Information Technology Outsourcing has received significant practitioner and academic attention and has become a viable management option. However organizations often fail to meet outsourcing expectations and to manage the multiple challenges involved in ITO (Cullen et al., 2005).
This essay aims to throw light on JIT's IT outsourcing lifecycle. In the first part, JIT's sourcing strategy, approach and decisions are discussed. In the second section, JIT's main sourcing strategy problems are summarized and specific recommendations are given for the Helpdesk activity. The last part discusses the option of offshoring of IT services for JIT's case.
ANALYSIS OF THE JIT OUTSOURCING CASE
This section aims to critically analyze JIT's sourcing strategy. The outsourcing lifecycle model, suggested by Cullen et al. (2005) is adopted for the analysis, classifying the outsourcing dimensions into four phases: 'Architect', 'Engage', 'Operate' and 'Regenerate'.
'Architect' Phase: Sourcing strategy and motives
As Cullen et al (2005) suggest, during the 'architect' phase, the foundations for the outsourcing strategy are established. Based on the strategic objective of 10% IT budget reduction, JIT had to reduce both administrating and operating expenses. Having the recent Corporate Intranet outsourcing success in-mind and getting insights from an IT professional, John Smith considered the solution of outsourcing IT activities. The expert's advice was to target a specific objection for outsourcing, nevertheless Smith preferred to pursue multiple strategies, seeking cost reduction and improvement of IT service quality, as well as a shift of focus from non-core to core IT activities; the internal IT staff would emphasize on crucial IT strategic activities, like future IT upgrades and enhancements, instead of day-to-day maintenance and support.
As for sourcing models, JIT chose a selective outsourcing model. The selection of IT activities to be outsourced was based on their contribution to company's operations and their impact on competitive positioning, as Lacity et al. (1996) suggest. In JIT's case, both the Helpdesk and the Data Centers could be identified as 'useful commodities', since they provided benefits to the business but did not differentiate JIT against its competitors and therefore could be outsourced.
For the Helpdesk, there was an additional motive for outsourcing; the unsatisfactory quality of delivered services. However, there might have been a misinterpretation of the current situation, as based on the survey findings (Exhibit 3), the main identified issue for the PC Helpdesk is the time to fix problems and not the actual service quality (response times, staff skills and overall experience were found 'satisfactory' or 'excellent'). Nonetheless, the Helpdesk was one of the activities that the JIT's CIO chose to outsource.
The next and most important part of this phase was the design of the outsourcing plan and contract draft. Despite having no prior experience on outsourcing contracts, JIT did not involve consultants to investigate the required service level, market conditions or other contracts. Based on the limited information provided in the case, service level agreements and performance metrics, contract framework and indicative price were not drafted, as they should be. This led to increased risks for the outsourcing contract and the future relationship with the vendors; structure and roles and risks should have been thoroughly planned. JIT lacked several key client capabilities that are paramount to success (Willcocks and Craig, 2008). Although Smith had demonstrated strong leadership, driving the outsourcing initiative and influencing the board, he had too many responsibilities; as part of the project, a project team (involving more IT people) could have been formed to plan and implement the outsourcing initiative, handling risks and expectations. Lastly, a small team of consultants could have been involved to provide valuable outsourcing expertise, investigate the market conditions and recent contacts and facilitate the contract, assisting JIT's outsourcing decisions and management of common risks.
'Engage' Phase: Vendor selection, cost-benefit analysis and contracting
The next phase of the outsourcing lifecycle ('Engage') included the supplier selection and contract negotiation (Cullen et al., 2005). As far as the selection process is concerned, JIT's main criteria were cost, quality of service and experience for the Helpdesk and the Data Center vendor selection, reflecting the five due diligence processes conducted on suppliers; company, price, contract, solution and customer reference (Oshri et al., 2009). However, since the main driver for the outsourcing venture was cost, the selection was largely based on the cost-benefits analysis. Comparing the JIT's IT budget in 2001 (Exhibit 1) and the proposed IT budget post-outsourcing (Exhibit 11), administrative expenses would be significantly reduced (by approximately $378,000), as the IT Infrastructure department would be downsized from five to two employees. This cost reduction would derive from cuts in salaries, benefits, travel, insurance, office equipment and training. On the other hand, the overall operational expenses would have to be increased due to the contracted suppliers, although the Data Center and Infrastructure maintenance costs would be less. All these would lead to a drop of total IT expenses (administrative and operational) by 4%, in contrast to the intended 10%. However, in combination with the increase in JIT's internal allocation per PC (from $180/PC/month to $200/PC/month), the total IT budget would be cut down by 9.1%.
