Firms undertake outsourcing for a variety of reasons such as cost advantages, competitive pressure, improve quality of service, access to unique expertise and the ability to concentrate on its core activities. At the same time, outsourcing of information technology (IT) or business process continue to pose challenges for firms. It is estimated that 70% of selective sourcing deals and 50% of larger scale deals involving complex processes will be successful (Oshri et al, 2009). It can therefore be inferred that outsourcing projects are fraught with risks and its failure can have serious implications on the performance of the organization.
In this essay, the data center and PC helpdesk outsourcing at JIT, a trading company, has been critically analyzed. The essay begins with an analysis of the data center and PC help desk outsourcing along several key phases involved in IT outsourcing lifecycle, namely, sourcing strategy, contract development, vendor strategy, transitioning and governance mechanisms. It then provides recommendations on how to solve the help desk challenge faced by the CIO and whether offshoring can be included in the sourcing strategy for data center and PC help desk sourcing.
ANALYSIS OF THE OUTSOURCING STRATEGY
The sourcing strategy followed by JIT for can be considered to be selective sourcing. In selective sourcing, IT functions are considered as a portfolio of activities, some of which are outsourced to external vendors while others are executed internally. In such an arrangement the vendor is responsible for delivering the results of outsourced activities while the client is responsible for the insourced activities (Lacity et al, 1996). In JIT, the data center and PC help desk activities were outsourced while the application maintenance was retained under the internal team. On the basis of the approach proposed by Willcocks et al (2002) for deciding which processes to outsource, the JIT data center can be categorized under "Qualifiers" as it house application servers which are considered as critical for business operations but at the same time does not contribute in a big way towards its competitive positioning. Using the same approach, PC help desk activity can be categorized as "Necessary Evils". On the basis on this categorization, it can be argued that both these processes were suitable candidates for outsourcing. JIT's data center outsourcing supplier selection based on quality and past experience can be considered to be a good decision in comparison to PC help desk, which was mainly motivated by cost considerations. From the data center point of view, it allowed JIT access to superior supplier expertise, experience and improved quality of service compared to in-house. One of the main benefits of multiple suppliers is the low switching cost apart from motivating performance (Rottman & Lacity, 2006). If JIT had followed a single sourcing approach, the switching cost would have been high and switching to a different supplier might have affected the relationship with the existing supplier and any outsourcing projects executed by them.
In any outsourcing project, vendor selection is considered a critical determinant of its success (Levina & Ross, 2003). The vendor selection strategy adopted by JIT is similar to the "best of breed" approach with JIT managing the two suppliers. While outsourcing, there are several supplier capabilities that a client organization must evaluate in order to find the most suitable supplier and in case of JIT, it clear from the outcome of PC help desk outsourcing that there was lack of due diligence during the vendor selection process. On the basis of Levina and Ross (2003) categorization of the supplier capabilities, it can be argued that in PC help desk outsourcing, CMPI did not have the necessary client specific capabilities. CMPI did not understand JIT's business structure, industry, culture or how it operated and this was one of reasons for the failure. On the basis of supplier capabilities suggested by Feeny et al (2005), JIT should have evaluated suppliers mainly on the basis of domain expertise, organizational design, customer development, governance and technological exploitation capabilities. For example, there was a clear lack of technological expertise as CMPI employees did not have the necessary skills required in JIT context. CMPI employees also did not have the necessary customer development capabilities which would have allowed them to understand business needs, user requirements and make service level improvements. It is also evident from the lack of accountability on behalf of CMPI that there was no effective governance structure in place.
The scale of JIT PC helpdesk project was huge compared to any other projects undertaken by CMPI and this posed a significant operational risk. It can be inferred from the case study that although the cost was high in comparison to CMPI, Outsourcing Solutions satisfied most of the capabilities and competencies required for PC helpdesk outsourcing. In this context, it is worth mentioning that since a high percentage of PC helpdesk calls were made with regards to hardware and software related issues (Exhibit 8 of the case study) Outsourcing Solutions would have been better equipped to handle these issues since they provided these services as part of their overall service portfolio. Apart from this, DR Solutions was financially strong, had wide experience and expertise and as a result would have been able to align its processes and practices much more effectively in accordance to JIT's business needs.
