates innovation. Outcomes will be
dependent on key enabling factors within the relationship, which the research
set out to identify.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 127
Outsourcing: From Cost Management to Innovation and Business Value
Case 1
Client firm A is a leading engineering company, increasingly focused on
defense markets. It has annual revenues of more than $20 billion and extensive
operations in both the USA and Europe. Client A took the decision to outsource
most of its IT activity in 1993. It was a decision taken by the highest-level Group
Executives who were unconvinced that IT was a core competence and saw that
outsourcing would provide an immediate and much needed improvement to the
balance sheet. They also hoped that it would result in lower IT costs over time.
Their chosen provider was Supplier X, itself a major firm with current revenues
of more than $15 billion and an extensive client base across many geographies
and industry sectors. Supplier X took on the great majority of Client A’s IT oper-
ations—and 85% of its IT staff—in 1994, and remains Client A’s provider to this
day. However, the relationship has
Michael R. Weeks is an Assistant Professor of passed through a number of moods and
Management in the Sykes College of Business at the phases, and two contract renegotiations.
University of Tampa. <mrw@weeks2000.com>
The first of these, in 1996, sought to
David Feeny is the Director of the Oxford Institute of realign the contract to client business
Information Management and a Fellow of Templeton
College and the Saïd Business School of the objectives after an initial period marked
University of Oxford. <david.feeny@sbs.ox.ac.uk> by adversarial debates around contract
terms and expectations. The second
renegotiation, in 2000, was triggered by substantial changes in Client A’s busi-
ness configuration following major M&A activity. The opportunity was taken in
2000 to more formally express Client A’s expectation of an innovation contribu-
tion from Supplier X—an expectation that had been present from the start, but
was not being met to Client A’s satisfaction. Two years later, however, a down-
turn in market conditions led to new pressures from Client A to reduce IT cost
levels beyond the contract terms; and there was continuing ambiguity observed
in Client A’s view of the role and significance of IT, particularly at strategic busi-
ness unit (SBU) level. Nevertheless, Supplier X’s revenues from the relationship
had grown from around $200 million in 1994 to more than $750 million, and
Client A was reported to be the company’s largest single customer.
Case 2
The second case study involved a leading manufacturing concern and its
relationship with another of the major providers of IT outsourcing services.
Client B specializes in gas turbine technology for aviation and marine applica-
tions, and it has annual revenues of around $12 billion. Its IT outsourcing expe-
rience started in 1996 when its largest single business division transferred almost
all of its IT activity and staff to Supplier Y—an IT services firm with revenues of
around $10 billion—in a contract worth around $125 million per annum. As in
Case 1, balance sheet benefits from the transfer were again significant in the
128 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
decision making. By the middle of the current decade Supplier Y’s business with
Client B was worth around $400 million per annum, and they provided IT ser-
vices to all of Client B’s business divisions. However, the relationship had been
on something of a rollercoaster ride. Both parties agreed that it started well.
Supplier Y involved its consultancy arm, which operated across its eight Client
Industry Divisions, in a series of business process improvement projects that
delivered early benefits to Client B. However, by 2000 it was judged that the
technology infrastructure planned to support new business processes was mis-
aligned with the reality of pressures on Client B’s IT cost structure. A renegoti-
ated contract in 2000 provided Client B with further short-term financial
benefits, and Supplier Y with a contract extension. It also included mutual com-
mitment to a significant reduction in unit costs through rationalization of the
infrastructure, a project that led a year later to a further crisis when Supplier Y
claimed that Client B was failing to deliver on the company-wide standardiza-
tion on which such rationalization depended. At the time of the research inter-
views, the outlook for the relationship was in the balance, with recent changes
to the leadership of Supplier Y’s account team intended to restore a positive
climate.