In terms of contracting, the actual negotiations should involve the refinement of the service level agreement (SLA) requirements already drafted in the 'Architect' phase (Cullen et al., 2005). However, given the information provided in the case, it seems that JIT failed to define clear SLA requirements before opening the competitive process, making itself vulnerable in the contracting procedure. Due to a lack of experience and external consultation placed JIT at a disadvantage with respect to supplier selection and contracting procedures; vendors were in a better position to favour their own interests, instead of establishing a win-win situation for both parties (Lacity and Willcocks, 1995). In the next paragraphs, selection process and contracting procedures are analyzed for each type of service.
PC Helpdesk
The bilingual requirement created difficulties in finding suppliers for the Helpdesk. The two candidate suppliers - CMPI and Outsourcing Solutions - offered high levels of helpdesk expertise and technical knowledge, as well as a number of client testimonials. The significant cost difference between the two suppliers was the main driver for the final selection, although CMPI's lack of experience in large-scale helpdesks created additional risks and uncertainties regarding their ability to deliver the promised services. Moreover, the contract with CMPI defined service performance based on quantitative metrics (calls resolution times - less than 4 hours) not taking qualitative aspects into account - for example, effective problem resolution instead of quick-fixes and follow-up calls, customer experience etc.
Data Center
The Data Center outsourcing plan included the relocation of JIT's servers to the vendor's site and support and maintenance services provided by the vendor. According to the case, five suppliers were found to meet JIT's criteria and these were narrowed down to two (shortlisting process is not mentioned though). Based on the cost-benefit analysis comparing current situation and the proposals (Exhibit 6), it seems that cost difference between the two vendors for both one-time relocation expenses and monthly costs was insignificant. On the other hand, the proposed monthly recurring expenses would be significantly reduced (compared to the current costs) and this would result in considerable cost benefits in the long-term.
In this case professionalism and consistency were the values that gave the advantage to DR Solutions; they proposed a consistent plan, tailored to JIT's needs and requirements. They interacted very professionally with JIT and provided useful guidance. On the other hand, Yoshiko Hosting sought to base their proposal on their established business relations and cultural bonds with JIT, demonstrating poor performance in terms of interactions and obvious integrations issues with their acquired company. Smith's leadership skills played a significant role in convincing the board to make the most reasonable decision, selecting DR Solutions.
'Operate' Phase: Transition, governance and ongoing management practices
The 'Operate' phase involves the outsourcing deal execution, including all aspects of transition and management of the outsourcing relationship. This phase is analyzed below for each type of IT service.
PC Helpdesk
For the Helpdesk, transition processes included transfer of CMPI technicians to JIT's site, creation of manuals for knowledge retention and transfer, as well as hands-on training with JIT employees. The case does not provide insights on how JIT handled the layoffs of three IT employees. All in all, there was evidence of a smooth transition and the goal of shifting the internal IT focus to core activities and long-term projects had been achieved.
The problems with the Helpdesk effectiveness and service quality were realized six months later, when an angry employee complained about the delivered service. This fact reveals poor governance structures and leadership issues; there should have been ways to report such problems earlier to managers and metrics in place to monitor CMPI performance, solution effectiveness and service quality levels. The underlying reason for this poor performance was the lack of motivation and accountability of CMPI's on-site staff, with management and reporting lines not being clear; although on-site Level-1 staff was managed by the Level-2 employee, it is not clear who the Level-2 employee reported to.
In addition to management and governance issues, cases of inappropriate staff behavior revealed a cultural misfit and a gap in staff training on the Japanese protocol. A lack of behavior management, which is a key supplier capability according to Feeny et al. (2005), proved to be critical in managing and motivating the supplier's on-site staff to find a sense of purpose and to achieve a superior service quality. Lastly, the realized insufficiency of troubleshooting skills confirmed the initial concerns about CMPI's lack of experience and inability to handle JIT's Helpdesk. To make things worse for JIT, CMPI was not in violation of the agreement, as these risks had not been taken into account in the contract. The replacement of the on-site technicians did not improve the situation, as the reasons for these problems were deeper, as already described.
