What are the advantages and disadvantages of taking an IT Services Management perspective when looking at an organization’s IT? Should companies be encouraged to view their IT fu

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Sustainable IT Outsourcing

Executive Summary

This article explores the relationship between IT outsourcing and enterprise architecture. An earlier article described four stages of architecture maturity (business silos, standardized technology, rationalized process, and business modularity).2 In this article, we conclude that three different outsourcing arrangements support transitions from one stage to another, as follows:

Firms transitioning from Stage 1 (business silos) to Stage 2 (standardized technology) can use a strategic partnership form of outsourcing to support the transition. The vendor can take the lead in defining, implementing, operating, and updating a standardized technology environment so that the client need not invest in developing these world-class skills. We describe how a partnership between Campbell Soup and IBM helped Campbell transition to Stage 2.

Companies transitioning from a Stage 2 enterprise architecture (standardized technology) to Stage 3 (rationalized process) can benefit from a co-sourcing alliance form of outsourcing in making this transition. The vendor, who is in a close working relationship with the client, can help implement the technology changes to support the new business processes while the client can focus on the change management aspects of the transition. An alliance between The Dow Chemical Company and Accenture serves as an example.

Companies transitioning from a Stage 3 enterprise architecture (rationalized process) to Stage 4 (business modularity) can benefit from the transaction exchange form of outsourcing. Our example is eFunds, a transaction exchange vendor, that helps its clients implement, process by process, their vision to become sleek, high-performing firms that use plug-and-play, industry-standard components.

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SuStainable it OutSOurcing SucceSS: let enterpriSe architecture be YOur guide1

Jeanne W. Ross MIT Sloan Center for Information Systems Research

Cynthia M. Beath University of Texas

MISQUarterly Executive

The InTerplay of enTerprIse archITecTure and ouTsourcIng�,�

In the early 1990s, management gurus envisioned future organizations as sleek, high-performing entities engaged in a small set of core competencies.� This

1 Jack Rockart was the accepting Senior Editor for this article. � Ross, J.W. “Creating a Strategic IT Architecture Competency: Learning in Stages,” MIS Quarterly Executive (�:1), March �00�, pp. �1-4�. � Many authors have written on this topic. Among them are: Hamel, G., and Prahalad, C.K. Competing for the Future, Harvard Business School Press, Boston, MA, 1996; Quinn, J.B. “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management Review (40:4), 1999, pp. 9-��; Quinn, J.B., and Hilmer, F.G. “Strategic Outsourcing,” Sloan Management Review (�5:4), Summer 1994, pp. 4�-55; Malone, T.W., Yates, J., and Benjamin, R. I. “Electronic Markets and Electronic Hierarchies,” Communications of the ACM (�0:6), June 1987, pp. 484-497.

model assumed a competitive environment in which firms were compelled to employ best practices at all levels. Thus, they would strategically choose to keep the work they could do better than everyone else inside their enterprise, while outsourcing to specialist firms all other processes.

In practice, outsourcing—and, specifically, IT outsourcing—has instead targeted cost savings and variable staffing objectives.4 This focus on cost savings is appropriate. To enhance business performance using IT, a firm must first learn to manage its IT costs and

4 By IT outsourcing, we mean a vendor providing to a client IT services that were formerly provided in-house by the client or that conceivably could have been provided in-house. If the services were formerly provided in-house, outsourcing may involve some transfer of resources or staff from the client to the vendor. But outsourcing does not have to involve such transfers.

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ensure reliable operations. Then, the firm can progress to more strategic IT investments.5

To progress from managing costs to making strategic IT investments, firms are designing and implementing an enterprise architecture. Enterprise architecture is the organizing logic for a firm’s IT infrastructure and business process capabilities to address the firm’s need for business process integration and standardization. IT outsourcing can help firms implement enterprise architecture and, thus. improve business processes. Doing so moves them closer to the vision of the high- performing organization of the future.

enTerprIse archITecTure MaTurITy Traditionally, most firms have built systems to address narrowly defined, current business needs. As the business changes, firms often require coordination among systems that were not anticipated in the original design. Thus, IT professionals spend a fair amount of time pulling some systems apart, while patching other systems together. Over time, firms have found that all this pulling and patching leads to system outages, loss of data integrity, high IT maintenance costs, and slow response to new systems requirements.

