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InformationSystemsOutsourcingLifeCycleAndRisksAnalysis
1.Introduction
Informationsystemsoutsourcinghasobtainedtremendousattentionsintheinformationtechnologyindustry.Althoughthereareanumberofreasonsforcompaniestopursuinginformationsystems(IS)outsourcing,themostprominentmotivationforISoutsourcingthatrevealedintheliteratureswas“costsaving”.CostfactorhasbeenamajordecisionfactorsforISoutsourcing.
Otherthancostfactor,thereareotherreasonsforoutsourcingdecision.TheOutsourcingInstitutesurveyedoutsourcingend-usersfromtheirmembershipin1998andfoundthattop10reasonscompaniesoutsourcewere:
Reduceandcontroloperatingcosts,improvecompanyfocus,gainaccesstoworld-classcapabilities,freeinternalresourcesforotherpurposes,resourcesarenotavailableinternally,acceleratereengineeringbenefits,functiondifficulttomanage/outofcontrol,makecapitalfundsavailable,sharerisks,andcashinfusion.
Withinthesetoptenoutsourcingreasons,therearethreeitemsthatrelatedtofinancialconcerns,theyareoperatingcosts,capitalfundsavailable,andcashinfusion.Sincethephenomenonofwagedifferenceexistsintheoutsourcedcountries,itisobviousthatoutsourcingcompanieswouldsaveremarkableamountoflaborcost.AccordingtoGartner,Inc.'
sreport,worldbusinessoutsourcingserviceswouldgrowfrom$110billionin2002to$173billionin2007,aproximately9.5%annualgrowthrate.
Inadditiontocostsavingconcern,thereareotherfactorsthatinfluenceoutsourcingdecision,includingtheawarenessofsuccessandriskfactors,theoutsourcingrisksidentificationandmanagement,andtheprojectqualitymanagement.Outsourcingactivitiesaresubstantiallycomplicatedandoutsourcingprojectusuallycarriesahugearrayofrisks.Unmanagedoutsourcingriskswillincreasetotalprojectcost,devaluatesoftwarequality,delayprojectcompletiontime,andfinallylowerthesuccessrateoftheoutsourcingproject.Outsourcingriskshavebeendiscoveredinareassuchasunexpectedtransitionandmanagementcosts,switchingcosts,costlycontractualamendments,disputesandlitigation,servicedebasement,costescalation,lossoforganizationalcompetence,hiddenservicecosts,andsoon.
Mostpublishedoutsourcingstudiesfocusedonorganizationalandmanagerialissues.WebelievethatISoutsourcingprojectsembracevariousrisksanduncertaintythatmayinhibitthechanceofoutsourcingsuccess.Inadditiontoserviceandmanagementrelatedriskissues,wefeelthattechnicalissuesthatrestrainthedegreeofoutsourcingsuccessmayhavebeenoverlooked.Thesetechnicalissuesareprojectmanagement,softwarequality,andqualityassessmentmethodsthatcanbeusedtoimplementISoutsourcingprojects.Unmanagedrisksgenerateloss.Weintendtoidentifythetechnicalrisksduringoutsourcingperiod,sothesetechnicalriskscanbeproperlymanagedandthecostofoutsourcingprojectcanbefurtherreduced.ThemainpurposeofthispaperistoidentifythedifferentphasesofISoutsourcinglifecycle,andtodiscusstheimplicationsofsuccessandriskfactors,softwarequalityandprojectmanagement,andtheirimpactstothesuccessofIToutsourcing.
Mostoutsourcinginitiativesinvolvestrategicplanningandmanagementparticipation,therefore,thedecisionprocessisobviouslybroadandlengthy.Inordertoconductacomprehensivestudyontooutsourcingprojectriskanalysis,weproposeanISoutsourcinglifecycleframeworktobeservedasayardstick.EachISoutsourcingphaseisnamedandallinheritedrisksareidentifiedinthislifecycleframework.Furthermore,weproposetousesoftwarequalitymanagementtoolsandmethodsinordertoenhancethesuccessrateofISoutsourcingproject.
ISO9000isaseriesofqualitysystemsstandardsdevelopedbytheInternationalOrganizationforStandardization(ISO).ISO'
squalitystandardshavebeenadoptedbymanycountriesasamajortargetforqualitycertification.OtherISOstandardssuchasISO9001,ISO9000-3,ISO9004-2,andISO9004-4arequalitystandardsthatcanbeappliedtothesoftwareindustry.Currently,ISOisworkingonISO31000,ariskmanagementguidancestandard.TheseISOqualitysystemsandriskmanagementstandardsaregenericinnature,however,theymaynotbesufficientforISoutsourcingpractice.Thispaper,therefore,proposesanoutsourcinglifecycleframeworktodistinguishrelatedqualityandriskmanagementissuesduringoutsourcingpractice.
ThefollowingsectionsstartwithneededtheoreticalfoundationstoISoutsourcing,includingeconomictheories,outsourcingcontractingtheories,andrisktheories.TheISoutsourcinglifecycleframeworkisthenintroduced.Itcontinuestodiscusstheriskimplicationsinprecontract,contract,andpost-contractphases.ISOstandardsonqualitysystemsandriskmanagementarediscussedandcomparedinthenextsection.Aconclusionanddirectionforfuturestudyareprovidedinthelastsection.
