Global Information Technology Outsourcing:

Search For Business Advantage

Mary Lacity & Leslie Willcocks, Wiley 2001

The Core I.T. Capabilities Framework

(Note: Figures are not imbedded in text but will be shown in class)

'The concept of your IT person being part of the management of the company, not just a technician sitting on the sidelines, is something that, in fact, keeps you from outsourcing certain roles.' - Vice president of IS, US petroleum company.

'…A building doesn't change its basic purpose over 20 years, whereas with IT it is only for at most three years. And there is a much closer relationship between the business and the technology. Other services you might procure are not as dynamic. But there still is this perception that you can manage IT contracts like any other contracts.' Contract administrator, Australian government agency.

'We originally identified these as non-core and targets for outsourcing. But, in fact, our applications support people have an understanding of the business, and of the specific applications context, that amounts to a core IT competency… - Technical director, B&Q.

Introduction

Over the last decade, shaping and staffing the IT function has presented a perennial, often intractable set of issues. By 2001 the continuing problems related to dynamic changes in the wider global and national economies, increased competitive pressures in most sectors, together with cost containment drives, mergers and acquisitions, rapid developments in information-based technologies, and regular reorganizations and organizational changes to anticipate or react to fluctuating markets and financial results. In all this much of the pressure comes from the constant fire-fighting. Thus a 1999 study of 220 plus companies found that the millenium bug, supporting existing systems, upgrading legacy systems and infrastructure investments were all ongoing priority issues. As a result: ‘if strategies are to be delivered, companies must rethink the way IT is structured and managed. Otherwise, with the best will in the world, highly skilled IT personnel will still be unable to move away from their day-to-day support role and focus on innovations for the future.’(1)

In the face of these pressures, one concern has been to restructure the IT function (2). The degree of centralization has been a prime subject of debate, and, in search of balance, many IT functions have regularly been moved up and down the centralization-decentralization continuum to reflect specific contingencies. Throughout the last decade IT has also become variously a corporate service, an internal bureau, a business venture, and the 1990s and the subject of various degrees of outsourcing. In large complex organizations we found the federal structure the major trend in configuration in the early 1990s. An important finding by Hodgkinson (1996) was the need for the structure of the IT function to reflect, and not be in tension with, that of the wider organization (3).

Another on-going concern has been with the difficult task of aligning business and IT/IS strategies (4). However, even where achieved, such alignment has seemed to have had little effect on the catalogue of implementation problems revealed in a range of studies. One research-based explanation suggested by Walton (1989) and Willcocks and Currie (1997) has been the frequent lack of follow-through on alignment from strategy through the development and implementation stages into routine operations. Other reasons cited for implementation difficulties include poor project management, slow systems development methods, and lack of line management involvement in the implementation process (5).

A further piece in the jigsaw of explanation has been referred to as the ‘culture gap’ between IT and the business. Closing the gap means working on both bringing the business closer to IS, and IS closer to the business. Particular areas of study here have been the central role played by CEO/CIO relationships; the advantages gained from bridge-building mechanisms, user-IS co-location and joint working processes; and the need to reshape skill mixes, including the development and role of hybrid managers (6).

In rethinking these strands, it becomes clear that restructuring, strategic alignment, improving project management expertise, providing better development tools and methodologies, and making line managers/users more responsible for IT, and more IT literate - these are necessary but not sufficient conditions for successful IT. In particular we note two further points. Firstly, the focus of attention has shifted from structuring the IT function towards issues of IT-user relationships, processes and skills. Secondly, a particularly neglected area is that of capabilities and skills within IT functions themselves. Our research over the last five years has focused on these missing, critical, and essentially human resource, elements in the equation - the capabilities and skills required to run a business value-adding IT function.

A focus on key capabilities and skills reflects a resource-based approach to how organizations can survive, pursue stakeholder objectives and compete. Early exponents of the theme of competitive advantage and strategic necessity through IT tended to adopt positioning frameworks for locating the role of IT; by implication the supportive role of the IT function was to deliver the systems required (7). Latterly we have seen more resource-based theories applied to how effective IT can be developed and sustained (8). This fits with moves in the broader strategy and organization literature toward resource-based theories and notions of core competence (9).

In practice top management are seen to be debating whether IT is core or non-core/peripheral to the future of their business; and what arrangements for IT best reflect their analysis. However, an uneasy juxtaposition of concepts bedevils this debate. For example, as we have seen, large IT outsourcing deals are signed but regularly labelled ‘strategic partnerships’, recognizing that IT exploitation remains a ‘critical’, but somehow ‘non-core’, element in the future of the business. Here we argue that resource-based theory needs to be unequivocally applied not just to the organization but also to the IT function itself. In doing this a key, but neglected question is produced, namely: which IT capabilities are core to the business’s future capacity to exploit IT successfully?