Firms design enterprise architecture to address the problems caused by legacy systems. Its intent is to identify the key technology, data, and system components that must be shared across multiple parts of the firm. Once designed, most firms then gradually build out their enterprise architecture by isolating (and usually standardizing) the components that will be used by multiple stakeholders.

Prior research has found that firms progress through four maturity stages in building out their enterprise architectures. Each stage incrementally increases the strategic value of IT to the enterprise and enhances enterprise effectiveness.6 The four stages, as shown in Figure 1, are:

5 See, for example, Westerman, G., Weill, P., and McDonald, M.Westerman, G., Weill, P., and McDonald, M. “Business Agility and IT Capabilities,” MIT CISR Research Briefing (VI:1), March �006. IT units cannot provide business value if they haveIT units cannot provide business value if they have not mastered the basics of efficient service delivery. But basic service delivery will not enhance business effectiveness. To have a positive business impact, a firm must master IT governance, effective project management, and strong business-IT relationships. 6 Ross, op. cit., �00�. Ross introduced this four-stage framework based on case studies at 40 companies. Subsequently, a survey of 100 firms supported these stages. See also Ross, J.W., Weill, P., and Robertson, D.C. Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, Harvard Business School Press, �006.

Business silos, where a firm applies IT to specific business needs and, thus, delivers locally optimal business solutions;

Standardized technology, where a firm builds a standardized central technology infrastructure to reduce the cost and time of delivering and supporting business solutions;

Rationalized processes, where a firm builds a base of IT-enabled processes that represent its core operations and that usually depend on shared and standardized business processes or data or both;

Business modularity, where a firm builds on these core processes with plug-and-play processes, built internally or externally.

Figure 1 shows the progression of the enterprise architecture maturity stages. Moving up a stage requires organizational change and discipline. In the first stage, firms develop the discipline to implement IT-enabled processes within a local function, product line, or region. In the second stage, firms discipline themselves to share standardized infrastructure services across individual IT-enabled processes. In stage three, firms adopt disciplined business processes, often by implementing large packaged systems, firm- wide portals, or other tools enabling enterprise-wide sharing of data and processes. Finally, in the fourth stage, firms become concerned with standardized interfaces so that they can readily adopt customized or industry-standard components.

The enterprise architecture maturity stages model offers a powerful lens for understanding how companies use IT strategically. CEMEX, the Mexican cement company, for example, built an ability to acquire new cement companies and rip and replace their systems and processes, by moving first to standardized technologies and then introducing a set of core business processes supported by an ERP.7 Similarly, 7-Eleven Japan, the retail chain store, created operating efficiencies by using standardized technology platforms and then extending its business model using a set of standard business processes.8

7 For more detail on how CEMEX moved through the architecture stages, see Chung, R., Marchand, D., and Kettinger, W. “The CEMEX Way: The Right Balance Between Local Business Flexibility and Global Standardization,” Case IMD-�-1�41 (Lausanne, Switzerland: IMD, �005), and Chung, R., Paddack, K., and Marchand, D. “CEMEX: Global Growth Through Superior Information Capabilities,” Case IMD- �-095� (Lausanne, Switzerland: IMD, �00�). � For more detail on 7-Eleven Japan’s architecture journey, see Nagayama, K. and Weill, P. “7-Eleven Japan Co., Ltd.: Reinventing the Retail Business Model,” working paper ��8, MIT Sloan Center for Information Systems Research, January �004.

