An Empirical Investigation of Information Technology Sourcing Practices: Lessons from Experience

• Published in: MIS quarterly Vol. 22; no. 3; pp. 363 - 408
• Main Authors: Lacity, Mary C., Willcocks, Leslie P.
• Format: Journal Article
• Language: English
• Published: Minneapolis The Society for Information Management and The Management Information Systems Research Center of the University of Minnesota, and The Association for Information Systems 01.09.1998; University of Minnesota, MIS Research Center
• Subjects: Alliances; Application; Best practice; Business structures; Case studies; Contracts; Cost control; Cost savings; Decision making; Financial budgets; Information technology; Insourcing; Insurance management; Outsourcing; Process management; Studies; Success; Technological planning; Trends; Vendors; United Kingdom > UK; United States > US
• ISSN: 0276-7783; 2162-9730
• DOI: 10.2307/249670

Following Kodak's landmark information technology (IT) outsourcing decisions in 1989, the IT outsourcing market grew to 76 billion dollars in 1995. As the outsourcing market continues to grow and as new contracting options emerge, the accumulated experiences of firms offer significant opportunities for learning. This paper builds on a previous collection of data on 61 IT sourcing decisions made in 40 U.S. and U.K. organizations during the period 1991 to 1995. This paper reanalyzed transcribed interviews from 145 participants. Using "expected cost savings achieved" as an indicator of success, five best practices were identified in the case companies. First, selective outsourcing decisions had higher success rates than total outsourcing or total insourcing decisions. Second, senior executives and IT managers who made decisions together had higher success rates than either stakeholder group acting alone. Third, organizations that invited both internal and external bids had higher success rates than organizations that merely compared external bids with current IT costs. Fourth, short-term contracts achieved higher success rates than long-term contracts. Fifth, detailed fee-for-service contracts had higher success rates than other types of fee-for-service contracts. The critical elements of three contracting models are described: fee-for-service contracts, strategic alliances/partnerships, and buying-in of vendor resources. When the practices generated from the case studies are compared with current practices, we begin to understand which practices are proving robust and why new practices emerge. For example, in the participating companies, the rhetoric of a "partnership" was misused to describe contracts that are actually fee-for-service contracts. Today, practitioners who understand the inherent conflicts in fixed fee-for-service contracts are demanding what they perceive to be more favorable contracting options, such as flexibly-priced contracts, performance-based contracts, and strategic alliances based on shared risks and rewards. This analysis reconciles some of the apparent discrepancies in past findings about the best ways to source IT.