INFORMATION SYSTEMS CLOUD-SOURCING

Question 1

Application service

Answer 1

= all services associated with the acquisition, development, and deployment of an IT application —> the market offers 3 options:

1. Application Service Providers (ASP): a firm that “manages and delivers application capabilities to multiple entities from a data centre across a wide area network” —> is a form of application outsourcing that involves hosting an application on a server that is centrally located and managed by the vendor. ASP customers access the application remotely via a private network or the Internet.
   Risks:
   * Volatility of the ASP market and the financial stability of vendors therein
   * Legal risks as the ASP market is relatively immature compared to the outsourcing market; contractual and legal issues have not been as thoroughly “shaken-out”
   * Technical risks as ASP success is more dependent on the underlying technology as opposed to the applications being hosted + customers are typically dependent on the Internet for service provision to a greater extent than any other forum of delivery (ex. network slowdowns)
2. Off-shoring: the utilisation of an external vendor that performs most or all of the programming in a country other than the one where the client is located
   Risks:
   * Communication risks, exacerbated by distance and, often, language and culture differences
   * Additional cost risks associated with higher than expected communication, coordination, and control costs
   * Legal risks includes questions about the appropriate jurisdiction for resolving dispute
   * Data privacy and intellectual property concerns
3. Domestic Outsourcing: external vendor that performs most or all of the programming in a country where the client is located.
   Risks:
   * Cost escalation
   * Service debasement
   * Medium/high switching costs

Question 2

Attributes of the outsourcing decision

Answer 2

1. Transaction particulars: the primary objective of a firm is to structure governance arrangements to economise the cost of transactions —> a company will evaluate considering:
   A. Transaction costs: The costs incurred in searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers.
   B. Production costs: The comparative cost of internalizing the application vs. the price the firm has to pay vendors for the same application.
2. Resource particulars follows 2 theoretical perspectives:
   A. Resource-Based theory (RBT): views the firm as a collection of resources. It proposes that a firm can gain competitive advantage by acquiring and deploying resources that are rare, valuable, difficult to imitate, and relatively immobile and non-substitutable.
   There are 3 attributes that the researchers hypothesise forms assess in determining which option to select when outsourcing application services:
   * Resource gap: The extent to which there are internal people with technical skills to provide the application service
   * Resource heterogeneity: The extent to which the application differentiates the firm.
   * Resource utilization: The extent to which resources are efficiently and effectively utilized.
   B. Resource Dependence theory (RDT): a firm cannot produce all of the resources needed for its operation and hence is dependent upon the external environment.
   There are 2 attributes the researchers hypothesise firms assess in determining which option to select when outsourcing an application service:
   * Task environment availability: The degree to which there are a number of vendors available to offer the application/service.
   * Resource suitability: The degree to which the vendor has access to a sufficient degree of telecommunications/network capabilities.
3. Knowledge particulars:
   The Knowledge-Based View of the firm (KBV) argues that the competitive advantage of a firm arises from how well it creates, stores, and applies knowledge. Firms that are better at creating and mobilizing knowledge will achieve competitive advantage over those that do not leverage the knowledge in their organizations
   There are three attributes that we hypothesize firms assess in determining which option to select when outsourcing an application service:
   * IT knowledge of service or product: The extent to which there is business-specific knowledge needed to service the application
   * Integration: The degree to which the application helps the knowledge flow within the firm
   * Knowledge risk: The degree to which there is knowledge specific to the organization that might put the firm at risk if disclosed by an external provider

Question 3

5 overarching themes that characterise why organisations adopt outsourcing:

Answer 3

• Knowledge: tacit knowledge which is essential to develop successful systems
• Costs: are directly related to transaction and production costs, and companies try to reduce these costs
• Resources: Companies seek resources due to the intrinsic resource gaps that exist between what they have and what they need.
• Strategy: relates to the strategic role of IS and can affect the outsourcing decision, especially as it relates to resource needs.
• Agency: relates to issues after the outsourcing decision is made such as contracts negotiation, contact and performance measurement, and contractual control.

Question 4

A CONJOINT APPROACH TO UNDERSTANDING IT APPLICATION SERVICES OUTSOURCING

Research findings: How executives approach making outsourcing choices?

