STRATEGIC OUTSOURCING OF IS FUNCTIONS

Strategic outsourcing of IS functions

Introduction

Expenditures on IT over the last decade have remained high and are expected to grow 4.5% to over 3.4 trillion dollars in 2008 (Gartner, 2008). Given the resulting pressures on the overall budgets, organizations have started to scrutinize such expenditures more closely. In an effort to remedy perceived inefficiencies in internal IS operations, reduce costs, and have easier access to new technologies, some organizations are deciding to outsource parts of IS operations. At the same time the outsourcing model has matured and providers have increased their capabilities and became more stable, internal IS departments have retooled and refocused in order to become more competitive with outside alternatives. As a result, outsourcing decisions continue to be important as they have become more common.

We define outsourcing as 'the use of external agencies to process, manage, or maintain internal data and to provide information related services' (Smith et al. , 1998), whether off shored or operated domestically. IS outsourcing has been studied extensively. Some studies focused on the implementation of the outsourcing decision, implications to nations, employees, and organizations (Dibbern et al. , 2004). Others have examined the success factors related to industry process standardization and some have created predictive models for outsourcing success. A distinct track of research in the outsourcing field examines the decision-making process of the outsourcers. With regards to this track, Dibbern et al. (2004) identified a gap in the literature in the area of comparative studies that include the object that is to be outsourced. This paper attempts to fill some of this gap by exploring how the object of an outsourcing decision (what to outsource), organizational size, and strategy lead companies to emphasize different decision factors (i.e., supplier, internal, technology, and cost factors). This insight could have significant benefits to service providers. Armed with this information, sellers may target the value proposition of their services based on firm size, strategy and the object of the outsourcing decision, instead of merely relying on cost as the overriding factor. Beside the practical benefits of understanding these links, the results of this study could also benefit future outsourcing research by highlighting the importance of appropriate research scope, that is, whether future research should be more narrowly focused on organizations of similar sizes, competitive strategies or grouped around the object being considered for outsourcing.

To determine what object to select in our study, we examined the software offerings of the largest enterprise resource planning (ERP) software provider in the world, SAP AG. With revenues of $15 billion in 2007, the German company has two distinct software offerings. The Online Transaction Processing (OLTP) software known as R/3, and the Decision Support System (DSS) software known as NetWeaver. Each of these solutions are marketed, sold and licensed separately by the company and the software offerings are, therefore, distinct in scope and purpose and have a significant market size. In our survey, the term 'OLTP' refers to the R/3 system and the term 'DSS' refers ...