outsourcing practices in europe - unimore

Outsourcing Practices in Europe

Issue Report N. 27 Draft July 2002

by Jane E. Millar SPRU

If any of the information contained in this report is reproduced or quoted the STAR (Socio-Economic Trends Assessment for the Digital Revolution) project must be acknowledged as the source.

Expert Assessment of Issue Reports

Issue Report N. 27

Outsourcing Practices in Europe

Expert: ______________________ Date: ______________________

NOTE: Please tick the appropriate box 1. Innovative objectives

Very good Good Fairly good Poor Very poor Other comments: ____________________

2. Approach and Methodology


3. Topicality


4. Quality of results: did the report reveal new insights?

Many Some Few None Other comments: ___________________

5. Practical use: is the report of practical

use for your own work?


6. Other general remarks and comments

_____________________________________

_____________________________________

_____________________________________

OVERALL ASSESSMENT

1 = Very good 2 = Good 3 = Fairly good 4 = Poor 5 = Very poor

Thank you very much for your support

Please return the completed questionnaire by fax to:

Databank Consulting - Fax: ++39/02/72107.402 - E-mail: [email protected]

Outsourcing Practices in Europe SPRU

STAR Issue Report N. 27 – July 2002

Preface Europe is entering into the new economy, but little is understood about it beyond its disruptive potential – only that the transition phase from a post-industrial to a globally networked knowledge society is likely to take 20 or 30 years. The STAR project – Socio-Economic Trends Assessment of the digital Revolution - is focused on the analysis of the development of the Digital Economy in Europe, in order to contribute to a better understanding of the conditions leading to sustainable social and economic growth patterns – how to survive the transition phase. STAR is an initiative of Key Action II “New Methods of Work and Electronic Commerce”, one of four key actions of the User-Friendly Information Society Programme. The IST Programme is part of the European Union’s Fifth Framework Programme for Research and Development. Its objective is to ensure that all European citizens and companies benefit from the opportunities of the emerging Information Society. Key Action II is designed to both give workers and enterprises a competitive edge and to improve the quality of everyone’s working life. It embraces technologies and issues as diverse as teleworking, the virtual company, logistics management and trading goods over the Internet. It aims to develop and demonstrate world-best work and business practices, exploiting European strengths in software, mobile technologies and enterprise management. STAR original research will contribute to achieve Key Action II goals by analysing evidence on the multiple changes brought about by the new economy in the socio-economic system and their policy implications. The consortium will interact with a Forum of experts within and outside the IST Programme to receive feed-back and insights on STAR results. STAR results will be published as a series of Issue Reports, Executive Briefings, and workshop presentations addressed to policy makers, industry managers and research experts. A Summary Report (annually from 2001 to 2003) will offer a synthesis of the overall conclusions, and present scenarios for the evolution and socio-economic impact of the digital economy in Europe. This report belongs to the STAR Issue Report series. The list of Reports is published in the annex. All reports are available for downloading from the project’s web site at www.databank.it/star. The opinions expressed are those of the authors and do not necessarily represent the official views of the European Commission or any other organisation or institution.



Table of Contents

Executive Summary 1

1. Introduction 3 1.1. Aims and Objectives 4 1.2. Structure of this Report 5

2. Setting the Scene - Visions of the Future … 6 2.1. … for Organisations 6 2.2. … for Employment 6 2.3. … for Skill 7 2.4. Forecasting the Future? 8

3. The Focus of STAR Research into Outsourcing, Employment and Skills in Europe 10 3.1. Key Issues 14 3.2. Defining Information Processing Services 16

4. Outsourcing Information Processing Services - A Review of Evidence 17 4.1. Trend 1: Signs of Increasing Geographic Flexibility? 17 4.2. Trend 2: Overcoming Barriers to Globalisation 19 4.3. Trend 3: Concentration of ‘Symbolic-analytical’ Work in Europe 21 4.4. Trend 4: Intra-European Specialisation but Regional Polarisation 23 4.5. Trend 5: Overcoming Structural Obstacles to Outsourcing? 23 4.6. Trend 6: Balancing the Market - The Role of Informal Professional

Communities 24 4.7. Trend 7: Growing International Competition 25 4.8. Trend 8: Climbing through Windows of Opportunity? 26 4.9. Trend 9: Emerging Skill Needs 27 4.10. Summary – Reviewing the Trends 28

5. Analytical Framework 30 5.1. Outsourcing information processing services: a service in context

perspective 31 5.2. Summary 34

6. Conclusions 35 6.1. Policy Implications 37

7. References 39

List of Issue Reports - Publication 2002Errore. Il segnalibro non è definito.



List of Figures Figure 1 Pressures Driving Firms to Outsource Information Processing Services....... 3 Figure 2 Future scenarios of work ................................................................................ 7 Figure 3 Models of outsourcing practice..................................................................... 12 Figure 4 Mapping between descriptions of information processing services ............. 16 Figure 5 Characteristics of Communication Media that Contribute to Achieving

Common Ground .......................................................................................... 18 Figure 6 Global Development Issues and Solution Strategies ................................... 19 Figure 7 The Service in Context Space...................................................................... 32 Figure 8 Representing Complexity in a Service in Context Framework ..................... 33


STAR Issue Report N. 27 – July 2002 1

Executive Summary This report focuses on the rapidly expanding global market for outsourced information processing services that is being driven by the competitive need for organisations to do more with less, and faster and better. The report identifies nine interdependent trends that are influencing the evolution of the outsourcing market, the location of opportunities for employment and the pattern of skills accumulation in Europe. Trend 1: Signs of Increasing Geographic Flexibility – examines how organisations

(customers and suppliers) are using ISTs to reduce coordination costs and relieve the tension between proximity and distance in outsourcing arrangements.

Trend 2: Overcoming Barriers to Globalisation – investigates the problems associated with outsourcing and the organisational arrangements, and outsourcing models and practices that are being implemented to overcome them.

Trend 3: Concentration of ‘Symbolic-Analytical’1 Work in Europe – addresses issues associated with the accumulation of high-value information processing skills in Europe.

Trend 4: Intra-European Specialisation but Regional Polarisation – focuses on the UK, the dominant market for outsourcing in Europe.

Trend 5: Overcoming Structural Obstacles to Outsourcing – outlines how some European countries such as Germany are overcoming the structural barriers that have impeded growth of the outsourcing market.