In any outsourcing activity, the contract is a very important part of the governance framework (Cullen & Willcocks, 2003) and is considered as the beginning and foundation of any outsourcing relationships (Kern & Willcocks, 2002). In case of JIT, the contract between the outsourcing vendors was a fee-for-service contract. A fee-for-service contract, apart from being a short-term contract, should provide detailed specifications about service levels, performance metrics and penalties for poor performance (Lacity & Willcocks, 2000), but in case of JIT it was a loosely defined contract and on the basis of this contract it was not possible to hold CMPI accountable for poor performance. While drafting the contract, JIT should have paid attention to some important practices such as inclusion of end-user satisfaction as well as technical service measures, set minimum levels of performance and clear service level agreements detailing the various aspects of performance (Oshri et al, 2009).
From a cost benefit analysis perspective of data center outsourcing, although the costs were nearly the same, there was significant difference in the services offered by the two suppliers. For example, the service and performance levels offered by DR Solution's were superior in comparison to Yoshiko Hosting (Exhibit 6 and 7). Apart from this JIT could also benefit immensely from DR Solutions expertise and experiences in revamping and upgrading its infrastructure, which was already in need of urgent upgrades. With regards to PC helpdesk outsourcing, there was a huge difference in cost between the two suppliers and the decision to select the low cost supplier resulted in a compromise of quality, which was evident post execution. Although the service levels were not mentioned explicitly by Outsourcing Solutions in their proposal, the likely benefits would have been similar to DR Solution. Outsourcing solution would also have in a better position to leverage the skills, expertise and best practices from their allied service portfolios in order to improve and if required, re-engineer PC help desk processes.
In an outsourcing project, the transition stage is considered to be very critical as it involves significant changes and risks. According to IGate (2004), the risk is very high during the transition stage, post signing of the contract. The risks which are likely during this phase are financial, regulatory and operational risks (Oshri et al, 2009). In case of JIT outsourcing, there are several instances of the lack of due diligence in transition management. During the initial stages of moving the data center to DR Solutions site, there was loss of crucial business hours resulting in significant financial losses. There was also considerable amount of time spent in stabilizing the data center, which again is an indication of ineffective transition management. JIT should have followed appropriate risk management strategies involving monitoring and testing to detect unaddressed risks during the very early stages of transition (IGate, 2004). Dry runs simulating the transition of data center from JIT to DR Solution site would have helped to identify and mitigate the risks, thereby preventing the loss of valuable time and financial resources.
Mani et al. (2006) have argued that inadequate attention to governance is the main reasons for the failure of some outsourcing projects to deliver value and it holds true in the failure of JIT's PC help desk outsourcing as well. The service level agreement (SLA) is an important instrument used in the governance of outsourcing projects and in case of JIT, it should have described in detail the type, scope, nature of services required along with the time of availability of these services and the expected level of performance. Such an SLA along with penalty clauses would have allowed JIT to hold CMPI accountable for poor performance and compel them to take corrective actions. In this context it would be appropriate to highlight that it took JIT six months to realize the problems in PC help desk outsourcing. This delay can be attributed to the lack of en effective SLA monitoring mechanism. The use of a monitoring or performance management system such as balanced scorecard (Herath & Kishore, 2009) would have alerted JIT to CMPI's poor performance at a very early stage. Apart from this end user satisfaction surveys, working level meetings and executive level oversight meetings with the provider to review performance are some of the practices which could have been used for governing the project (Oshri et al, 2009).
SUMMARY OF KEY PROBLEMS WITH JIT's OUTSOURCING STRATEGY
S.No
PHASES
PROBLEM DESCRIPTION
Outsourcing Decision ( pre and post contractual)
JIT should have involved external consultants or intermediaries. They could have assisted JIT during the various stages of the outsourcing such as project definition, requirements mapping, vendor search, contract formulation and negotiation. They could have also assisted during project management, vendor management, quality control and in facilitating and managing ongoing relationship between JIT and its suppliers (Mahnke et al, 2008).