2.Theoreticalfoundations
2.1.Economictheoriesrelatedtooutsourcing
AlthoughthereareanumberofreasonsforpursuingISoutsourcing,thecostsavingisamainattractionthatleadscompaniestosearchforoutsourcingopportunities.Inprinciple,fiveoutsourcingrelatedeconomictheoriesthatlaythegroundworkofoutsourcingpractice,theyare:
(1)productioncosteconomics,
(2)transactioncosttheory,(3)resourcebasedtheory,(4)competitiveadvantage,and(5)economiesofscale.
ProductioncosteconomicswasproposedbyWilliamson,whomentionedthat“afirmseekstomaximizeitsprofitalsosubjectstoitsproductionfunctionandmarketopportunitiesforsellingoutputsandbuyinginputs”.Itisclearthatproductioncosteconomicsidentifiesthephenomenonthatafirmmaypursuethegoaloflow-costproductionprocess.
TransactioncosttheorywasproposedbyCoase.Transactioncosttheoryimpliesthatinaneconomy,therearemanyeconomicactivitiesoccurredoutsidethepricesystems.Transactioncostsinbusinessactivitiesarethetimeandexpenseofnegotiation,andwritingandenforcingcontractsbetweenbuyersandsuppliers.Whentransactioncostislowbecauseofloweruncertainty,companiesareexpectedtoadoptoutsourcing.
Thefocusofresource-basedtheoryis“theheartofthefirmcentersondeploymentandcombinationofspecificinputsratherthanonavoidanceofopportunities”.Connersuggestedthat“Firmsasseekersofcostly-to-copyinputsforproductionanddistribution”.Throughresource-basedtheory,wecaninferthat“outsourcingdecisionistoseekexternalresourcesorcapabilityformeetingfirm'
sobjectivessuchascost-savingandcapabilityimproving”.
Porter,inhiscompetitiveforcesmodel,proposedtheconceptofcompetitiveadvantage.Besankoetal.explicatedthetermofcompetitiveadvantage,througheconomicconcept,as“Whenafirm(orbusinessunitwithinamulti-businessfirm)earnsahigherrateofeconomicprofitthantheaveragerateofeconomicprofitofotherfirmscompetingwithinthesamemarket,thefirmhasacompetitiveadvantage.”Outsourcingdecision,therefore,istoseekcostsavingthatmeetsthegoalofcompetitiveadvantagewithinafirm.
Theeconomiesofscaleisatheoreticalfoundationforcreatingandsustainingtheconsultingbusiness.Informationsystems(IS)andinformationtechnology(IT)consultingfirms,inessence,beartheadvantageofeconomiesofscalesincetheiraveragecostsdecreasebecausetheyofferamassamountofspecializedIS/ITservicesinthemarketplace.
2.2.Economicimplicationoncontracting
Anoutsourcingcontractdefinestheprovisionofservicesandchargesthatneedtobecompletedinacontractingperiodbetweentwocontractingparties.SincemostIS/ITprojectsarelargeinscale,avaluablecontractshouldlistcompletesetoftasksandresponsibilitiesthateachcontractingpartyneedstoperform.Thestudyofcontractingbecomesessentialbecauseacompletecontractsettingcouldeliminatepossibleopportunisticbehavior,confusion,andambiguitybetweentwocontractingparties.
Althoughcontractingpartiesintendtoreachacompletecontract,inrealworld,mostcontractsareincomplete.Incompletecontractscausenotonlyimplementingdifficultiesbutalsoresultinginlitigationaction.Businessrelationshipmayeasilyberuinedbyholdingincompletecontracts.Inordertoreachacompletecontract,thecontractingpartiesmustpaysufficientattentiontoremoveanyambiguity,confusion,andunidentifiedandimmeasurableconditions/termsfromthecontract.AccordingtoBesankoetal.,incompletecontractingstemsfromthefollowingthreefactors:
boundedrationality,difficultiesonspecifyingormeasuringperformance,andasymmetricinformation.
Boundedrationalitydescribeshumanlimitationoninformationprocessing,complexityhandling,andrationaldecision-making.Anincompletecontractstemsfromunexpectedcircumstancesthatmaybeignoredduringcontractnegotiation.Mostcontractsconsistofcomplexproductrequirementsandperformancemeasurements.Inreality,itisdifficulttospecifyasetofcomprehensivemetricsformeetingeachparty'
srightandresponsibility.Therefore,anyvagueoropen-endedstatementsincontractwilldefinitelyresultinanincompletecontract.Lastly,itispossiblethateachpartymaynothaveequalaccesstoallcontract-relevantinformationsources.Thissituationofasymmetricinformationresultsinanunfairnegotiation,thusitbecomesanincompletecontract.
2.3.Riskinoutsourcecontracting
Riskcanbeidentifiedasanundesirableevent,aprobabilityfunction,varianceofthedistributionofoutcomes,orexpectedloss.Riskcanbeclassifiedintoendogenousandexogenousrisks.Exogenousrisksare“ris