Trend 6: Balancing the Market – The Role of Informal Professional Communities – shows how supplier networks can be used to introduce balance into the emerging ‘buyer’s market’ for information processing services.

Trend 7: Growing International Competition – examines whether European jobs in information processing services are vulnerable to international competition.

Trend 8: Climbing through Windows of Opportunity – investigates whether and how the wider participation of European countries in the market for information processing work might be achieved.

Trend 9: Emerging Skill Needs – provides insights into the skills and capabilities required to fuel and grow the outsourcing market in Europe.

The Thrust of Change - Implications for Europe Overall, the most striking changes in outsourcing practice are in the diversity of institutional arrangements that are being adopted to support outsourcing, and in the agility with which firms are deploying different configurations of labour and technology to overcome problems with cooperative information processing work. These changes are influencing the division of labour within and between firms, the configuration and content of work, and the boundaries between occupations. These,

1 Associated with problem-solving, problem-identification and strategic-brokering.



together with changes in occupational practices, are spawning the development of new functions, tasks, roles and responsibilities. In Europe, the implications of these changes for information processing skills and employment are, as yet, unclear. In countries where the market is developed there appears to be a trend toward the accumulation of sophisticated, high-value skills, the demand for capabilities to fill strategic management functions at the technology-business interface, and for the recruitment and retention of hybrid skills that combine business and technical proficiencies. However, the dominant outsourcing model requires the development of relational-capital and learning between partners. Direct outsourcing arrangements between US or European customers and suppliers in low-income and developing countries, should they become established best practice, could place the high-value skills in Europe under threat. In other European countries the market is in its infancy, impeded by a legacy of unsupportive industrial structures and rigid employment legislation. There could be opportunities for late market entry but they might be limited and unsustainable. One view is that late-entrants could suffer from the first mover advantages of firms in India, for example, and from market contraction caused by advances in automation. On the other hand, early entrants have established the viability of the electronic outsourcing model and have paved the way for others to follow. A further option for late entrants, especially if relationships between existing service providers and their customers become more complex, might be for them to establish supplier relationships with existing service providers or virtual networks of suppliers and customers. Policy Implications The report identifies five issues that require policy attention. 1. The urgent need to ensure that data on shortages in occupations and skill needs are

kept up to date and monitored accurately to reflect industry requirements, and can be built into employment regulation, for example, immigration policy.

2. Complementary initiatives to build these skills in local economies require the removal of disincentives to invest in training, re-training and cross-training.

3. Governments and industry collaboration in education and training are required for the development of hybrid skills at the technology/business interface.

4. Start-up funds could be provided to individuals and small groups who want to build virtual communities in order to share knowledge and experience and increase the mobility and value of local talent.

5. Encouragement for the establishment of inter-European supplier networks, particularly those that might include participation of established service providers and new entrants, could contribute towards the wider participation of European firms in the outsourcing market.



1. Introduction The global market for outsourcing information processing services – created through the trend among companies towards externalising the information processing work associated with infrastructure management and applications services to third party suppliers – is expected to grow to over $US 150 billion2 by 2005 (Lacity et al., 2001; Wier et al., 2002). Confronted by a range of pressures (Figure 1), firms aim to enhance their competitiveness through improving the perception of shareholder value and increasing the return on their IT asset investments – i.e. by doing more with less, and faster and better. They are confident that outsourcing will enable them to reduce labour and procurement costs; cut capital investment costs, increase economies of scale and predict costs more accurately. In addition, they expect to use outsourcing to convert fixed costs into variable costs, decentralise existing bureaucratic structures and revise the ways that information processing service activities are coordinated. By these means, they hope to enhance asset management, increase speed and efficiency, access scarce skills and capabilities and achieve process efficiencies through gaining insight into best practice. Moreover, they expect that outsourcing will provide them with opportunities to share or shed risks, for example, in transition to a new technology; enhance flexibility and control, for instance, by creating a competitive environment between in-house employees and those in the supplier organisation that motivates staff to improve their performance; stimulate innovativeness by freeing internal staff to focus on other more valuable tasks, enhance the accuracy and the quality of services and focus on core business. Figure 1 Pressures Driving Firms to Outsource Information

Processing Services

Organizational Objectives

ITAssetsInterconnectedness

between nations

Interconnectedness between people and firms

Advanced technologies for collaboration

Increasing complexities andinterdependencies betweenIT equipment and systems

Business best practice fads and fashions

Global competition

Do more with less, faster and better

Economise on, and control, total fixed costs

Enhance speed, flexibility and responsiveness

Improve the accuracy and quality of services

Achieve process efficiency - revise coordination structure

Access scarce skills Focus on core business

Source: Author’s own diagram based on Goolsby (2001).

2 Data on the international ‘market’ for outsourced services increasingly are likely to be inaccurate, for

example, because they do not reflect the growing use of non-market mechanisms, such as, intra-company transfer to externalise production to offshore service establishments.



Advanced Information Society Technologies (ISTs) and the growing interconnectedness between people and nations make it technically feasible for outsourced knowledge work, such as information processing services, to be conducted telematically (electronic outsourcing). This work can, for example, be supported by the Internet, email, teleconferencing or videoconferencing and through the creation and use of new and advanced software tools that facilitate cooperative work (e.g. groupware applications). The potential for knowledge work to be conducted electronically expands the range of options for organising and coordinating work that are available to companies, for example, by offering the possibility for firms in industrialised countries to establish networked trading relationships with firms in lower-income and developing countries and thereby potentially contributing to a more equitable global distribution of wealth.3 There is considerable evidence to suggest that the international outsourcing market is growing, as North American and European firms set up operations outside of their local borders, and exchange work with these establishments and as outsourcing relationships between firms in different countries are established and become increasingly popular. While North American (particularly the US) and European (especially the UK) countries dominate the outsourcing market for information processing services, emerging markets are developing, for example, in Australia and New Zealand, Barbados, Brazil, China, France, Hungary, India, Israel, Japan, Malaysia, Mexico, Norway, the Philippines, Poland, Romania, Russia, Singapore, South Africa, Sweden and Pakistan (BusinessJournal, 2001; ILO, 2001). The potential for international outsourcing requires that companies re-evaluate the commercial viability of alternative sourcing options. Outsourcing, and particularly electronic outsourcing, carries the potential to redefine existing geographies of employment and skill on a global scale. Governments in almost every country are developing their countries’ capabilities to compete (primarily on the basis of cost, sometimes in conjunction with a secondary focus on quality) for trade in information processing services. Where they have been successful, the drive toward outsourcing has been reinforced. 1.1. Aims and Objectives The central motivation for this research is to provide insights into how outsourcing is influencing the nature and level of employment, and the accumulation of skills to support information processing work in Europe. The objective is to address the following three (related) questions about the implications of outsourcing for organisation, employment and skill accumulation in the Information Society. 1. What are the implications of outsourcing, and particularly electronic outsourcing, for

the control over and the coordination of information processing activities? 2. How do outsourcing and electronic outsourcing affect the nature of distribution of

employment among European countries?

