The Information Systems Outsourcing Bandwagon
During the 1980s, executives learned of the strategic role that information systems (IS) could provide to organizations. Through IS, companies could squelch competition, secure suppliers, obtain customer loyalty, and reduce the threat of new entrants. Executives read about the IS victory stories of American Airlines, American Hospital Supply, and Merrill Lynch as evidence of the success to be found in exploiting information systems. Many executives applied strategic IS models to their own organizations.
As we enter the 1990s, one would assume that the role of IS would escalate as the United States grows from a domestic, industrial society to a global information society. However, many practitioners, academics, and consultants now advise executives to outsource their IS services along with their cafeteria, mail delivery, and custodial services. By farming out many or all of their information services, executives are promised savings of 10 percent to 50 percent off their IS expenditures.1 Many companies are likely to heed this advice, as evidenced by a Yankee Group report that estimates that every Fortune “500” company will evaluate IS outsourcing and 20 percent will sign outsourcing deals by 1994.2 The outsourcing trend is not limited to American companies; Frost and Sullivan estimate that the European outsourcing market will grow from $1.5 billion in 1990 to $10 billion in 1996.3
So what has happened to the IS function in the past few years? Has IS suddenly become a commodity service that is best managed by a large supplier? Several practitioners believe so. Henry Pfendt, director of information technology at Eastman Kodak, claims outsourcing comes down to one question: “Do you want to manage commodities?”4 Elliot McNeil, Southland’s management of information systems (MIS) manager: “It’s like the electric company; you use less, you pay less.”5 Elizabeth Gardner, in a commentary on IS outsourcing in the health care industry: “Outsourcing takes over all information systems functions, much the way an outside company would manage food service or laundry.”6 Bernie Ward, editor of Sky magazine, described IS out-sourcing: “Like shoppers at a fruit stand, companies are picking an apple here or an orange there until they have selected a menu of outsourcing services.&
References
1. P. Krass, “The Dollars and Sense of Outsourcing,” Information Week, 26 February 1990, pp. 26–31;
J. Rochester and D. Douglas, eds., “Taking an Objective Look at Outsourcing,” I/S Analyzer 28 (1990): 1–16;
R. Hamilton, “Kendall Outsources IS Chief,” Computerworld, 13 November 1989, pp. 1, 4;
G. Anthes, “Perot Wins Ten-Year Outsourcing Deal,” Computerworld, 8 April 1991, p. 96;
C. Wilder, “Bend Me, Shape Me,” Computerworld, 24 December 1991, p. 14; and
S. Huff, “Outsourcing of Information Services,” Business Quarterly 55 (1991): 62–65.
2. Network World, 17 February 1992, pp. 1, 31–36.
3. J. Greenbaum, “Planning for Pan-European Outsourcing,” Information Week, 22 June 1992, pp. 40–48.
4. E. Kass and B. Caldwell, “Outsource Ins, Outs,” Information Week, 5 March 1990, p. 14.
5. J. Ambrosio, “Outsourcing at Southland: Best of Times, Worst of Times,” Computerworld, 25 March 1991, p. 61.
6. E. Gardner, “Going On-line with Outsiders,” Modern Healthcare, 15 July 1991, p. 35.
7. B. Ward, “Hiring Out: Outsourcing Is the New Buzzword in the Management of Information Systems,” Sky Magazine, August 1991, p. 40.
8. M. Hopper, “Rattling SABRE — New Ways to Compete on Information,” Harvard Business Review, May–June 1990, p. 119.
9. R. Huber, “How Continental Bank Outsourced Its ‘Crown Jewels’,” Harvard Business Review, January–February 1993, pp. 121–129.
10. L. Loh and N. Venkatraman, “Diffusion of Information Technology Outsourcing: Influence Sources and the Kodak Effect,”Information Systems Research 3 (1992): 334–358.
11. A. Radding, “The Ride Is No Bargain if You Can’t Steer,” Computerworld, 8 January 1990, p. 70.
12. V. Hovey, Presentation to the University of Houston’s Information Systems Research Center, 22 January 1991.
13. Loh and Venkatraman (1992).
14. Radding (1990), pp. 67, 70–72.
15. O. Williamson, Markets and Hierarchies (New York: Free Press, 1975).
16. For circumstances in which the term “partnership” is applicable, see:
J. Henderson, “Plugging into Strategic Partnerships: The Critical ISConnection,” Sloan Management Review, Spring 1990, pp. 7–18.
17. Krass (1990);
D. Livingston, “Take My System — Please!” Systems Integration 23 (1990): 40–44;
Radding (1990); and
Huff (1991).
18. T. Barron, “Some New Results in Testing for Economies of Scale in Computing,” Decision Support Systems 8 (1992): 405–429.
19. A. Friedberg and W. Yarberry, “Audit Rights in an Outsourcing Environment,” Internal Auditor, August 1991, pp. 53–59.
20. J. Moad, “Large-Scale Systems Survey,” Datamation, 15 May 1988, pp. 56–64.
21. Friedberg and Yarberry (1991).
22. T. Mason, Perot (Homewood, Illinois: Dow Jones-Irwin, 1990).
23. L. Loh and N. Venkatraman, “Stock Market Reaction to Information Technology Outsourcing: An Event Study” (Cambridge, Massachusetts: MIT Sloan School of Management, Working Paper No. 3499-92BPS, November 1992).
24. R. Benjamin and J. Blunt, “Critical IT Issues: The Next Ten Years,” Sloan Management Review, Summer 1992, pp. 7–19.
25. Huber (1993), pp. 122–123.
26. Huber (1993), p. 129.
27. W. Richard and A. Whinston, “Incomplete Contracting Issues in Information Systems Development Outsourcing,” Decision Support Systems 8 (1992): 459–477.