Vendor Selection
Although JIT's multisourcing strategy was a good decision, it compromised in the vendor selection stage, specifically PC help desk. JIT should have analyzed in detail the supplier capabilities, competencies and alignment with their business requirements and not only cost.
Transition Management
There was lack of effective transition management. As part of transition management, JIT should have undertaken risk management which could have helped to identify and overcome some of the issues which resulted in financial loss during data center transition. CMPI employees should have also undergone change management in order to understand the culture, protocols and operating styles at JIT.
Outsourcing Contract
The JIT outsourcing contract was poorly designed and did not cover all future contingencies. Specifically, the SLA which is part of the contract should have provided detailed descriptions about the delivery, performance quality and availability of the services along with the penalties for poor performance.
Governance Mechanism
From the PC help desk outsourcing issues, it is clear that there was lack of effective SLA, monitoring/performance management systems and effective governing structures. JIT should have set up a project management structure to manage and co-ordinate efforts at all level, including strategic. This would have helped to address CMPI's lack of accountability.
RECOMMENDATIONS TO FIX PC HELP DESK PROBLEM
In order to solve the PC help desk problem, it is advisable to renew the contract with CMPI rather than getting it back in-house; but having said that, JIT should be proactive in managing the project and make critical amendments in the contract. With regards to insourcing PC help desk, there are some issues. First, there is the issue of hiring people with the appropriate skills and then training them, apart from acquainting them with JIT's business operations and culture. Second, outsourcing PC help desk to an outside vendor is likely to induce fresh thinking and implementation of best practices as well as leverage vendor's expertise and past experiences. Third, there is the possibility of the infrastructure staff getting tied up with the day to day maintenance and operations issues again resulting in providing inadequate attention to critical infrastructure upgrades and enhancements projects.
An effective contract defining the important parameters of the outsourcing relationship is critical for good governance (Mani et al, 2006). Apart from pricing, payment and liability elements, the contract should include specified SLA's, penalty clauses, specific provisions for adapting to future changing circumstances and early termination provisions (Fitzgerald & Willcocks, 1994). With regards to the SLA, JIT should precisely define all the aspects pertaining to the delivery of the service such as the type, scope, nature of services required along with the time of availability of these services and the expected level of performance and quality. In order to detect poor performance or service quality deterioration at an early stage, JIT should ensure that the SLA's are monitored constantly and for this Balanced Scorecard should be used.
Apart from SLA's, as part of governance, JIT should proactively be involved in the setting up of a governance structure, although it is the responsibility of CMPI. Along with operational level mapping of roles and responsibilities between JIT and CMPI, it is also necessary at the strategic level. This will introduce a sense of accountability and responsibility into the project. As part of managing CMPI's performance effectively, it is advisable for JIT to follow some key practices such as the use of incentives to motivate higher performance, use of penalties to meet performance requirements, end-user satisfaction surveys, schedule executive and working level meetings between them to gauge CMPI's performance (Oshri et al, 2009).
An observation which can be made from the PC help desk problem is that the CMPI employees did not understand JIT's business structure, industry and culture. Although CMPI employees were trained on PC help desk operation, they did not undergo any change management programs or trainings which would have provided them a better understanding of JIT's style of functioning and business environment. In order to overcome this problem, JIT can proactively undertake change management program with CMPI to ensure that its employees have a clear understanding of JIT business operations and environment. This will ensure a better alignment of CMPI's practices and processes with JIT's goals and objectives.
OFFSHORING AS A SOURCING STRATEGY FOR JIT
In JIT outsourcing, considering offshoring as a sourcing strategy is advisable in case of PC help desk but not data center. The arguments in favor of this decision along with key considerations during offshoring process are explained in subsequent paragraphs.
