Factors considered when outsourcing a DSS

Factors considered when outsourcing a DSS Bjarne Berg Ph.D. Research Seminar UNCC-Charlotte 3/2/2007

What We’ll Cover… • Introductions • Literature and Research Questions • Population Definitions & Sampling methods • Findings • The most important factors for OLTP and DSS outsourcing overall • Divergent factors for OLTP and DSS outsourcing • Determining Strategies • Factors considered in outsourcing by competitive strategies • Outsourcing trends and expectations 2007-2009

Limitations, Assumptions, Risks The study is limited to organizations engaged in SAP activities such as running, implementing or managing SAP resources i.e. R/3, NetWeaver, or BW (SAP data warehouses). Reliability was tested for consistency in 4 separate samples of sizes ranging from 230 to 802. Validity was tested within a construct using Cronbach alphas on the instrument. Not all constructs has multiple questions, so not all measures were validated (i.e. labor costs, overall costs). However, measures used in this study was separately validated by other published studies. I.e. Our supplier factors had 11 questions and an average inter-item correlation of 0.83 (equivalent to an average of only 69% shared variance between items) have a reliability coefficient of .964

Theoretical Rational In the IT sense, the cost advantage has recently been sought through outsourcing of transactional processing and the challenge has been to decide how far to take outsourcing of supplementary systems. A good example is the Decision Support Systems (DSS). A DSS provides intelligence about operations, increases alternative exploration and leads to increased choices for the organization (Simon, 1960). In short, the benefit of a DSS is to provide managers with an opportunity to anticipate, identify, and creatively respond to changing consumer demands. The challenge is that good DSS are very expensive to implement and that a general approach to outsourcing can “depress industry profitability if companies outsource to the same providers and their solutions become more alike” (Porter, 2000).

Background Companies that outsource their DSS and focuses on cost as the main source of competitive advantage may experience significant risks to their future ability to differentiate their products and services. In short, in organization’s that has outsourced IT, inflexibilities to market changes may also be a risk to business performance (Earl, 1996). The risks may be disproportional to larger companies, as outsourced systems can be used on an economy of scale, where small companies can effectively compete with larger companies (Rayport & Sviokla, 1994).

Our research questions A recent survey of 357 firms, suggested that total outsourcing can be a very dangerous strategy, due to the inflexibility it creates and managers should be very selective in what IT functions are outsourced (Gonzales et. al, 2005). We propose that DSS are at the heart of the firm’s ability to become aware of new opportunities, and therefore these systems must have a very high degree of flexibility. Our research questions are therefore: 1. Are organizations that employ a niche or a differentiating strategy less likely to consider overall costs, or labor costs, than organizations that are primarily competing using a low cost strategy. 2. Is an organization’s competitive advantage strategy a factor in the current, and planned, IT spending on OLTP and DSS. 3. Are larger organizations more likely than smaller organizations to consider factors related to their service providers when considering outsourcing DSS. 4. Are smaller organizations more likely to consider technology factors when deciding to outsource decision support systems.

Measures Research on measures associated with risk factors for information technology outsourcing (Bahli & Rivard, 2002), has examined three sources of risks known as transactional risks, client risks and supplier risks. Since the service provider’s value proposition of outsourcing (Levina & Ross, 2003) may be different from that those of the organization doing the outsourcing we examined the established measures from a follow-up study that examined this divergent value proposition (Djavanshir, 2005). In this study, a survey 114 senior IT manager demonstrated that labor cost reduction, access to host country's skilled workforce and talents, ability to take advantage of host country's universities, providing continuous operations, improved flexibility and agility were the main reasons given by managers for moving IT functions to an outside provider.

Measures Access to the expertise of the employees of the service provider may also be a factor. In a research effort to build a success model prediction model, a set of measures given by management for deciding who to outsource to gain access to expertise was examined (Gable, 1996).

Survey development As measures of company size, published revenues and number of employees for the world’s largest 1000 organizations were used (Fortune, 2005). Based on these measures, a survey was created in March 2006. The instrument was reviewed by a group of five information technology professors from two institutions as well as a set of graduate students. Based on this input, a test sample was made (n=23) of a preliminary instrument to examine it for clarity, terminology, and organization. We obtained UNC-C human subject research approval in April, and conducted survey’s at 4 major SAP conferences (convenience sampling) through out April – November in Florida, California and Nevada. The survey had 47 questions.

Sample Size and Response Rates The study is limited to organizations engaged in SAP activities such as running, implementing or managing SAP resources i.e. R/3, NetWeaver, or BW (SAP data warehouses). Over a period of 8 months we sampled a total of 1,889 individuals using a written survey. The anonymous convenience samples were taken at four different SAP national conferences with a combined attendance of over 15,800 individuals

* Significant at 99% confidence level, two-tailed matched pair t-test of sample means assuming equal variance.** Significant at 95% confidence level. *** Significant at 90% confidence level.

Determining Strategies Clustering of responses to three different survey questions regarding competitive strategies was performed using group average and Minikowski as a distance measure (p=3). The WPGMC method (Lance & Williams, 1967) yielded 3 useful clusters, each representing a niche, a low cost, and a differentiating strategy, using a 5 point Likert scale. As the cluster centroids were established, each response was classified based on their Minikowski distance. K-means Manhattan distance Minekowski distance The intra-cluster correlation coefficient (ICC) aka choptic-r was calculated for the significance of the 3 forced clusters (Donner, Birkett, Buck, 1981). All clusters were found to be significant at a alpha=0.05 level.