Case 3
There are a number of parallels between Case 3 and Case 1. Client C is
also a prominent engineering group with an emphasis on defense markets; it
started to outsource its IT activity in 1991; and its chosen long-term provider is
also Supplier X (as in Case 1), although the client firm headquarters (and the
central relationships) are on opposite sides of the Atlantic. One of the relevant
differences is that Client C had a strategic rather than financial rationale for out-
sourcing IT. Foreseeing a period of major uncertainty in its markets at the end of
the Cold War, Client C wanted to increase its agility by de-coupling IT operations
from a particular business configuration. This did not signal a belief that IT was
unimportant to the business; in fact, retained IT managers report at more senior
Group and Division levels in Client C than they do in either Client A or B. More-
over, although they continue to employ fewer of their own IT staff than Client
A, it is markedly more than in Client B. A further contrast with the first two
cases is that Client C models its relationship with Supplier X on the wider orga-
nizational norms of the business: an enabling umbrella contract with Supplier X
is held by the Group CIO; and business divisions have their traditional obligation
to pay attention to the center’s lead, but the right not to follow it. In practice, all
divisions do use Supplier X, but through specific contracts that each has negoti-
ated for itself. Overall, Supplier X achieves annual revenues of roughly $220
million from Client C, and the relationship seems to have avoided the crises
described in the previous cases. Although we examined the overall relationship
between Client C and Supplier X, our primary focus for this case study was
Client C’s submarine manufacturing division in the northeastern U.S.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 129
Outsourcing: From Cost Management to Innovation and Business Value
Case 4
Our fourth case study is rather different. Client D is one of the major
pharmaceutical firms, with annual revenues in excess of $18 billion. It is an
extensive user of IT and retains 2500 IT staff—choosing to outsource only IT
infrastructure (excluding software development). Until 2000, it had taken no
major IT outsourcing initiatives within an overall IT infrastructure budget of
approximately $160 million. Its decision in 2000 to outsource its IT infrastruc-
ture was driven by a desire to improve the quality and integrity of a fragmented
asset base (partly inherited through merger activity) and by a perception that
this could best be achieved through an expert external firm while internal
resources focused on development of innovation-oriented applications. The cho-
sen provider was Supplier Z, one of the large IT sector firms that have increas-
ingly diversified from hardware and software products into the provision of IT
services during the past decade. As a product provider, Supplier Z was already
well known to Client D. Both sides emphasized a spirit of partnership and a code
of behavior to support the new relationship, and a carefully structured contract
protected Supplier Z from early short-term cost pressures. At the time of the
research, this comparatively younger relationship was encountering issues but
had avoided any major crises.
130 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 131
Outsourcing: From Cost Management to Innovation and Business Value
▪ Case 3 represented the richest ground for innovation study, with almost
one hundred innovation projects—large and small—being pursued under
the auspices of a joint Client C/ Supplier X Review Board. We focused the
research in this case on the innovation process as a whole, but with par-
ticular attention to a successful innovation in the strategic category.
▪ Case 4, by contrast, was looking only for IT operational-level innovations
within its outsourcing relationship. We studied two initiatives in this cate-
gory, one of them having achieved success while the other was in the
process of addressing significant difficulties.
Innovations can indeed be achieved within an IT outsourcing relation-
ship, but (not surprisingly) most of the examples we found were at the IT opera-
tional level. Even at this level, failures seemed to be explained more by the IT
outsourcing context than by mistaken goals or lack of professional implementa-
tion effort. The relative scarcity of the higher-level innovation outcomes of par-
ticular interest to our client interviewees further underlines the importance of
understanding the particular challenges that an IT outsourcing context may pre-
sent. Since that context clearly varies over “time and tide,” our analysis starts
with insights to be gained from a life-cycle perspective on IT outsourcing rela-
tionships.
132 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
▪ Most (sometimes virtually all) of the employees who represent the tech-
nology know-how of the client firm are transferred to the supplier, whose
business it now is to understand IT. This has ongoing implications for the
levels of dialogue in which the client and supplier can engage and, conse-
quently, for the levels of trust.
▪ The devolution of strategic business unit IT-related decision making,
which has typically been a feature of multi-business firms, is now sharply
reversed as power comes to reside at the corporate center with the execu-
tive who owns the central contract with the supplier. This limits the free-
dom to maneuver within business units and reduces their inclination to
invest in innovations that require a significant IT component.
▪ A clear signal is given to SBU executives that IT is positioned as non-
core/commodity, and that it is not therefore expected to feature signifi-
cantly in their key business decisions. This reduces the chances that IT
managers within business units will have the involvement and influence
required to engage in innovations beyond the IT operational level.
▪ The winning supplier firm now faces the challenge of achieving contract
profitability despite an unremitting client pressure on cost and an inheri-
tance that often included outdated technology and inappropriate staffing
levels. The client-supplier relationship becomes dominated by constant
negotiation around the contract and what it included in terms of scope
and agreed pricing. A zero-sum game is played out, with suppliers poten-
tially experiencing the “Winner’s Curse,” which results when the price
required to win a contract is so low that the successful bidder cannot pos-
sibly make a profit.9 Such a low-trust buyer-supplier relationship is far
removed from the ecology required for innovation.
