path, which involved rotating professionals within engagements, assigning personnel development managers and creating both technical and management hierarchies.
• Methodology.development.and.dissemination: Was necessary for consistent delivery of best of breed solutions to client problems. Whereas the client’s staff focused on addressing users’ immediate needs, the vendor introduced meth- odologies that focused on overall operational improvements on projects. The vendor had a long history of methodology development. The methodologies not only specified processes, they also standardized project documentation through forms and templates such as change request forms, lost time logs and weekly status report forms, to closely monitor project status.
• Customer.relationship.management:.Was formalized through level of ser- vice agreements. Each agreement set a fixed price for agreed-upon services.
The major philosophy of outsourcing was that the vendor is taking a risk. The vendor is responsible for whatever is defined in that client interface document as being the vendor’s responsibility. While agreements might not lead to greater user satisfaction with the level of IT services, it did reduce uncertainty, thereby creating clearer expectations and an acceptance of limits. As users accepted these limits, they recognized and appreciated services that exceeded contract requirements.
These three competencies turned out to be complementary by being mutually reinforcing. Management practices targeted at one competency tended to enhance the other competencies as well. This reinforcing pattern was apparent in all three pairings of the competencies:
• Personnel.development.and.methodology.development.and.dissemination.
are.complementary.competencies: The methodology competency reinforced personnel development by helping junior staff learn quickly what they were expected to do. While methodologies were sometimes viewed as constrain- ing individual initiative, one junior consultant argued that the methodology empowered her and others to challenge management directives that might be inconsistent with documented practices. In addition, standardization of practices around methodology facilitated staff rotations and scheduling. In the same way, personnel development practices, such as skill development, rotations and promotion policies provided training, encouragement and incen- tives that led to consistent use and improvement of methodologies across the organization.
• Methodology.development.and.dissemination.and.customer.relationships.
are.complementary.competencies: When methodology delivered operational improvements, the vendor could sometimes increase service levels with no
added cost to the client. In some cases, the vendor had been able to pull people off a project and had elected to share the savings with the client. These very visible improvements in IT service levels reinforced the customer relationship.
Methodological approaches also improved customer relationship manage- ment practices by defining and standardizing best practices for creating and managing level of service agreements. The customer relationship management competence similarly reinforced the methodology competence. The vendor regularly communicated with the client to discuss issues and expectations, and one outcome was to help the client managers understand the methodologies so that they could facilitate, rather than hinder, the vendor’s ability to meet expectations. Thus, client managers shared their knowledge of systems with the vendor and provided early warnings, where possible, when business or corporate IT changes might have an impact on the vendor’s responsibilities.
• Personnel.development.and.customer.relationships.are.complimentary.
competencies:.Personnel development practices reinforced customer relation- ships by ensuring that staff understood and accepted accountability for meet- ing contractual obligations. Personnel development practices also developed communication skills to help staff establish customer expectations and build trust. At the same time, strong customer relationships led to better buy-in on the customer’s part and to personnel development policies that required release time or movement of personnel, such as training programs, mentoring, and job rotations.
The concepts of complementariness and core competencies explain that the vendor can increase productivity and reduce costs on client projects by applying this set of complementary application management competencies. Levina and Ross (2003) examined how the vendor delivers value to clients as a result of its ability to develop complementary competencies. First, they went beyond neoclassical economics theory to explain why potential clients are unlikely to develop these complementary competencies internally. They then explored the mechanisms that ensure that the benefits of the vendor’s competencies are, in part, passed on to clients.
• Why.clients.do.not.replicate.and.apply.vendors’.competencies:.Typically, clients have a different set of market structures and resource constraints than the IT services industry. Accordingly, clients have a different organization and different business processes. Clients have hired personnel to address the market conditions and customer demands of their industry. Clients can attempt to build IT application competencies rather than outsource to vendors, but, unlike vendors, they may find that optimizing the development and applica- tion of IT competencies will conflict with optimizing core business activities.
Vendors, on the other hand, can shield themselves from these conflicts through
the structure provided by contracts, which specify deliverables rather than levels of investment in competencies.
For example, to address labor market constraints, clients could increase the compensation of technical specialists, but non-IT workers might perceive the inflated IT salaries as unfair. Similarly, clients are typically not as well posi- tioned as vendors to institute an IT personnel career development office or a practice of IT personnel rotation and promotion.