Data Center
In terms of Data Center transition, server transfer was flawless; nevertheless issues occurred in the network reconfiguration and reoperation, resulting in delays and in a significant loss of revenue for JIT. Although, the initial plan involved a dual-phase transition that would allow testing, it required more resources and time; the one-phase approach without testing was preferred, involving considerable risks, which Smith also failed to manage contractually. For instance, in several outsourcing contracts, the risk of delayed Data Center restoration or reoperation is managed by providing compensations for any lost revenue caused by the delay. Last but not least, the interparty relationship proved to be problematic, as interactions between JIT's and DR Solutions were slow and crisis management proved to be ineffective, taking almost two days before flying in the network specialist for the network issue and eventually having the mentioned consequences for JIT.
All in all, despite these problems in transition, JIT's Data Center was stabilized and no further serious issues have occurred.
'Regenerate' Phase: Outcomes, lessons and further actions
The final phase of the lifecycle ('Regenerate') provides the opportunity to assess contract outcomes and lessons learnt and decide on future strategies with respect to the existing contracts. JIT's initial objectives were realized partially; costs were reduced, (though not to the intended extent) and internal IT department could focus on more strategic IT activities; the Data Centre was stabilized and operated smoothly. On the other hand, there was dissatisfaction with the Helpdesk's function; alternative options had to be re-assessed and decisions had to be made promptly. Available options and recommendations for the Helpdesk are discussed in section 4.
The table below summarizes the sourcing strategy problems, as already discussed, also indicating the parties involved.
Phase
Problem
Refers to
'Architect'
-Lack of prior experience in large-scale outsourcing projects
-No active involvement of external experts/consultants
-Lack of clear strategic direction (pursuing multiple objectives)
-Inadequate investigation of market conditions and outsourcing options
-Insufficient planning of SLA requirements/contract terms
-Lack of project team/too many project responsibilities for CIO
CIO,
IT department
'Engage'
-Failure to negotiate contract/achieve win-win deal
-Failure to manage risks through transition plan and/or contractually
PC Helpdesk,
Data Center
-Small number of perspective suppliers due to bilingual requirement, creating disadvantage for JIT
-Lack of CMPI experience in large-scale Helpdesks
PC Helpdesk
'Operate'
-Poor Helpdesk performance
-Lack of CMPI staff's motivation and sense of purpose
-Insufficient training on JIT's culture/behavior
-Inadequate CMPI troubleshooting skills
-Unclear management/reporting lines
PC Helpdesk
-Lack of proper crisis management
-Slow/Inefficient communications and poor governance (JIT-DR Solutions)
Data Center
Table 1: JIT's sourcing strategy problems
RECOMMENDATIONS FOR HELPDESK
As part of the 'Regenerate' phase of the Helpdesk outsourcing lifecycle, JIT's CIO had to assess the available options (at that time) by the contract expiration (Reese and Sutton, 2007):
Back-sourcing Helpdesk in-house
Select different vendor and negotiate new domestic-outsourcing contract
Renegotiating terms and renewing contract, also considering alternative sourcing models (e.g. co-sourcing)
The main priorities should be solving existing problems and improving overall service quality, however cost should be considered since it had been the primary motive for the outsourcing initiative. Back-sourcing would require recruitment of new IT staff, as the downsized IT department would be unable to handle the Helpdesk. Recruitment involves high costs and addition of employees would take JIT back to the pre-outsourcing era (cost-wise). As for changing vendor, it would involve high switching costs, time and resources to repeat the entire process: investigating potential suppliers, external consultation, selecting new vendor and negotiating the deal. Lastly, there was the same risk of finding inadequate number of suppliers due to the bilingual requirement.
Renegotiating and renewing the existing contract is the best solution. Applying insights from two successful cases, JIT and CMPI should collaborate in achieving a win-win deal for both parties, through collaborating outsourcing (Dooling and Meshkaty, 2009) or a co-sourcing model (Oshri et al., 2009), as described below.
A renamed Tech Support Center would consist of just two retrained CMPI technicians, supervised by the IT Services Administrator from JIT's Applications department, whose other tasks could be accomplished by Infrastructure staff or by their four Applications colleagues. Reports already generated by CMPI should allow the adjustment of SLAs towards a more beneficial deal for JIT. Low-cost added tools could improve common issue resolution by users (FAQ section) or instant problem resolution by TSC staff (remote desktop resolution). Finally, TSC outcomes and service quality should be measured and discussed in monthly meetings.
All the above recommendations would mainly involve one-time costs, but could lead to long-term cost reduction and improvement of Helpdesk service quality and efficiency. Table 2 presents recommendations and expected benefits.