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© 2006 University of Minnesota MIS Quarterly Executive Vol. 5 No. 4 / Dec 2006 183

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While firms can generate business value from IT in all four stages, the strategic impact of IT increases as a firm moves up through the stages. It’s important to note two things about the architecture stages:

Firms cannot skip a stage because each stage involves both technology and organizational changes that prepare a firm for the next stage.

Large firms in our research required, on average, five years per stage.9

The organizational changes at each stage include new business processes, new management practices, new governance approaches, and new attitudes about the role of IT. We have observed a number of attempts to skip stages but none that were successful.

Firms also cannot outsource the responsibility for enterprise architecture (or its challenges). However,

9 We have been studying enterprise architecture for only 11 years, so we have not observed any firm’s entire journey. However, we have seen firms, like Schindler Elevator and MetLife, move from Stage 1 to Stage �. See Ross, J. et al., op. cit., �006, for further discussion of these examples. Also, see Martin Curley’s description of the transformation of shared services at Intel in this issue of MIS Quarterly Executive. It describes the challenge of the second stage in large, diverse companies.

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companies like Campbell Soup and Dow Chemical Company do leverage the expertise of vendors in their architecture transformation efforts. We describe their approaches to enterprise architecture maturity later.

Three susTaInable ouTsourcIng arrangeMenTs Clients10 outsource IT and IT-enabled business processes for a number of reasons, including lower costs, variable capacity, risk mitigation, process reengineering, and the opportunity to focus on core capabilities. Our survey research showed that executives most often target efficiency objectives, such as variable capacity (almost 90%) and cost savings (over 70%) (see Figure �). Even those citing strategic objectives rarely focus on such enterprise architecture concerns as reengineering business processes or achieving business process discipline.11

10 We use the term client to denote the buyer of outsourced services, and the term vendor to denote the organization providing the outsourced services. 11 This finding is consistent with other research. See, for example, reports on outsourcing outcomes at www.forrester.com and www.gartner.com.

Figure 1: Four Stages of Architecture Maturity

Business Silos

Business Modularity

Rationalized Processes

Standardized Technology

Standardized enterprise processes/data

Standard interfaces and business components

Enterprise-wide technology standards

Locally optimal business solutions

Strategic Business Value

12% 48% 34% 6% % of Firms

© 2006 MIT Sloan Center for Information Systems Research (CISR). Used with permission.

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A few executives, however, enthusiastically describe the contribution of outsourcing to enterprise architecture maturity. They have taken a variety of approaches to outsourcing. In our research, we identified three potentially sustainable forms of outsourcing arrangements.1� Each can play a different role with respect to enterprise architecture:

A strategic partnership exists when a vendor takes on near-total responsibility for an integrated set of client operations. Such a partnership is useful in helping clients transition from Stage 1 of architecture maturity (business silos) to Stage � (standardized technology) because the vendor can take the lead in defining, implementing, operating, and updating a standard technology environment. The client need not invest in developing these skills and can, instead, focus on IT strategy and policies.

A co-sourcing alliance exists when client and vendor meld resources and accept joint responsibility for project or operational outcomes. Such an alliance is useful in helping clients transition from Stage � of architecture maturity (standardized technology) to Stage � (rationalized processes) because the vendor, who is in a close working relationship with the client, can help implement new technologies to support the new business processes, while the

12 These findings were first reported in Ross, J.W. and Beath, C.M. “Sustainable Value from Outsourcing: Finding the Sweet Spot,” MIT CISR Research Briefing, (V:1A), March �005.

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client can focus on the change management aspects of the transition.

A transaction exchange exists when a vendor executes a well-defined, repeatable IT process or IT-enabled business process on behalf of a client. Such an exchange is useful in helping clients transition from Stage � of architecture maturity (rationalized processes) to Stage 4 (business modularity) because transaction exchanges are a low-hassle means to get access to plug-and-play, industry-standard components.

Besides helping firms transition to different stages of architecture maturity, the converse is also true: firms with higher architecture maturity can take greater advantage of each of these forms of outsourcing. Key characteristics of each outsourcing arrangement are described in Figure �.