Here we address this issue in the context of delivering an IT sourcing strategy. Firstly, we detail the major contextual pressures shaping IT functions in the last five years. In the light of these pressures, we develop a perspective on the emerging shape of the IT function. The key capabilities and skills are then detailed. Here IT capability will refer to an assembly of skills, techniques, and know-how developed over time that enable an organization to acquire, deploy and leverage IT investments in pursuit of business strategies. The challenges and implications of developing and applying these capabilities and skills will be discussed, and related to the issue of sourcing IT capability.

Pressures On The IT Function

Before examining these core capabilities and skills, it is important to understand in more detail the key forces that are shaping their development. There are four main pressures, and we seen no let up in these over the 2000-2004 period. The first is the increasing business reliance on information technologies that are subject to rapid change. In some industries the IT infrastructure is becoming almost synonymous with the organization structure. As one CIO at a major bank commented:

"If the bank was without its major IT systems for 24 hours we would go out of business."

As IT penetrates to the core of operations, so its reliability, the speed with which IT solutions can be delivered, and understanding of new technologies and their potential application, become business critical. The growth of business process reengineering – remembering that moves to e-business imply a new bout of reengineering and what has been described as ‘reengineering on steroids’ - has also concentrated minds. Research, by ourselves and others, shows IT regarded as a key enabler of the process-based organization. Within these trends, IT delivery and support become key performance indicators for the IT function.

Secondly, successive recessions, allied from the mid-1990s with intensive competition across sectors, have led to pressures for cost containment and headcount reductions together with ever more concern for IT to demonstrate the business value it represents.

Thirdly, there is evidence of a long term shift in the way organizations are configured and managed. In pursuit of ‘core competence’ strategies, an increasing number of firms and indeed governments, have sought to apply the principles embedded in a core-periphery model of functioning (for a strong example see BP Exploration in chapter 7). An organization, it is argued, can only be effective at a few core activities, and should concentrate on developing these to world class. Anything else should be eliminated, minimized or outsourced. This raises important questions about whether the whole, or parts of the IT function itself are perceived as core or support. On applying the core competence concept to the IT function at oil major BP Exploration (part of BP Amoco), an IT manager commented:

"It’s a method of rebuilding the focus of your organization so that you focus on what is important to the company, and not what’s important to the traditional IT world."

As earlier chapters show, a related fourth trend has been the growing number, size and maturity of external IT services providers. Senior executives have been attracted by the outsourcing potential for IT, driven by supplier promises of up to 40% IT cost reductions, the ‘bandwagon’ effect, disappointment with in-house performance, skills shortages, the need to do things quickly, and the desire to focus on core activities in difficult economic and competitive climates. Earlier chapters have shown that selective IT outsourcing in particular can realize a range of financial, business and technical advantages for organizations, provided it is carefully entered into and managed.

These trends raise key related issues of performance, business value, relevance, and alternative sourcing that provide considerable challenges for more traditional IT functions.

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Figure 1

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Figure 1 - Forces Shaping The Future IT Function

This chapter provides an extensive review of our thinking on the multiple capabilities and skills mix organizations require to manage successfully over time the supply and demand for IT services. Our research leads us to conclude that, in the face of the trends and challenges outlined above, a critical emerging need is for the development of what later we call the ‘high performance’ IT function.

The Emerging Core IT Capabilities Model

The view presented here of core IS capabilities and the ‘high performance’ IT function has been developed from several strands of research carried out in the 1992-2000 period (10). In reviewing this research, organizations seemed to be converging on core capabilities concepts from two different directions. Some organizations we can characterize as starting with the principle that IT is to be outsourced, and the main question was: ‘what if any capability should be retained in house?’. These organizations tended to have particular insights into the various capabilities required to contract for and manage externally provided IT services. By contrast, other organizations had worked from the premise that IT represents an important strategic resource, and focused their analysis on what must exist to ensure their continuing ability to exploit it. These latter organizations tended to have sharper insights into the capabilities required to understand and articulate business-driven IT needs, and those which relate to developing the appropriate technical platform. They were often less sophisticated in their definition of supply management capabilities even though they often accepted that much IT service would become externally sourced in the fullness of time. By synthesizing the learning that was being achieved from these two different start points, we can provide a rich picture of the core capabilities required in IT functions in the new decade.