In our cases, Client B experienced all four of these negative effects and
Client A all except the first. The longer-term consequences can be seen in both
cases. The more strategic approach to IT outsourcing of Client C, however, pro-
tected it from all four dangers; and Client D with its focused entry into IT out-
sourcing sought to circumvent this stage altogether.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 133
Outsourcing: From Cost Management to Innovation and Business Value
134 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
ertheless, the examples in Case 1 and Case 3 show that important innovations at
the IT operational level can be achieved during this stage. Business process- and
strategic-level innovations require further capability.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 135
Outsourcing: From Cost Management to Innovation and Business Value
Relationship Enablers
• Innovation Governance
• Trust
• Measurement Specificity
Strategic
Business Process
IT Operational
INNOVATION OUTCOMES
Client Enablers
• Technology Skills IT Supplier Enablers
• Selective Sourcing Mindset • Business Process Skills
• IT Organizational Alignment • Industry Scope
• IT Leadership
Client A was also struggling with the right balance of technical versus business
process knowledge. A divisional CIO for Client A said:
“I don’t need technicians; I need business people. I’ve got technicians. There’s a
role for both. I need to blend the technical expertise of Supplier X with the busi-
ness requirement of [our firm]. I need to have enough knowledge in the people I
have, so just from a technical standpoint, we know we’re not getting sold a bill of
goods.”
On the other hand, Client D never reduced its technical skills pool. The
firm maintained a large technical contingent for software development; how-
ever, these technical personnel frequently encroached upon Supplier Z’s terri-
136 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
tory in hardware and services. The supplier felt that Client D was stifling the
potential creativity of Supplier Z by over-specifying needs and micro-managing.
The “Goldilocks Principle” applies it seems—too many is no better than too few.
Client C seemed to achieve the best balance of technical and business
knowledge, but this was due to the maturity of the relationship and a conscious
decision to develop certain competencies. The divisional CIO for the submarine
division points out:
“The relationship has evolved, and we have some new people in here. We had to
do some resetting of expectations along the line here. In addition to skills in their
respective [technical] fields, whether that is application development or infra-
structure, the knowledge of the business is key for me.”
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 137
Outsourcing: From Cost Management to Innovation and Business Value
Executive-Level IT Leadership
Strongly related to the need for IT organizational alignment is executive-
level leadership of IT. Whatever the formal nomenclature (CIO, IT Director), the
term refers to an IT leader who sits one or two levels below the business CEO in
the organizational structure, who has regular access to the CEO and other key
players, and who is regarded by them as an important member of the business
team. Again, this is not a new idea in the context of exploiting IT for business
value,14 but it is an idea that often needs to be re-examined within the context
of outsourced IT.
The direct need is to establish or re-establish excellent relationships
between CEOs and IT Leaders within the business units where innovation initia-
tives are being promoted. However, we found that firms struggled to get this
enabler in place at business unit level if a different situation exists at corporate
level. As one frustrated IT executive at business unit level for Client B explained
to us:
“Our Corporate CIO is five layers down in the organization. And this is a part of
the problem—our company does not have, in my view, at the enterprise level, the
vision of what IT means to their business. They don’t understand it to the extent
they’re willing to change their organization structure and their operating model to
reflect IT’s importance to the firm.”
138 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
leadership is required at both corporate and business unit levels of the client
firm, and one cannot sustainably exist without the other.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 139
Outsourcing: From Cost Management to Innovation and Business Value
140 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 141
Outsourcing: From Cost Management to Innovation and Business Value
142 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
Measurement Specificity
Selective Sourcing Mindset
Effective Innovation Governance
Trust
Business Process
Client-Industry Scope of Supplier
Client IT and Corporate Structure Match
Supplier Business Process Design Knowledge
IT Operational
Client Team
Technology Knowledge Personal Trust
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 143
Outsourcing: From Cost Management to Innovation and Business Value
The CIO for the submarine division at Client C took the initiative to
involve Supplier X in early and high-level discussions about the implications of
the new direction. Elsewhere within the firm, Supplier X had the relevant
expertise, and during a long-established relationship Supplier X had developed
the motivational trust with Client C that gave them the confidence to respond.
The joint project expanded the Client C environment into new locations, new
markets, and a new product. Client C’s successful transition into the overhaul
market was highlighted in Client C’s 2006 annual report.
144 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU
Outsourcing: From Cost Management to Innovation and Business Value
learning curve may provide additional insight into the challenge of putting the
enablers in place.
APPENDIX
About the Research
The concepts presented here are the result of a two-year study of the
effects of IT outsourcing relationships on business innovation. The research
included four primary case studies, featuring three “client” firms in
aerospace/defense and one in the pharmaceutical industry. All were interna-
tional firms with multi-billion dollar revenues and perceived to be leaders in
their sectors. Their IT outsourcing relationships, mostly of long standing, were
with three of the most prominent providers of such services. More than 70
detailed interviews were conducted with client and supplier representatives in
roughly equal measure. Interviews included client CIOs at the corporate and the
business unit levels, and the most senior account executives within the suppli-
ers. Interviewees were asked to share their perceptions of all important aspects
of the outsourcing context and relationship and to describe examples of both
successful and unsuccessful innovation initiatives, with their own insights into
what had an impact on these outcomes. After transcription and analysis, our
findings were presented back to research participants for discussion and
validation.