• Why.vendors.share.productivity.gains.with.clients: From the client per- spective, the vendor’s value proposition would not exist if the benefits of complementary competencies accrued solely to the vendor. Contract-based, interpersonal and reputation-based mechanisms encourage vendors to share advantages with clients. Clients may deploy some contract-based mechanisms including pilot projects, multiphase contracting with penalties, interpersonal relationship building, carrot and stick incentives and short-term contracts and competent contract monitoring. All of these mechanisms increase client con- trol and motivate vendors to demonstrate value to the client. Since the value of outsourcing to the client is very hard to measure, most researchers have focused on client satisfaction.
Reputation-based mechanisms provide vendors with a strong incentive to share productivity gains with clients. IT service vendors’ focus on reputation-build- ing in their relationships with clients. In addition to their current contracting structure, vendors care about their long-term market position. Thus, the vendor is inclined to share benefits with the client so that the information about the vendor’s contribution enables it to win future contracts. Developing a solid industry reputation helps a vendor win new, and extend existing, engagements, which lead to the acquisition of, and control over, more projects.
Knowledge-intensive service firms, like outsourcing vendors, are typical value shops, and such firms depend on reputation for success, as reputation is a key driver of firm value creation. Reputation is a relational concept, in the sense that firms are judged by their stakeholders relative to their competitors.
Reputation is what is generally said or believed about an entity by someone, it is the net perception of a firm held by stakeholders judged relative to other firms. According to Sheehan (2002), there are four conditions which must be present for reputation to work. First, rents earned from maintaining a good reputation must be greater than not. Second, there must be a minimum of contact among stakeholders to allow for the changes in reputation to be com- municated. Third, there needs to be a possibility of repeat business. And last, there must be some uncertainty regarding the firm’s type and/or behavior.
Reputation is related to the asymmetry of information, which is a typical feature of knowledge-intensive service firms. Asymmetry is present when
clients believe the firm knows something that the clients do not and believe it is necessary to know to solve their problems.
Reputation can be classified as a strategic resource in knowledge-intensive firms. To be a strategic resource, it has to be valuable, rare, costly to imitate and possible to organize. Reputation is valuable as it increases the value re- ceived by the client. Reputation is rare, as by definition only a few firms can be considered best in the industry. Reputation is costly to imitate, as it is difficult
Figure 6.3. Vendor’s value proposition
Applications.Management.
Market.Characteristics Client Needs
•Rapid response to business and technological changes
•Kostnads-effectivitet IT Labor Constraints
•High level of turnover
•Rise of IT workers salaries
•Scarcity of advanced technical skills
Reward for skills updating
Number and variety of projects controlled by the vendor
Vendor practices Client
satisfaction
Complimentary.
Cometencies: Personnel Methods Customer Relationships Reputation-based
mechanisms
defines
increases
drives
leads to higher Contract-based.
mechanisms Interpersonal.
mechanisms
to build a reputation in the short run. Reputation is possible to organize in the general sense of controllability, which implies that a firm can be organized to take advantage of reputation as a resource.
The vendor’s strategy and practices are depicted in Figure 6.3. This model of the IT vendor’s value proposition suggests that client needs, as shaped by market con- straints, specify the requirements for client satisfaction. Client satisfaction results from services provided by vendors through the application of a complementary set of core competencies targeted at delivering higher service at a lower marginal cost.
Client satisfaction is achieved in Figure 6.3 when the application of core competen- cies to projects is enabled by a healthy client-vendor relationship, which is in part influenced by the vendor’s expertise in managing client relationships. Competencies, in turn, grow through the vendor’s firm-wide experience gained from controlling a large number and variety of projects, which, in turn grow due to the reputation the vendor, and develop through its ability to satisfy customers. The model represents a set of positive feedback loops, which will result in negative outcomes if, for ex- ample, the competencies do not match client needs.
Erlingsson and Grødem (2005) conducted research to empirically test the vendor value proposition suggested by Levina and Ross (2003). Specifically, they for- mulated the following research question: What are the relationships among an IT outsourcing vendor’s complementary core competencies and outsourcing success?
In line with Levina and Ross (2003), their research proposed that the vendor has three core competencies which are complementary to each other. The three core competencies are:
• Personnel development
• Methodology development and dissemination
• Customer relationship management
These are argued to create more value as mutually reinforcing competencies than as individual, stand alone ones. Thus, benefits from doing more of one activity increases if the vendor is also doing more of another complementary competency.