Strategic Partnerships High-profile IT outsourcing deals often are intended to be strategic partnerships.1� In a strategic partnership, a vendor provides an integrated set of operational services. For example, a single strategic partnership

1� Some well-known examples of these deals include Kodak, General Dynamics, and British Petroleum, described in Applegate, L., and Montealegre, R. “Eastman Kodak Organization: Managing Information Systems Through Strategic Alliances,” Harvard Business School Case 9-19�-0�0, Boston, MA; McFarlan, F.W., and Seger, K. “General Dynamics and Computer Sciences Corporation: Outsourcing the IS Function (A),” Harvard Business School Case 9-19�-144; and Cross, J. “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard Business Review (7�:�), May-June 1995, pp. 94-104.

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Figure 2: IT Outsourcing Objectives

Cost reduction

Variable capacity/expertise on demand

Architectural Improvement Objectives

Strategic Adaptation Objectives

Reengineer internal business processes

Increase business process discipline

Management focus on competencies

Strategic agility

Leverage new IT

Mitigate technology risks

Technology/expertise transfer

10% 20% 30% 40% 50% 60% 70% 80% 90%

*Percentage of 80 outsourcing contracts citing the objective as important (4) or very important (5) on a scale of 1–5.

Percentage of Contracts Pursuing Objective

© 2005 MIT Sloan Center for Information Systems Research (CISR) and Dr. Cynthia M. Beath. Used with permission.

Efficiency Objectives

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Sustainable IT Outsourcing

deal might encompass mainframe operations, WAN and LAN management, telephony, web hosting, and help-desk services. By integrating service offerings, the vendor intends to add value beyond the sum of the individual services.

As with most outsourcing arrangements, client firms often target cost savings as the key benefit of their strategic partnerships. However, strategic partnerships have other potential benefits, including higher quality services, more disciplined IT processes, the opportunity to monetize intangible assets, and the ability to refocus managerial attention off of IT operations and on to the firm’s core competencies.14 Vendors profit from strategic partnerships if they can develop and leverage economies of scale and scope and further deepen their unique expertise and best practices.15 Despite the potential for mutual benefit, though, these deals are risky. In our survey, only 50% of strategic partnerships were viewed as successful by the client companies. And clients consistently acknowledged that unsuccessful deals did not benefit vendors either.

14 While there is much debate about what constitutes a core competency, the belief that core competencies should not be outsourced has gained considerable traction. See, for example, Quinn, J.B. “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management Review (40:4), 1999, pp. 9-�1. 15 For a detailed discussion of how vendors build capabilities and drive down their costs. see Levina, N., and Ross, J.W. “From the Vendor’s Perspective: Exploring the Value Proposition in Information Technology Outsourcing,” MIS Quarterly (�7:�), �00�, pp. 1-�4.

Metrics are part of the problem. While vendors expect to earn a margin on the integrated set of services, clients often assess their partners based on the price and performance of each individual service level agreement. If the client’s IT management practices were sloppy, the vendor can introduce efficiencies, and both parties can realize value. But most efficiencies are realized only when clients forego entrenched behaviors. In IT strategic partnerships, many companies struggle with behavior changes that require adhering to new technology standards or limiting the number of discretionary changes to systems and processing schedules. Without behavioral changes in the client organization (and this includes the behaviors of non-IT managers), there may not be enough real savings for both client and vendor to achieve their bottom line objectives.

A strategic IT partnership can be particularly valuable in moving a client firm toward greater technology standardization. In an effective partnership, the vendor takes the lead in defining, implementing, operating, and updating a standardized technology environment so that the client can take the lead in developing firm-wide IT governance and IT strategy. Campbell Soup Company provides an example of how such partnerships can support the transition from stage 1 to stage �.

