Some Reasons for Failed Information Technology Outsourcing Initiatives and how Capital Budgeting and Value Chain Analysis can Help


Some Reasons for Failed Information Technology Outsourcing Initiatives and how Capital Budgeting and Value Chain Analysis can Help
Some Reasons for Failed Information Technology Outsourcing Initiatives and how Capital Budgeting and Value Chain Analysis can Help

Date: 16.03.2018

Major IT functions and projects are being outsourced all over the world. While offshore outsourcing by United States firms is highly controversial, any form of IT outsourcing carries with it concerns and risks. Within the United States, problems have developed between vendors and clients that have been likened to a failed marriage (Rath, 2001). One such strained relationship resulted from a substantial 1995 contract in which New Century Energy of Denver outsourced virtually all its IT functions to IBM Global Services. The lack of flexibility in the contract for addressing the needs of the various business units of NEC led to the necessity to renegotiate the contract in 1999. Despite the problems with both the initial arrangement and renegotiating the contract, NEC still considered outsourcing beneficial. Anthem, a health insurer, established a five-year contract with Unisys in 1996 for various IT services, but quickly became dissatisfied with the level of service provided. After considering bringing the functions back in-house, they went out for bids on a new contract that included defined service levels and management processes, eventually awarded to Affiliated Computer Services. Adidas America had to face two of their three ASP’s (application service providers) going out of business. They had to act immediately and selected a smaller firm that could respond quickly to their situation. This enabled them to not suffer any business interruptions. These examples all point to the need for adequate risk identification, planning, and management to make functional IT outsourcing successful. A significant example of international failure was the attempt by British Petroleum (BP) Exploration to outsource its IT function to a consortium of firms, both US and European based. By the 1990s, BP Exploration deemed it prudent to outsource almost all of its IT function with the goals of reducing costs and increasing effectiveness. Providing IT services for the organization was no longer considered a core competency. After searching for over a year, BP Exploration determined that no single supplier could meet their requirements. It was therefore decided that a consortium of firms would be put together instead. This consortium consisted of the European firms, the Sema Group and British Telecommunications (BT) Syncordia, and the US firm, Science Applications International Corporation (SAIC), headquartered in San Diego, California. As might be expected, putting together a structured agreement between all these participants was difficult and European ‘anti-trust’ law eventually made it necessary for BP Exploration to enter into individual contracts with the three firms. Problems were encountered from the beginning. In addition to not meeting BP Exploration’s expectations, consortium partners had trouble maintaining productive working relationships. After a few years, it became apparent that the consortium approach was not working well and was much too complicated. BP Exploration subsequently chose EDS as a single primary supplier to provide the service management of their entire IT infrastructure. 373 This history and one possible explanation for the failure of the consortium outsourcing arrangement have been offered by Kern and Blois (2002). They cite the absence of “norms” developing between all parties as significantly contributing to the eventual failure. ‘Norms’ are expectations of behavior and actions that can be largely cultural. They can also be expectations of how organizations will work together, as in this consortium. These types of norms can be classified in three dimensions (Heide and John, 1992): 1. Flexibility, the expectation of the willingness to adapt and change 2. Information exchange, the sharing of useful information, and 3. Solidarity, working to maintain the relationship 4. The consortium lacked in information exchange and solidarity. They remained, to a great extent, competitors. The more traditional single-supplier relationship with EDS was one in which everyone understands what is expected of the various organizations involved. The risk in this case was with an untried, complex arrangement. While outsourcing risky IT development projects with detailed firm price contracts may seem a reasonable approach to lessening an organization’s own internal risks, there can be external risks associated with vendors. Natovich (2003) chronicles the case of Bezeq, an Israel based telecommunications company, outsourcing the development of its new billing system to the international software company AMS in the late 1990s. Anticipated enhanced competition due to pending deregulation in the telecommunications industry emphasized the strategic importance of this project to Bezeq. AMS was the primary vendor, but two others, as well as the IT staff of Bezeq, were involved. Scope definition problems resulted from a three year lag between the original Request for Proposal (RFP) and the beginning of work. Renegotiation was constant throughout the project and led to the development of an adversarial relationship rather than a cooperative one. Indirectly, it could be argued that this well known risk of poor project requirements definition ultimately led to failure. However, occurring over a period of time, even minor disputes served to sour the relationship. Additional pressures on the relationship appeared when it became evident to AMS management that continuing the fixed price contract would result in heavy financial losses unless scope or pricing adjustments were allowed by Bezeq. This represented a de-escalation of management commitment to the project by the vendor, not the client. The client’s management was still heavily committed to the project. Exacerbating the situation was the change in corporate strategy by AMS to no longer consider large contracts with telecommunications firms as having future strategic value. The project eventually reached a standoff with both AMS and Bezeq holding firm to their positions. When Bezeq felt AMS failed to meet a contractual milestone, they claimed a breech and terminated the contract. The resulting legal dispute was later settled out of court. Rather than mitigating project risks by outsourcing, Bezeq only exchanged internal development risks for a new set of external vendor risks.

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