Abstract
Malaysia is poised to become a preferred shared service and outsourcing hub in Asia. The presence of many world-class organizations increases the service providers’ capabilities. Many local providers received competency certifications such as capability maturity model and integration (CMMi) to improve confidence among service receivers. There is no study on service providers’ capabilities and competencies in IT outsourcing project implementations in Malaysia context. Hence, the study aims to explore on service provider’s value propositions in terms of capabilities and competencies and also to investigate the relationship dimension and its factors in outsourcing arrangements. We adopt multiple-case studies approach to obtain data in that we review literature, websites, documents, news as well as perform interviews from senior executive management in five service provider firms to explore and understand their success propositions. Our findings indicate that Malaysia practice is not much difference from developed countries except for the Asian cultural values still a dominant factor in local service providers. Technical as well as non-technical capabilities and competencies remain the top success factors while project and relationship management also contribute to the success. Relationship plays a critical success factor in determining successful project implementation. This study contributes to literature as well as Malaysian IT outsourcing practical reference for business managers.
Keywords: IT outsourcing, supply-side, capabilities, relationship, propositions, success factors
Introduction
The fifth Prime Minister launched Malaysia Shared Services and Outsourcing (SSO) initiative in Austin, Texas in 2005 to further boost the foundation laid by former Prime Minister that Multimedia Super Corridor (MSC) initiative. Malaysia aims to become a leading high-value propositions SSO hub in Asia leaving India and China with low-cost providers. Frost and Sullivan (2005) report ranked Malaysia as second behind India in Finance sector and third in Energy sector. AT Kearney (2005, 2006) and Gartner (2006) also ranked Malaysia high as the potential outsourcing provider in the world.
Growth of SSO market
The global worldwide Shared Services and Outsourcing (SSO) market is expected to grow at a CAGR of 15 per cent over the next few years, reaching USD1.43 trillion by 2009 as compared to USD930 billion in 2006. “The outsourcing need is growing and we intend to fully leverage on our achievements to meet this need,” said MDec Chief Executive Officer. He added that ICT services like SSO contributed RM2.8 billion to the Malaysia Gross Domestic Product of RM495.6 billion. Multimedia Development Corporation (MDec) is a government arm to spearhead the growth of IT industry with its Multimedia Super Corridor (MSC) flagship initiatives. Outsourcing Malaysia (OM) and PIKOM chairman, cited that the local SSO industry is currently worth USD300 million growing at a CAGR of 30% year on year, compared with the current global IT outsourcing size of USD24 billion. In 2012, the Malaysian SSO industry is targeted to be worth USD2 billion providing 300,000 jobs .
Previous Information Technology outsourcing (ITO) researches indicate the growing complexities of IT outsourcing arrangement (Marcolin and Ross, 2005). As a result, many studies or news reported project failures (Cullen et al., 2005). Most studies agree that relationship between service receivers and providers is a key to successful project arrangements and implementations. Dibbern et al., (2004) suggest future researches on service providers’ perspectives, relationship and success factors and this study attempts to answer the calls. Hence, we are interested to investigate on the service providers’ capabilities and competencies to provide values to their corresponding service receivers. In addition, we also explore the general practices and business models proposed to their service receivers.
Generally, the broad aim of the study is to investigate and answer the main research questions on:
i) How are the ITO implementations being approached and dealt with by the service providers?
ii) What are the factors that contribute towards project success?
The paper is structured as follows: (i) The above introduction briefs the general shared services and outsourcing and IT outsourcing initiatives in Malaysia and guides to the problem statements and aims of the research; (ii) Literature review highlights on previous researches on capabilities and competencies, relationships and success; (iii) Guiding theories provide the guiding theoretical foundation to conduct the case studies data collection and analysis; (iv) Findings will elaborate on the example of one case global delivery framework and offshore service delivery model highlighting the main implementation process steps adopted by the firm; and finally (v) Implications section wraps up the discussion on the research findings and potential contributions and impact of the paper and its findings.
Literature review
a) Capabilities and Competencies
Prahalad and Hamel outline that the source of competitive advantage is to be found in the management’s ability to identify the core competencies of a firm, i.e. “consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities” (Prahalad and Hamel 1990).
Competencies are a subset of resources, defined by Wade and Hulland (2004) as “repeatable patterns of actions in the use of assets to create, produce and/or offer products to markets”. Competencies are thus capacities or abilities within a firm, which can be linked together as business processes, in order to enable a specific purpose or outcome. They consist of one or more workflows and routines that manage the interaction among a firm’s resources. The researcher regards competencies as being the cross-functional integration and coordination of competencies (Javidan 1998). Finally, core competencies are those competencies, that:
1. Provide potential access to a wide variety of markets,
2. Must contribute to the perceived customer benefits of the end product and
3. Are difficult for competitors to imitate (Prahalad and Hamel 1990).
A core competency can take various forms, including technical/subject matter know-how, a reliable process, and/or close relationships with customers and suppliers. It may also include product development or culture, such as employee dedication. Core competencies are particular strengths relative to other organisations in the industry which provide the fundamental basis for the provision of added value.