As Erlingsson and Grødem’s (2005) research was attempting to empirically verify Levina and Ross’s (2003) claims, the first six research propositions are made up from the competencies and the suggested complementary relationships between them as follows:
1. Will increased personnel development lead to more methodology development and dissemination?
2. Will increased methodology development and dissemination lead to more personnel development?
3. Will increased personnel development lead to more customer relationship management?
4. Will increased customer relationship management lead to more personnel development?
5. Will increased methodology development and dissemination lead to more customer relationship management?
6. Will increased customer relationship management lead to more methodology development and dissemination?
The final three propositions address the direct relationship between core competen- cies and outsourcing success. It can be reasoned that in order for the competencies to be complementary to each other and to have an effect on outsourcing success, both competencies must have an impact. If one competency does not have a rela- tionship to outsourcing success, there is no mutuality. Therefore the direct impact of each competency on outsourcing success contributes the last three propositions as follows:
7. Will more personnel development lead to increased IT outsourcing success?
8. Will more methodology development and dissemination lead to increased IT outsourcing success?
9. Will more customer relationship management lead to increased IT outsourcing success?
In Erlingsson and Grødem’s (2005) research, outsourcing success was measured by customer benefits, customer satisfaction and vendor benefits. Customer benefits are the extent of economical, technical and strategic benefits attained. Customer satisfaction is the extent of overall satisfaction with the contract and desire to retain with the outsourcing partner. Vendor benefits are the degree of economical, business development and organizational benefits attained.
In their empirical study of outsourcing relationships, Erlingsson and Grødem (2005) tested the first six propositions using simple regression and found that all relation- ships between core competencies were statistically significant. This implies that the assumed complementarities between personnel development, methodology development and dissemination and customer relationship management found initial support.
However, when applying multiple regression analysis, not all relationships were significant anymore. Relationships three to six were still statistically significant. The
final complementary relationship, between customer relationship and methodology development, was not found to be present anymore. No statistical significance in either direction was shown. This contradicts the theory suggested by Levina and Ross (2003).
The last three propositions (7, 8, and 9) did find support in the empirical research.
Personnel development, customer relationship management and methodology de- velopment and dissemination all influence outsourcing success. In our knowledge management perspective, such findings imply that improved knowledge management by the vendor in terms of personnel development, customer relationship manage- ment and methodology development and dissemination will increase outsourcing success.
However, when applying multiple regression analysis, not all relationships were significant anymore. Based on their empirical research, Erlingsson and Grødem (2005) developed a new model of significant relationships between vendor compe- tencies and outsourcing success as illustrated in Figure 6.4.
Figure 6.4. Empirical relationships for vendor competencies
Personnel Development
Skill training
Teamwork
Methodology Development and Dissemination
Best Practice Framework Customer Relationship Management
Sharing Efficiency Benefits
Management of Customer Goals and Priorities
Sharing Expertise
Governance Structure
Outsourcing Sucess
Vendor Benefits
Client Benefits
Client Satisfaction
Personnel development in Figure 6.4 can be substituted with the more common term of human resource development. Human resource development is a process of developing and freeing up human potential and expertise through organizational development and personnel training and development in order to improve perfor- mance. Training is an important part of human resource development. There are two paths of skill training — formal and informal. Teamwork is another part of human resource development with an emphasis on cooperation rather than competition, on open disclosure of information and on building loyalty to the firm as significant underpinnings of success. Norms of interaction for teamwork include willingness to value and respond to diversity, openness to criticism and tolerance for failure.
Customer relationship management in Figure 6.4 is defined in terms of sharing ef- ficiency benefits, management of customer goals and priorities, sharing expertise and governance structure. Efficiency can be defined as the internal perspective to metrics like cost reduction and productivity enhancement. Management of customer goals and priorities is concerned with the vendor organization’s ability to under- stand and satisfy the customer’s needs and objectives by becoming better at meet- ing requirements. Sharing expertise with client’s staff requires the vendor to have the right policies and procedures in order to transfer knowledge effectively to the client organization. Governance structure is the framework for assigning decision rights concerning principles, architecture and infrastructure so that both vendor and customer have powers that match responsibilities.
Finally, methodology development and dissemination in Figure 6.4 is concerned with best practice framework. Best practice is the best of breed solutions to customer problems. For example, ITIL (Information Technology Infrastructure Library) pro- vides a set of best practice guidelines and architectures to ensure that IT processes are closely aligned to business processes (Erlingsson & Grødem, 2005).