Figure 3: Three Outsourcing Arrangements

Strategic Partnership Co-sourcing Alliance Transaction Exchange

What is outsourced Broad responsibility for operational activities

Project management and implementation

Narrowly defined, repeatable process

Key metrics Bottom-line impact Project success Quality and/or cost per transaction

Client-Vendor Relationship

Negotiated accountability

Joint project management

Arms length

Client expectations1 Cost savings; Variable capacity; Management focus on core competencies

Cost savings; Access to expertise on demand

World class processes; Variable capacity; Management focus on core competencies

Vendor offerings2

Capability to deliver broad range of specialized services; Integration expertise; Disciplined practices; Economies of scale

Labor arbitrage; Project management expertise; Expertise on specialized technologies

Standard best practice process components; Economies of scale; Distinctive platforms or assets

Client success 3 Vendor success

50% 50%

63% 75%

90% 90%

1 Client expectations based on 80 surveys of outsourcing success; there was a statistically significant relationship between the outsourcing model and the listed client expectations.

2 Derived from eight case studies of company outsourcing experience. 3 Client views based on 80 surveys of outsourcing success. Questions asked: “Within the firm we view this outsourcing agreement as a

success” and “The vendor is profiting from the outsourcing arrangement.” Percentage is based on number of respondents who rated the statement as a 4 or 5 on a scale of 1 to 5.

Decreasing risk

© 2005 MIT Sloan Center for Information Systems Research (CISR) and Dr. Cynthia M. Beath. Used with permission.

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The Campbell Soup Company: A Strategic Partnership Campbell is a $7 billion food company whose brands include Campbell’s and Godiva (global), Pepperidge Farm and Prego (U.S.), Gardennay (Canada), Blå Band (Sweden, Finland, and Norway), Liebig (Belgium and France), and Arnott’s (Asia). In FY 2005, Campbell had approximately �4,000 employees in �� countries and earned $755 million. Profits from continuing operations increased 11% over FY �004. 16

In �000, Campbell, like other companies in the consumer packaged food industry, faced competitive pressures from many sides. Consumers were both price and health conscious. Industry consolidation had left Campbell, a medium sized firm, in the shadow of giants, such as Kraft, Unilever, and Nestle. Moreover, Campbell’s upstream agribusiness partners and downstream retail partners were consolidating and, as a result, had become increasingly powerful in their dealings with Campbell and its peers. Meanwhile, the downstream retailers were increasing their offerings in private label foods.

To address these challenges, Campbell’s management team focused on distinguishing between core and non- core business activities. The team intended to manage core activities—especially retail execution, trade management, and product lifecycle management— for differentiation and growth. In contrast, non- core activities would be managed for low cost. This approach to managing the business represented a radical shift from a set of independent businesses to a more centralized, standardized enterprise. This planned transformation had huge implications for IT, and the CEO brought in Doreen Wright as senior vice president and the company’s first corporate CIO, to address the IT challenges. According to Wright:

“Looking at the IT function is like having the company look at itself in the mirror: whatever’s wrong with the company will show up in the IT function. Clearly, Campbell had been run as a portfolio of independent businesses—too independent. Similarly, the various IT groups were independent. … We were a hodgepodge of disparate computing platforms and network protocols without an enterprise [architecture]. We had every conceivable technology running somewhere. [We were] a confederation of global IT groups, with little or no governance

16 Details about Campbell Soup are drawn from Chapter 7 in Ross, op. cit., �006, pp. 148-15�.

and an inflexible IT infrastructure that was very costly to support.”

Wright set out to move Campbell IT from Stage 1 architecture maturity (business silos) to Stage � (standardized technology). She chose to outsource many traditional IT services (e.g., application development, maintenance, and computer operations) to IBM. In the process, the IT unit centralized governance, strategy (including architecture), and shared infrastructure. The combination of centralization and outsourcing helped Campbell achieve global commonality in networks, e-mail, operating systems, platforms, and middleware (with targeted exceptions at some international facilities).

From �00� through �004, IT banked nearly $5 million in one-time savings and an additional $8 million in savings annually. CIO Wright credited more than half the annual savings to various adjustments Campbell and IBM made in their sourcing arrangements, including raising service levels at no additional cost and implementing various cost-saving upgrades, migrations, and replacements.