In offshoring decisions, firms are usually faced with two types of risks - operational and structural risks (Aron & Singh, 2005). In case of JIT, the main operational risk is likely to arise due to vendor location, that is, geographical separation, culture gap and limitations of communications and transmission systems between JIT and the vendor. The main structural risks which are likely involve the offshore vendor stopping or reducing investment in the training and employment of well qualified professionals for managing the data center and/or the alteration of the contract once JIT has moved their data center to offshore vendor site. Firms can usually reduce the operational risk, which is high in case of JIT data center, in two ways. First, by codifying the process so as to ensure that it can be executed by anyone anywhere and second, with the use of performance metrics to measure the quality of processes. In case of JIT data center, although it is possible to use metrics to measure process quality, it is not easy to codify the process. With regards to structural risks, it is moderate considering the fact that it is possible to use precise metrics to measure as well as monitor work. Based on these levels of risk classification and comparing it with Aron and Singh (2005) framework for evaluating offshoring decision, it can be argued that the data center should not be offshored. JIT data center, as discussed earlier, is critical for the smooth functioning of its business operations and therefore the service availability and quality is paramount. This can be best ensured when the data center is onshore rather than at an offshore location.
In the case of PC help desk, the operational and structural risk being low, on the basis of Aron and Singh (2005) framework we can argue that PC help desk is ideal for offshoring. Taking into consideration cost reduction as one of the strategic intents of JIT, it is advisable to go for offshore outsourcing in comparison to a captive model because the setup costs for JIT would be higher than for a local vendor and without attaining economies of scale, the captive centre model would prove to be costly (Kotlarsky & Oshri, 2008). With regards to country selection, JIT should assess in detail the suitability of countries on the basis of cost, language, skills availability, environment, quality of infrastructure and risk profile (Farrell, 2006; Gartner, 2009). For determining the attractiveness of a country on the basis of cost, JIT should specifically consider labor and infrastructure costs. In terms of language, an important criterion is that the potential country should have technical people who can speak Japanese as well as English since 50% of the JIT employees are Japanese. In terms of availability of skills, the potential offshore location should have a sizeable labor force with IT hardware and software skills. The vendor landscape should also be analyzed to determine the size and maturity of the market. While analyzing countries on the basis of environment factor, attention should be given to accessibility, travel time and time difference. With regards to the quality of infrastructure, it can have a major influence on the effectiveness and efficiency of JIT's help desk operation. Proper attention should be given to various aspects of IT and telecommunication infrastructure such as network downtime, quality, speed and connectivity. While analyzing the country risk profile, occurrence and frequency of disruptive events such as labor uprising, political instability and natural disasters should be given importance. Frequent disruptions can have an impact on the availability of PC help desk service.
The contract plays a vital role in the success of any offshoring project. It is advisable for JIT to enter into a short term to medium contracts with the vendor to avoid getting stuck into contractual lock-ins and to allow it to have a better understanding of offshoring and the associated transaction costs (Baldwin et al, 2001). It is also important to include sufficient flexibility into the contract that will allow JIT to take advantage of process improvements, new technological offerings and improved service levels arising from technological advances as well as market competitions (King, 2007). As described in the earlier sections, SLA's defining the various aspects of the services contracted to the vendor should also be included in the contract and monitored on a continuous basis as part of governance mechanism.
CONCLUSION
From the analysis of the JIT: Full Circle Outsourcing, it is clear that although outsourcing provides several benefits such as cost advantages, access to service providers unique expertise and the ability of the client organization to focus on core activities, it is fraught with a number of challenges and risks. These risks can occur during any of the stages of the outsourcing lifecycle, that is, during the initial strategic decision, vendor selection, vendor management and/or transition stages. In case of JIT, while the data center outsourcing was a success, the PC help desk outsourcing was a failure. One of the major reasons which could be attributed to this was the lack of due diligence during the vendor selection process. While vendor quality and past performance were the main criteria in data center outsourcing, cost was the criteria for PC help desk. The lack of governance mechanism and the design of a loose contract were also responsible for this failure. It is therefore important to carry out the necessary due diligence during the various stages of the outsourcing lifecycle to ensure its success.