3 However, Madon (1997) raises serious questions about government investment programmes to stimulate

the software market in India and the lack of evidence of distributive justice from software export trade success in Bangalore.



3. What are the implications of trends in outsourcing practice for the distribution and accumulation of skills in European counties?

The report is based on an extensive review and analysis of the existing academic, management and trade literature. This has been used to identify dominant trends in outsourcing practices in Europe. These trends have been examined through interviews with six selected industry experts in leading international consultancy firms. Interviews focused on the implications of trends in outsourcing practice for the location and distribution of information processing work and for the future of employment and skill in Europe. The report provides an initial assessment of the vulnerability of European information processing work to competition from non-European countries, identifies opportunities for and barriers to the wider participation of European countries in the knowledge-based economy, and provides insight into the demand for new skills and competences in Europe. The report also presents the analytical framework for empirical research described in Issue Report No. 28 (Millar, 2002) that aims to contribute towards a better understanding of the dynamics of the outsourcing practices adopted by European firms and the strategies used by individuals to exploit their skills and knowledge in the Information Society. 1.2. Structure of this Report The remainder of this report is organised into five sections. Section 2 outlines alternative scenarios of the future for organisation, employment and skills in the Information Society. These establish the context for the STAR research into outsourcing that is described in Section 3. Section 4 identifies and analyses a number of inter-related trends in information processing services outsourcing, and electronic outsourcing, practice in Europe and examines their implications for employment and skills in Europe. These trends draw attention to dominant shifts in outsourcing practice and their influence on the international distribution of labour and skill. They indicate that information processing work is becoming increasingly mobile and that international competition in the market for service provision is intense. They suggest that asset specificity in Europe is becoming polarised and highlight the main features that have attracted investment into the European market. However, they also identify potential barriers that might impede European countries from extending further their participation in the market for outsourced information processing work and highlight the new and emerging skill needs that increasingly will be associated with outsourcing success. Section 5 presents the analytical framework that will be applied in analysing the results of in-depth case study research into outsourcing practice in Europe. The framework enables a better understanding of the dynamics and evolution of outsourcing models and practices in Europe. It provides an interpretive scheme where the focus is on the management practices that aim to establish coordination through facilitating interaction between service characteristics and context-specific attributes of the outsourcing relationship and that are critical for establishing and sustaining the viability of outsourcing arrangements. Conclusions and recommendations for policy are set out in Section 6.



2. Setting the Scene - Visions of the Future …

Academics (Castells, 1996, 2001; Laubacher et al., 2001), business analysts (Cairncross, 2001, 2002; Hamel, 2000; Kelly, 1999; Leadbeater, 1999) and futurologists (Beck, 2000; Reich, 1992; Rifkin, 2000) have made many predictions about the potential of ISTs to support the creation of organisational forms that involve new divisions of labour within and between firms and countries and map alternative scenarios for the geographies of employment and skill on a global scale. 2.1. … for Organisations For example, Laubacher and Malone (2001) detail two scenarios for 21st Century organisations. The first scenario, ‘Small Companies, Large Networks’, is made up of autonomous, self-organised, temporary and fluid, transaction-based coalitions between small firms and independent contractors that are networked to perform project-based work. At the same time, more persistent and inclusive virtual voluntary associations evolve out of existing parochial professional communities, college associations, university fraternities, clubs, churches, community groups, families and so on to satisfy citizens’ ‘life-maintenance’ needs for social networking, lifelong learning, reputation building and income adjustment. The second scenario, ‘Virtual Countries’, foresees a global conglomerate formed out of keiretsu style4 relationship-based alliances that span every industry. These large vertically and horizontally integrated alliances provide individuals with a sense of identity and meet their needs for income and employment security, healthcare, education and social networking. Employees own the firms that they work in through pension plans, stock options and other such schemes. Control is through representative governance and financial transparency assists decision-making processes and legitimates the exercise of the authority that is resident in the hierarchy. 2.2. … for Employment Beck (2000) charts a range of employment scenarios for the world economy (Figure 2). Under each of four themes, Beck questions the assumptions upon which optimistic outcomes are based and articulates the possibility of collapse unless reforms are enacted. The promise of enhanced global wealth through participation in de-spatialised knowledge work supported by ISTs is tempered by the fear of unemployment through labour displacing technological advance. The hope for full employment in societies benefiting

4 The Japanese management principle of partnership between different people and resources and the use of

minimum bureaucracy to coordinate stakeholder involvement.



from increasing decentralisation and globalisation is moderated by recognition of the limited mobility of human labour and the problems of creating effective social networks to support these positive developments. The goal of sustainable development for all is countered by the growing discrepancy between the rich and the poor countries, and participants and non-participants in the global economy.

Figure 2 Future scenarios of work

Theme Hope Collapse Science-based information technologies

1. From the work society to the knowledge society

2. Capitalism without work

Globalisation 3. The world market: the neo-liberal jobs’ miracle

4. The fixed location of work: a globalisation risk

Ecological crises 5. Sustainable work: the ecological miracle

6. Global apartheid

Individualisation 7. The self-employed: the freedom from insecurity

8. Individualisation of work: disintegration of society

Source: Beck, 2000, p.37

2.3. … for Skill Focusing on skills, Reich (1992) anticipated the growth of an international economy, encompassing North America, Asia, Africa, Latin America, Western Europe, Eastern Europe and Russia, within which ‘real competitive position in the world economy is coming to depend on the function you perform in it’ (p. 208). Reich predicted the emerging dominance of three main functional roles and examined the implications of the evolution of these roles for the nature and location of skills and employment: routine production services (involving repetitive, standardised tasks), in-person services (involving simple, repetitive tasks that require face-to-face interaction) and symbolic-analytic services (problem-solving, problem-identifying and strategic-brokering work). According to Reich, two of these functions - routine production services and in-person services - are relatively low skilled and labour intensive and are often subject to cost-based international competition (particularly from the developing nations), or labour-displacing technical change. Wealth accrues to those able to provide the relatively high-skilled, high value-added work involved in symbolic-analytical services. These forces (competition based on cost and labour displacing technical change) are expected eventually to relocate routine, standardised and repetitive tasks to the least cost countries and to create vast discrepancies within and between countries in terms of wealth. These effects are aggravated by the increasingly free movement of goods, services, money, technology and people internationally and fostered, for instance, through the application of ICTs to support international electronic trade – electronic outsourcing - in services (Reich, 1992; Rifkin, 2000).