Determining Strategies Of the 1,899 respondents, 44 did not identify company size, and 36 did not identify a strategy (response = ‘n/a’). This yielded a sample size of 1,809 for further study,

Findings When examining each organization size and the factors considered for overall OLTP and DSS outsourcing, we found that Fortune-500 organizations would rate cost factors (labor and overall costs) as most important, regardless of competitive strategies. Fortune-1000 organizations would rate internal factors (improved flexibility, agility, familiarity with outsourcing, 24hrs operations) a most important, while smaller organizations would rate supplier factors (skilled work force, number of providers, investments, prior experience, similar activities, similar industry, knowledge of provider’s employees, trust, general expertise, understanding of needs, education system at provider location) as the most important factors. Significant differences found within strategy groups (single factor ANOVA), and within system (two-factor ANOVA without replication) using alpha = 0.05 (p ranging from 5.93E-05 and 2.63E-55). Note: 270 respondents did not engage in any form of outsourcing and was not planning to do so either (within 3 years) or had no responses to factors considered. Overall sample size is therefore 1,575.

Findings While the factors considered were uniform across the various strategies, we did find that the magnitude was different based on organizational size. As expected, low cost Fortune-500 organizations had the highest emphasis on costs when outsourcing, while smaller niche players had a significantly higher emphasis on supplier factors. A surprising finding was that Fortune-1000 organizations engaged in a differentiation strategy placed a statistically significantly higher emphasis on internal factors when compared to other same size niche or low costs organizations. Further research would be needed to establish why this may be the case.

Expected Outsourcing trends by Organization Size The respondents reported that an average of 6.8% of IT budgets were spent on outsourced OLTP efforts. There were no significant differences between the organization sizes. As expected, the respondents also reported slightly less spending on DSS outsourcing initiatives. The major differences were in the expectation levels, where respondents from Fortune-500 companies reported the highest growth in both OLTP and DSS outsourcing over the next 3 years. Overall, the expected annualized growth rate in spending on OLTP outsourcing (2007-2009) was 21.6% and 12.6% for DSS systems.

Next steps Need a volunteer (faculty?) who want to work with me to complete this paper and put the findings back into context. Submission – where? Deadline – when?

Core work reviewed Bahli, B. and Rivard, R (2003) “A Validation of Measures associated with risk factors in information technology outsourcing”., Proceedings of the 36th Hawaii International Conference on System Sciences, IEEE. Donner A, Birkett N, Buck C (1981) Randomization by cluster. Sample size requirements and analysis. Am J Epidemiol 1981, 114:906-914. Djavanshir, G.R. (2005) “Surveying the risks and benefits of IT outsourcing”., IT Professional Volume 7, Issue 6, Nov.-Dec. 2005 Page(s):32 - 37 Engineering Management Journal (2005), “Outsourcing is a failure, claims survey”, Volume 6, Dec. 2004-Jan. 2005 Page(s):7 - 7 Bahli, B.; Rivard, S. (2003), “A validation of measures associated with the risk factors in technology outsourcing”, System Sciences, 2003. Proceedings of the 36th Annual Hawaii International Conference on 6-9 Jan 2003 Page(s):10 pp. Fortune (2005). “The Fortune-1000 list of the largest companies”, April 18, 2005. Gable, G.G.; Sharp, J.A. (1992), “Outsourcing assistance with computer system selection: a success factors model” System Sciences, Proceedings of the Twenty-Fifth Hawaii International Conference on Volume iii, 7-10 Jan. 1992 Page(s):566 - 577 vol.3

Core work reviewed Gable, G.G. (1996). “Outsourcing IT advice: a success prediction model”, Information Systems Conference of New Zealand, Proceedings 30-31 Oct. 1996 Page(s):143 - 153 Gonzalez, R., Gasco, J. and Liopis, J. (2005) “Information systems outsourcing risks: a study of large firms”. Industrial Management & Data Systems; 2005, Vol. 105 Issue 1, p45-61, 17p Internet Center for Management and Business Administration Inc. (ICMBAI) http://www.quickmba.com/strategy/competitive-advantage/ (accessed Feb. 2nd, 2006). Lance, G., Williams, T. (1967)., “A General Theory of Classificatory Sorting Strategies: II”., Computer Journal 10, pp 271-277. Levina, N., Ross, J. (2003)., “Vendor’s perspectives: Exploring the value proposition in information technology outsourcing”., MIS Quarterly, Sept. Porter, M. E. (1980) “Competitive Strategy”, Free Press, NY Porter, M. E. (1985) “Competitive Advantage”, Free Press, NY Porter, M. E. (1998)., “Competitive Advantage : Creating and Sustaining Superior Performance”., Free Press; 1st P edition (June 1, 1998) ISBN: 0684841460 Porter, M. E. (2001) “Strategy and the Internet”, Harvard Business Review, March pp. 63-78.

Core work reviewed Rayport, J. and Sviokla J. (1994) “Managing the marketplace”, Harvard Business Rewvis, Nov-Dec. 1994., pp. 141-150. Rayport, J. and Sviokla J. (1995) “Exploiting the virtual value chain”, Harvard Business Rewvis, Nov-Dec. 1995., pp. 75-85. Simon, H, (1960) “The New Science of Management Decisions”., New York: Harper and Row Webster, M., Muhlemann, A. P. and Alder, C. (2000). „Decision support for the scheduling of subcontract manufacture. Wilcocks, L., Fitzgerald G., and Feeny D. (1995), “Outsourcing IT: the strategic implications”, Long Range Planning, Vol. 28. No 5, pp 59-70.

Factors considered when outsourcing a DSS

Factors considered when outsourcing a DSS

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