The concept of core competencies was developed in the management field. Hamel and Prahalad (1990) wrote that a core competency is "an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." An organization’s competencies form a nested “hierarchy of integration” (Grant 1996). At the base of the hierarchy are granular competencies, representing for example specialized knowledge held by individual organizational members. Those competencies are integrated into broader functional competencies. As we move up the hierarchy, the competencies become less task-specific and more general and the span of specialized functionality being integrated broadens (Grant 1996). As discussed below, the hierarchy of nested competencies culminates on the highest level in five generic competencies which can be found in almost every company: “developing products and services”, “client interaction”, “fulfilling customer demands”, “managing and controlling the enterprise”, and “collaborative activities”. These can be categorized into technical (IT-oriented and managerial), project management, relationship management and business understanding capabilities and competencies (Wade and Hulland, 2004).
b) Service receiver-provider IT Outsourcing Relationships
Early researches regarding outsourcing relationships viewed the agreement between service provider and service receiver as an “alliance” (McFarlan and Nolan, 1995; Sargent, 2006). The outsourcing relationship terminology of “alliance” or “partnership” between service receiver and service provider would later be re-evaluated by Lacity and Willcocks (1998). Klepper (1993) is one of the earliest researcher into ITO relationship. Klepper (1993) developed a contingency framework for efficient relationships with IS vendors but the framework still remains to be tested. Another model of IS partnering relationships was developed in 1994 and is based on the work of Frazier, Spekman and O’Neil (1998) with modifications appropriate to the kinds of exchange relationships that develop and the factors that drive outsourcing exchanges in the IS field.
Grover et al. (1996) furthered the research of outsourcing relationships as an alliance or partnership with their research regarding the effect of service quality and partnership on the success of outsourcing relationships. Their work, which included the use of 188 surveys of top computer executives, found a significant correlation between service quality and partnership with outsourcing success. Service quality is defined as the difference between the service receiver’s expectations and perceptions; the smaller the variance, the higher the level of service quality and conversely the larger the variance, the lower the level of service quality that is being provided to the service receiver. Grover et al. (1996) found that the presence of four qualities (trust, communication, satisfaction, and cooperation) were significant indicators of partnership and contributed to the perceived achievement of benefits of the outsourcing agreement. They concluded that the presence of the partnership qualities along with service quality provided important determinants of outsourcing success. Additionally, strategic alliances through partnerships might lead to more consistent service quality and ultimately successful outsourcing relationships.
The service receiver-provider relationship has been deemed to be vital to Information Systems (IS) outsourcing success (Seo et al., 2005). In their study in Korea, the impact of corporate human resource capability on IS outsourcing success is investigated. Using resource and capability theories, first the human resource capability factors that comprise corporate IT competencies is identified, and then, with the premise that relationship intensity should be affected by the process of IS outsourcing, the interaction process of IS outsourcing as the first order impact of the human resource competencies is defined. The research is distinguished by integrating corporate IT resource and capability theories with social exchange theory, which in most cases are treated separately in IS outsourcing research. The findings have significant implications for the management of human resources in IS outsourcing.
Similarly, Han et al., (2008) investigated the effect of a firm’s resource competencies and interaction processes on the success of IT outsourcing in Korea. Grounded in available literature on outsourcing relationship and process theory as well as a resource-based view of the IT resource capability, a conceptual model was composed to examine the causal structure of capability, process, and relationship in IT outsourcing. They identified the firm’s resource capability factors and, based on the premise that relationship intensity should be affected by the IT outsourcing process, they developed a first-order factor analysis of resource competencies in the interactions between the outsourcer and provider. Results of empirical testing using responses from 267 IT outsourcing project teams in Korea supported most of our hypotheses. The integration of corporate IT resource and capability theories with social exchange theory distinguishes our research from that of others, who have generally treated these theories separately
c) IT Outsourcing Success
Outsourcing success has been measured in a variety of ways, including realizing expectations (Lacity and Hirschheim, 1993), avoiding negative outcomes or minimizing risk (Aubert et al. 1999), quantitative measures (Lacity and Willcocks, 1998), and attaining economic, technological, and strategic benefits (Grover et al., 1996; Lee and Kim, 1999). An oft-used surrogate for outsourcing success in prior research is satisfaction (Koh et al., 2004; Lee and Kim, 1999; Saunders et al., 1997). Satisfaction is a positive affective state arising from the respondent’s favorable assessment of the subject matter being evaluated (Anderson and Narus, 1984; Thibaut and Kelly, 1959). This is a useful overall measure in that it enables the individual managers to judge the outsourcing arrangement based on the criteria that each one feels is most relevant.
The resource-based view of the firm supports the argument that service receiver and service provider competencies are essential ingredients in an effective outsourcing arrangement. Competencies are necessary determinants for eventual success. However, they must first be deployed to create and sustain high quality information systems and functions that support the firm in its pursuit of competitive advantage. This is consistent with the general theme of previous studies stating that IS quality impacts organizational performance (DeLone and McLean 1992; Seddon 1997; DeLone and McLean 2002). Since the outsourcing arrangement is the vehicle through which IT solutions to business problems/opportunities are developed and deployed, it follows that the quality of the outsourcing arrangement directly affects outsourcing success or failure. In general, quality has been considered a determinant of satisfaction in the marketing arena (e.g., Anderson and Sullivan, 1993) as well as the IS literature (e.g., Nelson et al., 2005; Whyte et al., 1997).
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