2.4. Forecasting the Future? The three sets of scenarios presented above for organisation structure, and employment and skills have a common core that directly addresses the central dilemma for organisations in the digital economy –control over and coordination of work –each based on a different approach towards the management of dependencies between work activities. For example, the main difference between the two scenarios for organisation in the 21st century identified by Laubacher and Malone is the tension between proximity and distance involved in coordinating inputs to production. The Small Companies/Large Networks scenario favours decentralised control and coordination through arms-length transactions between networks of cooperating suppliers. In contrast, control in the ‘Virtual Countries’ scenario is centralised and coordination is regulated by internal transactions between collaborating partners. Beck’s thesis for the future of employment, centres on the explication of a series of tensions between the global and the local control of capital and labour and their implications for the coordination of social-economic activities. For instance, the progressive elimination of the boundaries of time and distance in economic activity supported by ISTs redefines the location decisions of capital (global and mobile) and intensifies competition between countries for investment and cheap labour (local and fixed). The potential for greater individual autonomy and self-employment among the beneficiaries of global capital investment carry with them the prospect of vulnerability and social disintegration for the rest. Reich’s predictions about the future distribution of skills in the Information Society are based on a set of assumptions about the characteristics of knowledge-work and skill in the service sector (for example, the potential to isolate, extract and transfer different types of knowledge between locations) and the availability and cost effectiveness of alternative configurations of human resources and technology involved in service provision. Whether, and which of, these predictions represent a more accurate view of the future for organisations, employment and skill in the Information Society, depends upon two main factors: interaction costs and social processes. Interaction costs (Hagel et al., 2000; Mitchell, 2002) are based on the money and time spent in exchanging goods, services or ideas. According to Hagel and Singer, interaction costs are the ‘friction in the economy’ that determines how companies organise to coordinate production and form relationships with other companies. They argue that integrated companies are based on three core businesses5 that, although intertwined, differ in terms of their culture and economics. The customer centred, customer relationship business is one in which success is based on achieving economies of scope. The employee-centred business is one of developing of new products and services, which aims to achieve economies of speed. The cost-focused

5 There is considerable similarity between these and Reich’s three functions (in-person services, symbolic-

analytic services and routine production services).



infrastructure business is one where rewards are based on the achievement of economies of scale. ISTs can enable the costs of interaction involved in coordinating knowledge work between companies to change because they support changes in the characteristics of interaction in work and alter the distribution of tasks that require proximity and those that can be performed at a distance. Together with pressures of deregulation and global competition, technological advance makes it possible for companies to reorganise activities within particular businesses, and to unbundle and rebundle them into new configurations that have the necessary size and the capabilities to succeed in increasingly competitive markets. This may require effecting changes in the existing division of labour within the firm and in the roles and responsibilities of employees. It may involve the creation of horizontal linkages with other companies – especially in those businesses where size matters, i.e. those that focus on customer relationship management or infrastructure management. It might follow that outsourcing, as one way to extend the boundaries of a firm, would be most likely to occur in these business areas. Further, electronic outsourcing arrangements with firms in countries that have an abundant, low cost supply of appropriately skilled labour could provide an effective model for infrastructure management. However, the way new institutional forms are created, operate and evolve also depends on social processes. For example, the formation and development of an inter-firm network structure might vary depending on whether inducement for collaboration occurs on the basis of relational capital or through the exploitation of opportunities to broker between different industry segments in order to fill structural holes, or gaps, in the flow of information within the network (Walker et al., 2000). Individuals who become autonomous within employment relationships or independent from formal employment may be integrated within virtual or physical professional communities that make them less rather than more vulnerable. Indeed, and particularly in the information processing services sector – the focus for this research - individuals may not move into highly autonomous employment relationships or become independent unless they are connected to a substantial social network that spans the boundaries of organisations (Leadbeater, 1999). The ability of geographically dispersed inter-firm networks to create the relational capital necessary to support, and add value to, the flow of knowledge between locations might have implications for whether European firms can exploit opportunities to externalise certain types of knowledge-work to least-cost nations. It may also influence whether firms in these locations can build the capabilities to compete against European firms for trade in higher value-added services.



3. The Focus of STAR Research into Outsourcing, Employment and Skills in Europe

In Europe the IST programme is charged with monitoring the evolution of the emerging economy, steering its progress and avoiding the pitfalls of collapse. In particular, Key Action II, ‘New Methods of Work and Electronic Commerce’, aims to promote competitiveness, flexibility and adaptability among organisations and in the European workforce, in order to enhance their sustained participation in the global economy through enabling the development of complementary ISTs and working practices. The ability of any society to adapt to changing circumstances depends on organisational dynamics – including the diversity of organisational forms in the population - and on their responses to new challenges. Increasing organisational diversity, especially under conditions of socio-economic uncertainty, tends to go hand-in-hand with greater information about production, a wider distribution of opportunities for career development and a broader skills-base in employment in order to fill the new careers that become available (Hannan et al., 1989). ISTs can play a critical role in helping organisations to adapt quickly to change, for example, by supporting the technical and economic feasibility of a diverse range of organisational designs through which to coordinate interdependent activities. The potential for firms to use ISTs in order to increase the division of labour involved in production, and change the distribution and character of the tasks that are performed within the firm, can have a positive effect on the firm’s abilities to accumulate specialist skills. However, it may also add to the complexity of production, generate uncertainty, for example, about the most appropriate way to coordinate interdependent tasks, and lead to production bottlenecks (Foss, 2001). There are two main coordination mechanisms in any economic system: markets – that rely on the price system to allocate resources, and hierarchies within firms – that use authority to allocate resources (Williamson, 1990). Outsourcing decisions are typically considered as decisions about whether to make the inputs to production within the organisational hierarchy or whether to buy them on the market. However, Foss (2001, p. 172) argues that make or buy decisions are about whether to organise a subset of interdependent production tasks in one company or another. In effect, make or buy decisions call into question common assumptions about the boundaries of the firm and raise issues about how best to coordinate particular functions, for example, the most appropriate size, governance structure and labour organisation (Aoki, 1990). These decisions raise the issue of whether this can be achieved independently within the firm through the use of arms length market transactions or by creating more complex relationships among institutions. Some (Castells, 1996; Powell, 1990) claim that ISTs enable the creation of a hybrid coordination mechanism that blurs the boundaries between firms, the networked firm, in which coordination is reliant neither completely on the market nor on the hierarchy.