CALIFORNIA MANAGEMENT REVIEW VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU 145
Outsourcing: From Cost Management to Innovation and Business Value
Notes
1. P.F. Drucker, “The Discipline of Innovation,” Harvard Business Review, 76/6
(November/December 1998): 149-157; A.H. Van de Ven, D.E. Polley, R. Garud, and S.
Venkataraman, The Innovation Journey (New York, NY: Oxford University Press, 1999); H.W.
Chesbrough and D.J. Teece, “Organizing for Innovation,” Harvard Business Review, 80/8
(August 2002): 27-135.
2. M.J. Earl and D.F. Feeny, “Is Your CIO Adding Value,” Sloan Management Review, 35/3
(Spring 1994): 11-20; K. Yamada, “The Innovation Imperative,” CIO Insight, (October 2001),
pp. 35-42; M. Polansky, T. Inuganti, and S. Wiggins, “The 21st Century CIO,” Business Strat-
egy Review, 15/2 (Summer 2004): 29-33.
3. Y. Shi, “Today’s Solution and Tomorrow’s Problem: The Business Process Outsourcing Risk
Management Puzzle,” California Management Review, 49/3 (Spring 2007): 27-44.
4. M.C. Lacity and R. Hirschheim, “The Information Systems Outsourcing Bandwagon,” Sloan
Management Review, 35/1 (Fall 1993): 73-86.
5. H. Chesbrough, Open Innovation (Boston, MA: Harvard Business School Press, 2003); C.M.
Christensen and M.E. Raynor, The Innovator’s Solution (Boston, MA: Harvard Business School
Press, 2003); D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Man-
agement,” Strategic Management Journal, 18/7 (August 1997): 509-533; Ven, Polley, Garud,
and Venkataraman, op. cit.
6. J.W. Rottman and M.C. Lacity, “Proven Practices for Effectively Offshoring IT Work,” MIT
Sloan Management Review, 47/3 (Spring 2006): 56-63.
7. C.K. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business
Review, 68/3 (May/June 1990): 79-91.
8. Lacity and Hirschheim, op. cit.
9. T. Kern, L.P. Willcocks, and E. van Heck, “The Winner’s Curse in IT Outsourcing: Strategies
for Avoiding Relational Trauma,” California Management Review, 44/2 (Winter 2002): 47-69.
10. T. Kern, “Relationships in Information Technology Outsourcing: An Exploratory Research
Study of a Conceptual Framework,” D.Phil. diss., Christ Church College, University of
Oxford, 1999; I.R. Macneill, The New Social Contract: An Inquiry into Modern Contractual Rela-
tions (New Haven, CT: Yale University Press, 1980).
11. W.M. Cohen and D.A. Levinthal, “Absorptive Capacity: A New Perspective on Learning and
Innovation,” Administrative Science Quarterly, 35/1 (March 1990): 128-152.
12. J. Cross, “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard Business
Review, 73/3 (May/June 1995): 94-102; J. Cross, M.J. Earl, and J.L. Sampler, “Transforma-
tion of the IT Function at British Petroleum,” MIS Quarterly, 21/4 (December 1997): 401-
423; M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “The Value of Selective IT Sourcing,” Sloan
Management Review, 37/3 (Spring 1996): 13-25.
13. F. Rockart, M.J. Earl, and J.W. Ross, “Eight Imperatives for the New IT Organization,” Sloan
Management Review, 38/1 (Fall 1996): 43-54.
14. Earl and Feeny, op. cit.; D.F. Feeny, B.R. Edwards, and K.M. Simpson, “Understanding the
CEO/CIO Relationship,” MIS Quarterly, 16/4 (December 1992): 435-448.
15. D.H. McKnight, L.L. Cummings, and N.L. Chervany, “Initial Trust Formation in New Organi-
zational Relationships,” Academy of Management Review, 23/3 (July 1998): 473-490.
16. J.D. Lewis and A. Weigert, “Trust as a Social Reality,” Social Forces, 63/4 (June 1985): 967-
985; M. Sako, Prices, Quality and Trust: Inter-firm Relationships in Britain and Japan (Cambridge:
Cambridge University Press, 1992); O.E. Williamson, “Calculativeness, Trust, and Economic
Organization,” Journal of Law & Economics, 36/1, part 2 (April 1993): 453-486; A. Zaheer and
N. Venkatraman, “Relational Governance as an Interorganizational Strategy: An Empirical
Test of the Role of Trust in Economic Exchange,” Strategic Management Journal, 16/5 (June
1995): 373-392; L.G. Zucker, “Production of Trust: Institutional Sources of Economic Struc-
ture, 1840-1920,” in B.M. Staw and L.L. Cummings, eds., Research in Organizational Behavior,
Volume 8 (Greenwich, CT: JAI Press, 1986): 53-111.
17. McKnight, Cummings, and Chervany, op. cit.
146 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 50, NO. 4 SUMMER 2008 CMR.BERKELEY.EDU