Recommendations (Who is involved)
Expected Benefits
Rename Helpdesk to TSC - Tech Support Center and send newsletters to all users (JIT)
Improve image of Helpdesk: 'TSC, a reliable and helpful center of support'
Establish goals for TSC (JIT-CMPI)
Provide a brand-new, clear TSC vision
Appoint IT Services Administrator as TSC Manager (JIT)
Increase on-site staff's sense of purpose and accountability, provide clear reporting line
Reduce on-site CMPI staff, provide additional training (CMPI)
Significant contract cost reduction, less but better qualified TSC employees
JIT Culture Workshop for TSC staff (JIT-CMPI)
Improved awareness on JIT's diverse culture and expected behaviors
Revise SLA requirements based on CMPI reports (JIT-CMPI)
More beneficial contract for JIT (e.g. lower percentage of escalated calls)
FAQ section integrated in Corporate Intranet (CMPI)
Significant reduction of calls for common problems, enabling users
Remote desktop resolution tool (CMPI)
Instant issue resolution, increased TSC efficiency
Weekly reports and user feedback - Monthly meetings (JIT-CMPI)
Continuous review and discussion of results and quality assessment - TSC staff empowered and users involved
Table 2: Recommendations and expected benefits
OFFSHORING
Instead of domestic outsourcing, JIT could consider offshoring for the Helpdesk and the Data Center, either by relocating these activities to another country (captive model) or by outsourcing with a vendor that is located outside the country (offshore outsourcing).
As suggested by Metters (2008), factors that JIT should consider with respect to offshoring are labor costs, cultural distance and infrastructure quality. Offshoring strategy could result in lower costs in labor and infrastructure in the long-term, but could also pose additional challenges in terms of management of outsourcing relationships, due to 'geographical separation and cultural differences' (Hirschheim et al., 200).
On the one hand, setting up a captive center offshore implies considerable investments and resources, in contrast to the strategic objective of the IT budget reduction. Also, the scale of JIT's IT operations could not justify this investment. On the other hand, offshore outsourcing would involve additional challenges for JIT; structural risks associated with the interparty relationships would be highlighted, as distance and cultural differences could amplify difficulties in monitoring the quality of the outsourced processes and managing the offshore supplier (Aron and Singh, 2005). In the next paragraphs the offshore option is discussed for each of the IT activities.
Several US-based companies choose offshore outsourcing for their call centers, exploiting falling telecommunications costs and achieving benefits related to cost reduction and quality improvement (Bailey and Farrell, 2004). However, in most cases the call center or helpdesk functions transferred outside the US, either at a captive center or to a third-party, involve large-scale, 24/7 operations - like AOL's captive call center located in the Philippines. For JIT, the limited range of services (PC, software and network support), working hours (8am-8pm) and relatively small number of calls received (approximately 500/month) make the offshore opportunity unattractive. Moreover, as Aron and Singh (2005) argue, offshoring activities that do not have precise quality metrics established, would involve high operational risks.
In addition, the bilingual requirement would create challenges in the selection of a country that could offer the appropriate language skills. Apart from Japan, Japanese language skills could be found in Korea, Taiwan and parts of China, but the drawbacks of time differences and distance would be discouraging factors in assessing this countries' attractiveness. Japanese is also spoken in Brazil, which could become an attractive option, if the Helpdesk operations were not limited.
Last but not least, the nature of services delivered to users could be another factor against moving the Helpdesk to an offshore location; the case study underlines the thankless nature of PC support, therefore having the Helpdesk staff on-site could have a positive impact on users' satisfaction and Helpdesk staff's morale, leading to improved Helpdesk productivity, overall satisfaction and service quality. This wouldn't be feasible in the case of offshoring.
As for the Data Center, although it has been a popular IT activity for offshoring, it would involve multiple challenges for JIT to handle; domestic outsourcing involved several risks for JIT in terms of transitions and the associated risks would be multiplied in the case of an offshore location. The infrastructure quality and security issues are factors that could also affect the Data Center operations at an offshore location (Hirschheim et al., 200). All in all, JIT's outsourced Data Center has been a success, despite the transition issues encountered and offshoring should not be considered in the short-term future.
Future offshoring options
As part of a long term strategy, JIT could consider the offshoring opportunity, based on the company's future needs. For instance, if JIT's Helpdesk operations expanded or service demands grew as a result of a possible merger or acquisition, the prospect of near-shoring could be assessed and adopted; selecting a third party located at a near-shore country, like Brazil, JIT could be able to find the required skills and high level IT support at a lower cost. As for the Data Center, in the long-term, offshore outsourcing could allow JIT to exploit the cloud capabilities, by selecting a vendor at a developing low-wage country, with an aim of achieving further reductions of operating costs and make the most of the multiple benefits that the cloud carries.