One important way to reduce production problems is by testing out alternative coordination strategies (Foss, 2001). Companies are actively experimenting with different transaction structures and models of outsourcing based on varying combinations of technology and labour (Figure 3) in order to achieve their anticipated rewards (Chiesa et al., 2000; Currie, 1996; Lacity et al., 2001; Spina et al., 2000; Willcocks et al., 1999). They are distributing their experiences over the Internet and management knowledge about the strengths and weaknesses of these alternative forms is growing. Within different geographic regions, there are a variety of contextual factors that shape the direction that outsourcing takes, for example, the culture of information processing practice within firms, the governance structure of companies, the industry structure, the history of industry relations, labour and employment regulations, and so on. Strategies towards outsourcing differ between countries. For instance, North American companies tend to have adopted more aggressive and offensive procurement-driven approaches that involve competitive bidding. European firms seem to prefer a more tactical, relationship driven and defensive approach in order to achieve control over costs and to enhance organisational efficiency. However, there is some indication that companies in both regions are migrating from (re-negotiating or terminating) long-term, fixed fee, total outsourcing contracts towards a more strategic approach (e.g. selective outsourcing). Case-study evidence has shown positive results for selective outsourcing involving infrastructure and support activities - particularly transitional outsourcing of technically mature legacy systems (Lacity et al., 2001). Firms are also fulfilling their needs for these select services through more creative contracting, e.g. multiple sourcing or value-added sourcing. The ability to engage in and manage outsourcing contracts and relationships with vendor firms is becoming critical in the Information Society. The direction and dynamics of organisational adaptation to the pressures to externalise information processing services has important implications for the location of opportunities for employment, for career development and for the nature and diversity of the skills that are accumulated within firms and in society. Superficial analysis would suggest that opportunities for employment within a country or region are likely to be very different if client firms employ offshore suppliers than if they source locally. Further, client firms engaged in long term total outsourcing contracts are likely to have very different strategies for the accumulation and development of their in-house IT capabilities than client companies that opt for strategic sourcing (including transitional sourcing) or shared management (co-specialisation) solutions.



Figure 3 Models of outsourcing practice

Models Description

Outsourcing The externalisation of technological activities to a third party and the acquisition of the relevant output by the client firm

Incremental outsourcing Engagement of temporary staff to fill short-term needs Total outsourcing/total component outsourcing/ generic outsourcing

The externalisation of the majority of information processing functions for a fixed price and on the basis of a long-term exchange relationship

Captive outsourcing/ spin offs

Where the in-house information processing department of a large enterprise sells its services on the market

Co-production/co-specialisation/ value-added outsourcing

Customer and supplier combine strengths to market services and develop mutually beneficial process improvements. Often these involve creating a joint venture or merger or acquisition between client and supplier companies.

Selective sourcing/ functional outsourcing

The externalisation of specific functions to ‘best-of-breed’ niche service suppliers

Transitional outsourcing A variation of selective sourcing that involves temporary outsourcing of a function to a supplier (e.g. of legacy systems) during a major transition in technology

Business process outsourcing/enterprise outsourcing

A variation of selective sourcing that involves the externalisation of a specific business process and its associated information processing activities to a specialist supplier. Typical examples include non-core activities such as payroll, human resources, or facilities management.

Applications outsourcing The rental of applications services from an external applications service provider (ASP)

Netsourcing

A hybrid form of outsourcing made possible by the convergence between applications outsourcing, business process outsourcing and network technology. It involves the rental from a vendor of centrally managed business processes (and applications) that are made available over the Internet or other networks on a ‘pay as you use’ basis

Out tasking Hiring external vendors to perform specific jobs or to manage specific projects within a department of a larger organisation

Multi-sourcing

The externalisation of work to multiple suppliers under an umbrella contract that obligates suppliers to work together in order to eliminate monopolies in vendor power to achieve advantages of combining ‘best of breed’ suppliers

Offshore outsourcing The externalisation of information processing to a supplier company that performs the work in another country in order to tap into favourable price, skill and performance differences

Co-sourcing The externalisation of work to a third party supplier. Client firm pays the supplier a share of the revenue arising from the use of the output.

Backsourcing Pulling outsourced functions back in-house.