Answer 4

1. Executives they are concerned about the cost of outsourcing, regardless of the option chosen. In the case of ASPs, executives focused more on transaction costs (search and negotiation costs) than on production costs (the comparative costs of internalising the application vs. the cost of sourcing), while the opposite was true for domestic and offshore outsourcing.
   —> This suggests that are concerned about the volatility of the ASP market and less concerned about vendor selection and negotiation issues for the domestic and offshore options, but more focused on application-specific costs in those instances
2. For all three sourcing options was the risk associated with disclosure by the vendor of knowledge specific to the organisation —> risk was higher for ASP and offshore and lower for domestic outsourcing
3. Respondents ranked highly was the networking and telecommunications capabilities of
   the vendor —> respondents became increasingly more concerned about the telecommunications and network capabilities of the vendor as the sourcing option shifted from a relatively standardised model (ASP) to those subject to more customisation and complexity.
4. The availability of technically qualified individuals (resource gap), and the extent to which the
   application provides competitive advantage to the firm (resource heterogeneity) were
   minimally important:
   * Regarding the resource gap there’s s an abundant supply of IT personnel with adequate technical expertise, both domestically and abroad.
   * Considering the resource heterogeneity It may be that the executives have come to the enlightened realisation that competitive advantage comes not from IT, but from the organisationally and socially complex linkages between IT and business processes both within the firm, and between the firm and its customers and suppliers
5. There is no one single theory that predominates across all three sourcing option
6. Resource-Based View attributes are not considered especially relevant
7. Resource Dependence attributes indicate that there is an adequate supply of qualified vendors, and that executives are focused on their capabilities.
8. Knowledge-Based View attributes boil down to one: knowledge risk, or the degree to which
   the firm might be harmed if organization-specific knowledge were to be disclosed by the vendor.—> suggests that the respondents value the criticality or sensitivity of knowledge embedded in the application to be much more relevant to the sourcing decision than the application’s reliance on business knowledge, or the extent to which it facilitates information flow within the firm.

Question 5

A CONJOINT APPROACH TO UNDERSTANDING IT APPLICATION SERVICES OUTSOURCING

Practical implications

Answer 5

• Organisations need to consider that the outsourcing of applications is really more a balancing act between risk and rewards
• Organisations should not look to outsourcing vendors as vehicles for overcoming internal limitations (resource gaps)
• Vendor capability, in terms of the vendor being able to deliver what it promises is a key aspect of outsourcing choice. This is especially true in the case of offshoring
• While costs are clearly an important dimension in the choice to outsource, the types of costs vary depending on the outsourcing option.

Question 6

How can companies structure IT outsourcing to deliver innovation?
Long-tail strategy for IT outsourcing

Answer 6

innovative IT-outsourcing model combines a few key partnerships with a dynamically changing and unrestricted number of smaller contracts with other suppliers to deliver specific value propositions beyond the capabilities of the key partner
* Embraces and even fosters a flow of new suppliers offering new capabilities that can enable the company to prosper in turbulent business environments
* Combine a few key partners with many smaller contracts
* Create incentives for niche suppliers
* Pay attention to governance of the suppliers portfolio

Question 7

Delivering value from the long tail strategy:

Answer 7

1. Distribute responsibility for scanning for new technologies= The design and evolution of the portfolio, to a large extent, relies on an emergent, bottom-up process. This process is driven by the distributed decision making of middle and senior managers who have the best understanding of their business and technological needs. —> These managers should therefore take on a proactive role, scanning for new technologies and leaving the door open for suppliers, both existing and new, to pitch innovative solutions to them.
2. Nurture relationships at the tail end: One pitfall of the long-tail strategy is that it demotivates new suppliers from investing in client relationships. In- deed, each supplier in the long tail may feel that its role is temporary and focus its best efforts on other clients that are willing to make long-term commitments. It is thus important that both business-unit managers and the sourcing-management office incentives suppliers to invest in the relationship. —> companies need to find creative incentives such as invitations to work on innovative projects
3. Encourage sales pitches from suppliers: the client’s program managers should encourage the suppliers to actively propose innovative services.
4. Govern your entire outsourcing portfolio: governance is needed to periodically rationalise the portfolio to increase the client’s commitment to the top-performing players while ensuring

competition. —> This rationalisation requires a deep understanding of value drivers of different types of outsourced service
5. Designing for integration: With diverse suppliers delivering specialised services, the long-tail strategy places significant emphasis on the client’s integration capability —> investments made into a strong technical architecture, shared data sources, and common standards, which enable the client to develop a holistic and detailed view of different processes within the organization