Campbell management was delighted with the cost savings from more efficient IT processes. CIO Wright, however, emphasized that the greater value of the strategic partnership was its impact on the company’s strategic goals:

“Because we are trying to transform ourselves, not just from a technology perspective but, much more importantly, from a business perspective, the thing that I need more than anything else is management capacity. I need the capacity of my staff to introduce the new, to understand it, and keep up. I’ve got business people clamoring to do data synchronization and collaborative planning with our customers, introducing new R&D capabilities and trade promotion capabilities, and all that kind of stuff. The last thing I want to soak up my leaders’ heads with is running the computers themselves. I need everybody’s mind on introducing the new. So, I completely outsource the infrastructure. The running stuff is all done by IBM. Maintaining the legacy applications is probably 75 percent outsourced. In almost all cases, I hire a third party as my integrator. That doesn’t mean we don’t have a high level of involvement, but I have the expertise of a partner who knows how to integrate.”

© 2006 University of Minnesota MIS Quarterly Executive Vol. 5 No. 4 / Dec 2006 187

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IBM helped lower Campbell’s IT costs because Campbell management led the charge toward IT centralization and standardization.

Campbell adheres to a first-choice provider principle, meaning that IBM is favored when new activities are to be outsourced—although not always chosen. This principle reduces search costs for Campbell and sales costs for IBM—and it encourages both partners to focus on strategic value, not just lower costs, in the outsourcing arrangement. (We have found that all strategic partnerships require persistent efforts by both client and vendor to define commodity services that the vendor partner can readily provide and the client can readily convert into business improvements.)

Because IT is so intertwined with business operations—with many systems continuing to support the way Campbell operated in the past rather than the way it intends to operate in the future—recognizing which services should be outsourced and which should be retained in-house is an ongoing negotiation. Wright notes that the arrangement will never be perfect:

“You know, if I were providing my own data center services, I would blow it sometimes. I would make bad decisions. It is not different when you have an outsourcer. What is important is that the two sides are each deriving benefits, that they trust each other, and that each gives and takes. A good number of our IBM people, including the manager, sit right with us in Camden [New Jersey]. The manager reports to the Campbell CTO and is at every [CTO] staff meeting. [IBM has] obviously signed confidentiality agreements. They have access to our business and IT strategic plans, and the senior IBM partner has strong relationships with many of our business leaders, in addition to me. [IBM has] a huge vested interest in this company. They want us to win like we want us to win, and there is a very, very high level of trust.”

Technology standardization helps firms address the cost and complexity of silos by reducing the number of technology platforms the IT unit supports—and the business depends on. In this stage, the firm is learning how to (1) fund shared infrastructure, (�) establish technology standards, (�) implement and update standards, (4) grant exceptions to the standards, and (5) manage shared services. These new requirements are a big adjustment from the business silos stage. They usually require a great deal of trial and error.

Co-sourcing Alliances In contrast to a strategic partnership, a co-sourcing alliance does not attempt to define boundaries distinguishing the responsibilities of each party. Instead, clients and vendors share responsibilities and accountability. A co-sourcing alliance is typically structured as a set of standing teams or project teams staffed jointly with client and vendor personnel. For example, one large financial services company has engaged an offshore company to handle much of its application development. The vendor partner has brought project management staff to the client’s site so that project teams comprise client and vendor staff on-site as well as vendor staff offshore. As is typical of co-sourcing alliances, this relationship draws on both the client’s deep business knowledge and the vendor’s specialized skills in technology and project management.17

An alternative form of a co-sourcing alliance is a joint venture that delivers ongoing services. For example, the city of Liverpool, England, created a joint venture with BT, called Liverpool Direct Ltd, to deliver IT and related services.18 The Liverpool City Council pays the joint venture £�0 million a year to cover the salaries of the �0 BT and 880 Liverpool city employees responsible for delivering the services. This relationship lev

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