In practice, relationships between outsourcing models are more complex and they evolve. As a result, the implications of outsourcing for employment and skill are less clear than often is imagined. For example, while co-specialisation may be adopted to protect against the negative effects of generic outsourcing (e.g. opportunistic behaviour caused by loss of ownership over knowledge in the client firm and increasing bilateral dependency between clients and suppliers), it may also be adopted as a pre-cursor to total outsourcing in response to the need to build trust and enhance capability in the supplier company (Bolisani et al., 2000; Cascio, 2000; Millar, 2000; Millar et al., 1997). In evaluating alternative organisational forms for production, firms weigh-up and compare the value of specialisation against the interaction costs involved in coordinating production (Butler et al., 1997). Typically, interaction costs may be lower when production occurs in-house. However, production costs are lower for external specialist providers. Outsourcing decisions, particularly electronic outsourcing decisions, involve examining the alternative coordination structures that, for particular tasks or functions, might meet a firm’s need to minimise interaction costs and enable an effective balance to be struck between the need for regular face-to-face contact and the possibilities for establishing remote, networked interactions between client and supplier companies (Mitchell, 2002). Some skills, such as deep technical expertise, and functions, such as mature, well understood, legacy systems, are expected to be easier and less costly to disperse than others, such as technical skills that depend on context-specific (and often tacit) business relevant knowledge and functions that are ill understood and subject to change. The increasing diffusion of ISTs and the creation and use of sophisticated software-based tools, techniques and methods for cooperative working can reduce the interaction costs involved in the coordination of information processing work and enable greater variety in sourcing arrangements. Indeed, the objective of groupware applications is to minimise the difficulties involved in coordinating inter-group activities. Further, a growing complex of relationships between client and supplier firms, for example, through the use of cooperative tools and the development of knowledge management techniques to stimulate inter-firm learning could reduce the interaction costs involved in exchanging context-specific knowledge. These relationships may introduce the potential for tasks and functions that were assumed to be location specific, i.e. those that require symbolic-analytical skills, to become more mobile. In these circumstances, given the relative immobility of labour, technological advances would tend to displace labour. Outsourcing does not occur only between formal organisations. ISTs can also be used to create expansive independent and informal social networks among professionals, support the mobility of their labour and sustain their potential to compete for contract employment. For example, the Professional Contractors Group in the UK, that was established in 1999 on the Internet and now represents 15,000 IT professional networked members, petitions the UK government on issues such as taxation and implementation of the work permit scheme in order to protect and enhance the value of their members’ labour and support their ability to compete for contract work.



3.1. Key Issues There has been a wealth of research on outsourcing during the last decade. Most of this has been conducted from a client perspective and focuses on the motivation for outsourcing, the scope of partnerships, and partnership performance. More recently, the focus has shifted towards presenting client and provider views, for example, on the difficulties of managing productive outsourcing relationships. Rarely has research integrated these perspectives in order to examine the dynamics of outsourcing relationships. Nor has research considered the implications of the evolution of outsourcing (and electronic outsourcing) practice for European employment and skill patterns. The majority of existing work has focused on intra-European client-supplier relationships rather than on the relationships between European firms and non-European sources of labour. It typically fails to address the relationship between ISTs, outsourcing and labour location (distance and proximity) – specifically, the potential for firms to electronically outsource various information processing functions to geographically remote areas or the potential for social networks in external or far flung regions to enable participation in de-localised work and the experience of firms that have done this. Moreover, the effects of client time/experience in managing outsourcing arrangements and changes in production practices (for example the shift towards a component-based development paradigm in the software industry) on outsourcing decision-making (including labour source location and perceptions of ‘fit’ between an individual’s capacities and attributes and the norms, values and working practices of the organisation) are rarely considered. This Issue Report (No. 27) and its empirically based companion, Issue Report No. 28 (Millar, 2002), examine the implications of trends in the dynamics and evolution of outsourcing practice for the globalisation of information processing services work and on the patterns of employment and skill accumulation in Europe. Three dominant features of progress in the Information Society set the context for this research: the growing interconnectedness between people and between countries and the widespread availability of affordable and powerful ICTs. These features are driving firms to examine and evaluate, in terms of their desirability, feasibility and effectiveness, alternative organisational designs – configurations of technology and human resources – to support the coordination of, and control over, information processing service activities. The aims and objectives of this research are to examine the implications of trends in outsourcing practice for organisation, the nature and level of employment and the accumulation of skills to support information processing work in Europe (Section 1.1). The research provides insights into a set of fundamental issues concerning:

• The creation of networks to support new divisions of labour What kinds of networked arrangements are being used to coordinate and control information processing work in Europe? How are these organisational forms created and what factors influence the ways that they evolve? How are ISTs used to support them?



• Constraints and opportunities influencing the new division of labour Is intra-European outsourcing a first stage in an evolving process towards a more global outsourcing of information processing services? Are European jobs vulnerable to foreign competition?

• What factors enable and inhibit the propensity of firms to outsource various

information processing functions? What is the relationship between the functions that are carried out in-house and those that are externalised?

• What factors enable and inhibit the capability of individuals in different countries to

negotiate entry into and participation in social network relationships and to benefit from opportunities to engage in outsourced work? How do these social networks value and reward the capabilities and attributes of individuals and what opportunities and barriers do individuals face when they attempt to progress within these networks? How do firms and individuals monitor the performance of social networks and extend their relational links in order to serve their various needs?

• What are the ultimate prospects of the new division of labour?

As each country strives ‘to improve the standard of living of its citizens by enhancing the value of what they contribute to the world economy’ (Reich, 1992), are there limits on the ability of people in lower income and developing countries to receive delocalised, routine work and/or on the propensity for firms in developed nations to outsource work to them?

• Alternatively, is Reich’s thesis too narrow - are lower-income and developing countries

using ICTs to tap into wider social networks and build the capabilities to compete for symbolic-analytical jobs? Are the symbolic analysts in Europe vulnerable to international competition?

These objectives are met: • in Issue Report No. 27 - by interrogating, on the basis of interview data, the academic,

management and trade literature on emerging patterns of change in the coordination of information processing work that is accompanying the growing use of ICTs and the increasing globalisation of economic activities, and through synthesising this information into an analytical framework that will be the basis for original, in-depth case-study research

• in Issue Report No. 28 (Millar, 2002) – by examining, through analysis of data from a small number of original, in-depth case-studies involving the externalisation of particular information processing functions and tasks, the dynamics and evolution of outsourcing practice.



3.2. Defining Information Processing Services There is no generally accepted definition of information processing work. However, satisfying the aims and objectives of this research require the development of a description that will enable the main functions (intended purposes), tasks (specific work) and skills involved in the production of information processing services, to be identified. According to Davenport (1993), information processing services can be viewed from a generic information-oriented perspective that focuses on the functions involved in manipulating and generating unstructured information. Alternatively, they can be seen from a more specific, transactions-oriented perspective that emphasises the relatively routine and repetitive processes (such as, cheque processing) involved in information processing work that resembles manufacturing processes.