The first step in the synthesis is represented by Figure 2. Here we present the four faces of the target, or emergent, IT function. We will present this model followed by the nine key research-derived capabilities that populate it, and then discuss the implications and challenges this form of IT function represents. Some points on terminology are in order. Throughout we employ a working definition of the Information Technology function as the set of activities, personnel and IT assets set up to define and ensure delivery of the information systems requirements of the business. Of course, such a function will be variously structured, physically located and staffed within different organizations. Figure 2 represents a development from existing terminology in the IT literature. Following Earl (1996), and in a continuation from previous work where the conceptual clarification proved consistently useful, we will now distinguish between information management (IM), information systems (IS) and information technology (IT) strategies (11). Additionally, the growth in IT outsourcing in the 1990s, together with a maturing and expanding IT service market, leads us to make explicit the need for IT/IS sourcing strategy and supportive capabilities within the contemporary organization. Some brief description of these four faces, or tasks, is now provided.

  • The business ‘face’ is concerned with the elicitation and delivery of business requirements. The domain of Information Systems Strategy, capabilities here are business-focused, demand led and concerned with defining the systems to be provided, their relationship to business needs, and where relevant the inter-relationships and inter-dependencies with other systems. A further focus here is a strategy for delivery, together with actual IS implementation
  • The technical ‘face’ is concerned with ensuring that the business has access to the technical capability it needs - taking into account such issues as current price/performance, future directions and integration potential. This is the domain of Information Technology Strategy that is defining the blueprint or architecture of the technical platform that will be used over time to support the target systems. IT presents the set of allowable options from which the technical implementation of each system must be selected. A further concern is to provide technical support for delivery of the IT strategy.
  • The ‘governance’ face is concerned with Information Management Strategy, which defines the governance and coordination of the organization's IT/IS activity. It elaborates such issues as:

- the role/mission of IS/IT within the business;

- the respective responsibilities of IS/IT and business staff in achieving that role;

- the people and processes involved in creation of the Information Systems strategy to support the business;

- the people and processes involved in achieving the chosen approach to systems implementation;

- the principles which should guide the development of Information Technology strategy;

- the processes which will be used to evaluate any proposals for IS/IT investment or services;

- the purpose and scope of any standards which should apply to IS/IT activity.

  • The supply ‘face’ encompasses understanding and use of the external IS/IT services market; its activity is driven by decisions about the sourcing of activity. As such it is the domain of IT/IS Market Sourcing Strategy. Particularly critical here are decisions on what to outsource and insource, on which external suppliers to use and how. A further concern is ensuring appropriate delivery of external services contracted for.

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Figure 2

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Figure 2 - Four ‘Faces’, or Tasks, of the Emerging IT Function

Requisite Capability In The Emerging IT Function

In this section we further develop the model of the future IT function by detailing nine capabilities required to render it dynamic and fully operational. These capabilities, expressed as roles, are shown in Figure 3. It should be noted that the nine capabilities populate seven spaces. As will emerge, these spaces are not accidentally arrived at. Three are essentially business, technology or service facing. One is a lynchpin governance position covered by two capabilities (see Figure 3 - Leadership and Informed Buying). Finally, there are three spaces that represent various interfaces between the three faces. The capabilities that populate these spaces are crucial for facilitating the integration of effort across the three faces. We now move to detailing each of the nine capabilities.

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Figure 3

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Figure 3 - Nine Capabilities In The Emerging IT Function

Capability 1 - IS/IT Governance

‘Integrating IS/IT effort with business purpose and activity’

At the heart of Figure 3, in the overlapped space of the three faces, is the need for effective IS/IT governance. Effective IS/IT leaders devise the organizational arrangements - structures, processes and staffing - to address each challenge area and manage their interdependencies. They set goals and direction in each area. Leaders also influence the overall business perception of IT's role and contribution, and establish strong business/IT relationships at the executive level and leverage those relationships to achieve a shared vision of IT. At the same time leaders determine the values and culture of the IT function and instill the belief that an IT staff's first duty is to contribute to the business.

Leadership is of course the traditional role of the CIO or Director of IT, although the future of that role is sometimes questioned. But our experience consistently reinforces our colleague David Feeny's view that the CIO is personally instrumental in organizational exploitation of IT, whether the IT is outsourced or not. Consider the example of East Midlands Electricity in the UK (Appendix B case 54). In 1992 the company outsourced its IT department and transferred almost the entire computer staff of 230 people in a twelve year, $230 million deal with Perot Systems. In 1995 senior managers accepted that systems were critical to the evolution of the company's business strategy as East Midlands sought to implement major new client/server systems.

The company recognized the need for a high-performance CIO to provide the necessary IT/IS leadership and manage the new IT organization. According to Andy Halford, the new Group IS Director, his job was to 'strengthen the in-house resource…. recognizing just how critical IT is going to be to the business during the next two to three years.' Then Managing Director, Norman Askew, believed that rebuilding the in-house team would also enable the company to improve control, revise the IS/IT strategies, and review the sourcing approach with Perot Systems. He remarked: 'You cannot outsource these things and then not manage them adequately.'