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Reasons for Outsourcing


Xerox was the pioneer in outsourcing its global information technology with Electronic Data Systems (EDS) in 1994.  The contract involved a huge amount of $3.2 billion with long time horizon for ten years.  Xerox possessed substantial technological prowess within the digital and computer arenas but why did it outsource?

Reasons for outsource

The CEO of Xerox reorganised the company from a geographic structure to a divisional structure in 1992 in order to focused on its core competencies to improve overall corporate performance.  This change also redefined both operational and management processes and hence, a new information systems infrastructure was essential to support this strategy.  The reasons to outsource the project instead of in-house were identified in the following sections.

Corporate culture

Xerox had strong culture embedded in the sense of partnership with suppliers and the company was experienced with outsourcing such as parts of its products and distribution for long time.  The Presidents Council aligned this culture to its information management (IM) and drove the outsourcing decision. 

Eliminating an irritant

There was tension between IM and the business divisions for IT function.  The division presidents viewed IT infrastructure investment as an expense because they did not feel they would get an adequate payback.  They also perceived that IM required redundant and unresponsiveness to urgency, technical obsolescence and lacked effective staff development mechanisms.  On the other hand, IM felt that the divisions did not fully appreciate their problems such as the old structure of the company and the legacy systems.  The notion of a remote and experienced outsourcer would help to eliminate the irritant.  Outsourcing could also help to improve both the quality and cost of IM services.

Financial

Funding constraints added to the impossibility of an internal solution.  IM foresaw that IT would be perceived as free resources and would be asked to satisfy more demands as long as IM was internal.  This would eventually cause backlog and made it very difficult to determine an appropriate spending level.  However, a third-party relationship would bring an entirely different view of IT expenditures and there would be a sense of discipline (Applegate et al, 1999).  An outsourcing contract with a fixed price for a specified level of service would also reduce uncertainty of costs (Laudon and Laudon, 1998).

Improve company focus

After addressing business requests, IM found that they had little time or money to address future infrastructure and process redesign issues.  They required immediate improvement to meet an increasingly competitive environment.  The time limit did not allow IM to change the infrastructure and processes without outside help.  Outsourcing the legacy systems and the desktop infrastructure to EDS could free up internal resources to focus on activities with higher value and payback, for example, the new strategic systems and infrastructure.

Outsourcing could also simplify general management agenda to focus on their core competence of primary mission: .The Document Company・ to improve corporate performance.

Economy

As EDS was specialist in the information systems services and technologies, benefits through their economies of scale and scope included rapid funding of new systems development; cost reductions in hardware/software licensing, facilities and support headcounts; extensive IT problem solving knowledge; IT investments and efficiency.

The outsourcing activity required leverage worldwide IM resources.  Global presence was extremely important and EDS was believed to have a superior global economy to support the activity.

Comments on the reasons

The surface of the reasons was agreeable that the outsourcing decision was right and benefited to the company.  However, when did the benefits of outsourcing outweigh the risks required Xerox to assess the role of information systems in the company.  The Applegate et al・s strategic grid and the Willcocks and Fitzgerald・s criteria for making sourcing decision (Galliers et al, 1999) were used to analyse whether Xerox・s reasons were generalised for its decision.

Strategic contribution of IT

The strategic grid from Applegate et al (1999) suggested that Xerox was in the Factory quadrant.  Xerox was heavily dependent on cost-effective, totally reliable IT operational support for their new divisional structure to enable internal operations to run smoothly.  System downtime would cause major organisational disruption for its global scale.  IT was used to enable critical, time-dependent operations to function smoothly, but the IT applications under development were not fundamental to the firm・s ability to compete because its core competency was focused on the mission of .The Document Company・.

The principle of the strategic grid was to outsource if IT was not strategic now or in the future to minimise strategic risk, for example maintenance of non-strategic systems.  Xerox outsourced the legacy systems and the desktop infrastructure to EDS could free up internal resources to focus on strategic activities such as the new strategic systems and infrastructure sounded a right move. 

As Factory was uninterrupted service-oriented information resource management, the strategic grid suggested that the outsourcing presumption was yes, unless company was huge and well managed.  The reasons to consider outsourcing from the strategic grid such as possibilities of economies of scale, high quality service and backup, management focus facilitated and extended channel technologies facilitate international IT solutions etc supported Xerox・s reasoning behind outsourcing about financial, improve company focus and economy. 

Willcocks and Fitzgerald・s criteria for making sourcing decision

Willcocks and Fitzgerald (Galliers et al, 1999) identified six key factors guiding the sourcing decisions as shown in Figure 1

From the business perspective, the Xerox・s outsourcing activity was a commodity, not distinguishing the business from a competitor in business offering and performance terms.  The impact of the IT activity on the business strategy was useful in improving performance.  The in-house cost for this IT activity compared to the marketplace was high.  The guide suggested the preferred option was to outsource the useful commodities in conditions of certainty about business requirements across the length of the contract.

From the technical perspective, the Xerox・s activity tended to outsource as the technology maturity was high due to the acceleration of technology innovation and the IT capability in-house compared to the marketplace was low.  However, the outsourcing activity was highly integrated with other parts of the infrastructure, which suggested the preferred option not to outsource.

The overall business and technical perspectives supported Xerox・s outsourcing decision for the reasons of financial, improve company focus and economy.  Outsourcing as an integral part of corporate culture, was adopted as an approach to manage information systems aligned to the business strategy.  However, integration was one major concern as it involved not only the systems, but also the management fit and the alignment of culture between Xerox and EDS.

 

Tend to outsource

Tend not to outsource

Business:

 

 

Are future business needs:

Certain

Uncertain

Is the potential contribution of this IT service/activity to business positioning a:

Commodity

Differentiator

Is the impact of this IT service/activity on the business strategy:

Useful

Vital

Is the in-house cost for this IT service/activity compared to the market-place

High

Low

Technical:

 

 

Is this IT service/activity:

Discrete

Integrated

Is the technological maturity:

High

Low

Is the IT capability in-house compared to the market-place:

Low

High

 Figure 1: Criteria for Making Sourcing Decisions

The analysis above supported most of the reasoning behind Xerox・s outsourcing decision except integration, which would be the major reason that tended not to outsource.  The fact that EDS was not cultural matched with Xerox might be a major obstacle for the integration.  However, it had its advantage and disadvantage.  The IM managers considered the advantage of .out-of-box・ thinking, while the disadvantage such as goal displacement might detriment to the partnership.  Hence, good coordination, commitment and relationship had to exist at the corporate as well as individual level for the success of the outsourcing decision.


References

Applegate, Lynda M; McFarlan, F Warren and McKenney, James L (1999), Corporate Information Systems Management: Text and Cases, International Edition, Irwin/McGraw-Hill MA

Galliers, Robert D; Leidner, Dorothy E and Baker, Bernadette S H (1999), Strategic Information Management: Challenges and Strategies in Managing Information Systems, 2nd Edition, Butterworth-Heinemann, MA

IMS Study Notes (2002), University of Warwick, Coventry

Laudon, Kenneth C and Laudon, Jane P (1998), Management Information Systems: New Approaches to Organisation & Technology, 5th Edition, Prentice Hall, New Jersey

Statum-Howza, Judith; Harris, Robert; Stanek, John and Forrest, Eric (1998), Outsourcing of Information Technology, The University of Michigan-Dearborn, [Online, accessed 15 May 2000]
URL:http://www-personal.umd.umich.edu/~eforrest/paper.html


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