Figure 4 Mapping between descriptions of information processing services

Reich’s Classification Functional Elements Task-specific Elements Identification of information needs and requirements

Information acquisition and elicitation

Requirements specification (business and technical requirements analysis, requirements definition and system specification)

Symbolic-analytical services

Information categorisation

Routine production services

Information formatting and packaging

Analysis and design (architectural, interface and application), application systems integration and programming

Information storage, dissemination and distribution

Infrastructure and network management, security, storage management, integration and system support (including help-desk services, installation and change management and disaster recovery)

Routine production services and in-person services

Information analysis and use

Data entry, testing and validation (unit, module and integration), application support (including help-desk services), customer services (including authentication and authorisation)

Source: Author’s own

However, in practice, both of these perspectives are subsumed under a perspective that gives primacy to the role of information systems and technology support. It is this perspective that is reflected in the structure of the organisational units that are responsible for information processing work, the tasks that are performed in them, and the careers and skills of the people who fulfil these tasks. Figure 4 provides an approximate map between Reich’s role/skill classification, the main functions involved in the production of information processing services and the specific tasks6 that are associated with them. 6 This builds on and extends Davenport’s work to reflect the common corporate perspective toward

information processing services that gives priority to information technology-related tasks. It is based on



4. Outsourcing Information Processing Services - A Review of Evidence

This section reviews the available evidence on outsourcing and the use of ISTs to support the externalisation of information processing services. It identifies and examines a series of interdependent trends that appear to be shaping outsourcing practice in Europe. Their implications for the distribution of information processing work and for the future of employment and the demands for skill in Europe are considered. 4.1. Trend 1: Signs of Increasing Geographic

Flexibility? Evidence of the use of advanced ISTs to support the de-localisation of information processing work is accumulating. For example, the EMERGENCE project demonstrates, on the basis of an 18-country employer survey,7 that 49% of establishments in Europe practice some form of electronic working (Huws et al., 2001b). However, the results of the first year STAR research caution that such ‘signs of increasing geographic flexibility should not be misinterpreted as being precursors of the total abolishment of time/space constraints that traditionally affect work relationships, as most teleworkers today spend only a small share of their working time away from the office’ (Gareis, 2001). Nevertheless, Huws and O’Regan (2001b) demonstrate that individuals do have the capabilities to transcend their organisational contexts. For example, they show that electronic outsourcing is the largest proportion of electronic working. Over half (56%) of all establishments outsource at least one business service activity and 43% use ICTs to support the delivery of outsourced work – which typically (in 39% of cases) involved software development and support and (in 38% of cases) ‘creative’8 services. Software development and support work was most commonly contracted out to firms within Europe (Poland, the Czech Republic and clustered around capital regions in countries with strong service sectors such as Brussels, London and Madrid). Creative services tended to be contracted out to regions in Southern Europe – Madrid, Athens and Milan – Southern France, Germany and the UK. In contrast, lower value-added, high-volume data processing work has tended to be delocalised to peripheral regions with low labour costs. Caution needs to be exercised in the interpretation of these results with respect to the location of opportunities for employment in Europe. Outsourcing arrangements evolve. Many firms that initially embarked on long-term, fixed-fee, total outsourcing contracts with external vendors are now re-negotiating and, in some cases, terminating these arrangements (Lacity et al., 2001). What may appear, for example on the basis of a prevalence survey, to be instances of total electronic outsourcing motivated by the need

analyses of employment in information systems and services (Davenport, 1993; Howells, 2000; Millar, 1996; Sommerville, 1992), interview data and a review of articles in the computing trade press.

7 Involving firms with more than 50 employees. 8 Defined to include research and development, design, editorial, multimedia and other forms of content

generation. This definition is likely to encompass a significant proportion of symbolic-analytical services, including software development work which, in practice, is often classified as R&D.



to relieve pressures caused by lack of available skills, in practice may evolve into more advanced, and potentially skill enhancing, co-operative arrangements such as co-specialisation and selective outsourcing (Spina et al., 2000; Willcocks et al., 1999). Such arrangements may require a different distribution of labour between local and non-local companies. These configurations are likely to vary for particular information processing tasks, for example, depending on the nature of the task and the availability and sophistication of tools to support cooperation in geographically distributed teams. It is clear that companies are making strategic use of the potential for ISTs to support trade in information processing work outside their national borders (Millar, 2000). Studies of distributed software work show that, through combining ISTs appropriately, firms can achieve considerable parity between interactions that take place at a distance and through synchronous, co-located interactions (Olson et al., 2000, 2001b). Figure 5 Characteristics of Communication Media that

Contribute to Achieving Common Ground Copresence Visibility Audibility Contemporality Simultaneity Sequentiality Reviewability Revisability

Face-to-face x x x x x x

Telephone x x x x Video conference x x x x x

Two-way-chat x x x x x

Answering machine x x

E-mail x x Letter x x

Source: Olson and Olson, 2000.

Figure 5 shows the different interactive functions that are supported by various communication media. Olson and Olson (2000) have also examined the sequence in which collaboration technologies (from telephone and email, through group calendaring and Intranet resident shared repositories, to the adoption and use of simultaneous collaboration tools such as NetMeeting and Exceed) are used in firms. This demonstrates the progressive use of ISTs to reduce the costs of distributed work by supporting increased intimacy and immediacy in interactions between companies in different locations. However, firms report that some of these technologies, for example, videoconferencing, are ‘far from glitch free’ (Frater, 2001). They report poor synchronisation and high dropout rates as commonly experienced obstacles that remain to be overcome. Research on computer supported cooperative work (CSCW) has demonstrated the use of techniques to coordinate (structure and smooth) the communication process within distributed teams (Olson et al., 2001a; Orlikowski et al., 1998). The creation of standards that govern the exchange of information is one important way to assist coordination and cooperation by ensuring coherence between tasks that are conducted remotely and those that are performed on-site (Hacki et al., 2001; Malone et al., 2001).



