To date, most research on information technology (IT) outsourcing concludes that firms decide to outsource IT services because they believe that outside vendors possess production cost advantages. Yet it is not clear whether vendors can provide production cost advantages, particularly to large firms who may be able to replicate vendors' production cost advantages in-house. Mixed outsourcing success in the past decade calls for a closer examination of the IT outsourcing vendor's value proposition. While the client's sourcing decisions and the client-vendor relationship have been examined in IT outsourcing literature, the vendor's perspective has hardly been explored. In this paper, we conduct a close examination of vendor strategy and practices in one long-term successful applications management outsourcing engagement. Our analysis indicates that the vendor's efficiency was based on the economic benefits derived from the ability to develop a complementary set of core competencies. This ability, in turn, was based on the centralization of decision rights from a variety and multitude of IT projects controlled by the vendor. The vendor was enticed to share the value with the client through formal and informal relationship management structures. We use the economic concept of complementarity in organizational design, along with prior findings from studies of client-vendor relationships, to explain the IT vendors' value proposition. We further explain how vendors can offer benefits that cannot be readily replicated internally by client firms.
This paper reports on a comparative case study of 13 industrial firms that implemented an enterprise resource planning (ERP) system. It compares firms based on their dialectic learning process. All firms had to overcome knowledge barriers of two types: those associated with the configuration of the ERP package, and those associated with the assimilation of new work processes. We found that both strong core teams and carefully managed consulting relationships addressed configuration knowledge barriers. User training that included both technical and business processes, along with a phased implementation approach, helped firms to overcome assimilation knowledge barriers. However, all firms in this study experienced ongoing concerns with assimilation knowledge barriers, and we observed two different approaches to address them. In a piecemeal approach, firms concentrated on the technology first and deferred consideration of process changes. In a concerted approach, both the technology and process changes were undertaken together. Although most respondents clearly stated a preference for either piecemeal or concerted change, all firms engaged in practices that reflected a combination of these approaches.
The received wisdom on information technology (IT) chargeback is that a chargeback system with certain key characteristics, such as usage-based charges, stable rates, understandable bills, and so forth, will help firms make effective decisions on IT investment and use. Eccles' model of transfer pricing provides a theoretical framework for this claim, and it also explains why chargeback systems can raise issues of fairness or create conflict between IT and its clients, as the IT literature has pointed out. Applying Eccles' model, this paper reports on a study of 10 organizations' IT chargeback systems and their impacts on business managers' economic decisions and on evaluations of IT and business unit performance. Respondents in just four of the 10 firms reported that chargeback had significantly influenced IT investment decisions. In addition, the business unit respondents at those same four firms offered more positive assessments of IT than their counterparts at other sites. These differences in chargeback-related outcomes could not be accounted for by looking at differences in the chargeback characteristics that are most commonly described in the IT literature. What was different in these four firms was that chargeback was being used to foster communication between IT and the business units. This communication was generating a rich shared understanding for both parties of the costs and benefits of alternative IT investments and service offerings. The literature on partnership argues that complex IT investment decisions demand a strong IT-business partnership. The analysis suggests that IT units in just four of the 10 firms were tapping into the potential of chargeback to facilitate the development of a partnership with their business unit counterparts.