Figure 6 Global Development Issues and Solution Strategies Cat. Name

Issue Liaisons Communi-cation

Architec-tural

principles

Incremental integration

Rational task

assignment

Common Tools

Common Work

Products

Contacts Central Bug

reporting

Experience Don't impose process

Computer Life-Cycle

Physical distance x x x x

Time zone disparity x x x x x x

Loss of commun. richness

Domain expertise x x x x x

Architecture x x x x x x SW negotiation x x x x x x Coord.

break down Sw conf.

management x x

Vendor x x x x Geog. dispersion Support

Govt. x

Issues Development process

x x x x x x x x Loss Team Spirit cultural diffs

Local impression of remote teams

x x x x

Source: Battin, Cocker and Kreidler (2001)

Moreover, as Figure 6 shows, companies are deploying a range of techniques to protect against the pitfalls (loss of communication richness, coordination breakdown, geographical dispersion, loss of team spirit and cultural differences) that characterise globally distributed work (Battin et al., 2001). Process changes also assist coordination, for example, the increasing standardisation of information processing work through the introduction of engineering techniques and methods and the subsequent fragmentation of information processing functions into isolated components that can be worked on independently. Historically, such changes were introduced to provide opportunities for task automation, for example, the development of automated code generators in the 1980s to eliminate programmer creativity, reduce costs and relieve the pressures of the ‘software skills crisis’. 4.2. Trend 2: Overcoming Barriers to Globalisation Firms appear to have experienced difficulties in all phases of the outsourcing process (Currie, 1996; Webster et al., 2000). These phases span procurement, including supplier evaluation and selection and articulating client requirements and translating them into contractual agreements; transition, including preparation, planning and scheduling, start-up; monitoring and managing the relationship with suppliers and assessing their performance against objectives; and contract re-negotiation. According to Willcocks and Lacity (1999), ‘nowhere does the outsourcing of IT emerge as a low-risk enterprise, unless those risks are offset by the adoption of specific practices.’ A number of companies that entered into large-scale total outsourcing arrangements in the 1990s, lured by promises of the advantages of the model for increased competitiveness and cost reduction over in-house alternatives, are terminating or renegotiating those early agreements. Some of these are ‘backsourcing’ - pulling IT functions back in-house, while others are revising outsourcing models and practices.



Total outsourcing deals typically tie vendors into long term, fixed fee contracts with suppliers. Problems have involved the removal of client control over information processing work and the limited potential for clients to deploy IT flexibly in uncertain competitive and technological environments. There is also the potential for vendors to behave opportunistically because of the bilateral dependence that tends to build up between supplier and client companies and the growing monopolistic behaviour of service supplier firms. Client firms involved in these early deals lacked experience with outsourcing and their knowledge and abilities to enter into, negotiate and manage contracts with suppliers were immature and limited. Poor pricing and inadequate understanding of the market value of services, inadequate clarity or ambiguity in the contract specification, lack of opportunities for contract revision and amendment, inadequate service level performance standards and absence of monitoring procedures, under-specification of the transition process, lack of equity in the distribution of benefits from outsourcing - typically in favour of the client firm (i.e. inadequate incentives for the vendor firm to improve their processes and performance) and inappropriate supplier evaluation and assessment strategies (for example, evaluating suppliers through indirect, rather than direct, negotiations (Purdy et al., 2000)) all appear to increase the cost and risks involved in outsourcing. The case-study based literature provides increasing evidence of undesirable outcomes such as unexpected transition and management costs, lock in, increased costs of contract amendments, service debasement, cost escalation (through opportunism), loss of organisational competences, disputes and litigation (Aubert et al., 1998; Lacity et al., 2001; Wier et al., 2002; Willcocks et al., 1999). Because of the high risks involved in total outsourcing and the difficulties that companies have experienced in managing these contracts, total outsourcing now represents the minority of outsourcing arrangements (Cushing, 2002) and companies are making more tactical outsourcing decisions. For example, long-term outsourcing contracts are being built for continuous change and revised governance structures put in place that enable both supplier and vendor companies to co-manage outsourcing relationships on a day-to-day basis. The focus on supplier selection and contract definition that characterised early sourcing decisions is being balanced against a focus on stakeholder and relationship management and performance measurement (i.e. measuring return on investment). For example, clients are insisting that suppliers meet service level agreements (SLAs) and are implementing techniques to evaluate supplier performance against SLAs. However, there is some concern that this trend will disadvantage small vendors (Currie, 1996). Companies are experimenting with different outsourcing models in order to try to overcome earlier problems. For example, there is a growing trend towards selective outsourcing for particular information processing tasks (out-tasking) and business processes (business process outsourcing) and the creation of a portfolio of ‘best of breed’ service suppliers that combine their specialist strengths, for instance, within multiple sourcing arrangements. Alliances and joint ventures among service providers and between providers and suppliers are becoming more common.



The creation of new ‘virtual’ organisational forms in order to facilitate cooperation over the Internet between companies can blur the boundaries between participating firms. For example, ‘supply webs’ or ‘value networks’9 are being created that link together and pool the resources of provider and customer firms (Ody, 2001). These are attractive because they avoid the problems of high initial investment in IT infrastructure and reduce the challenges of directly attracting IT workers. However, such arrangements can also lead to problems in outsourcing relationships, particularly those that involve suppliers in low-income or developing countries. This is because they introduce tensions between staff working on offshore and those working on domestic projects as a result perhaps of different conditions of work, incentive structures, values and rewards which can give rise to divided loyalties and confused identities among individuals (Millar, 2000). The ability to communicate corporate culture to an external outsourcing provider and the development of mutual trust between client and supplier firms are critical to creating and sustaining relationship-based outsourcing arrangements. Open communications help to establish shared objectives and values between staff working in companies in different organisational and cultural contexts and the development of incentive structures and reward mechanisms that offer the potential for mutual gain help to sustain cooperative arrangements. Most outsourcing involves infrastructure management and is still driven by the overriding desire to cut the costs of performing a series of routine operational tasks associated with maintaining legacy systems and overhead functions, such as billing, human resources, procurement and logistics (Auguste et al., 2002). Outsourcing growth, for example in the UK, is highest in sectors such as banking, insurance and financial services, aerospace and defence, oil and gas, and telecommunications services (Morgan-Chambers, 2001). However, as firms also look to build their IT resources and acquire IT capabilities, outsourcing is expanding to include application services (the improvement and support of business information systems) and firms are experimenting with outsourcing models that involve application services, for example, their delivery under contract with an application service provider (ASP). Nevertheless, certain strategic functions need to be kept in-house. According to Lacity and Willcocks (2001), these include ‘IT vision roles’ that are closely linked to the development of business strategy; functions that are associated with the management of service delivery, including purchasing services, contract and supplier management; and IT architecture design functions - because architecture design needs to reflect the business needs of the client organisation. 4.3. Trend 3: Concentration of ‘Symbolic-analytical’

Work in Europe There is some evidence that ‘symbolic-analytical’ work is being scaled up in European countries – possibly in response to the growing trend toward purchasing packaged

9 Networks of trading firms linked through a central co-ordinating hub to form a seamless, extended

enterprise.



business applications and an increasing tendency for non-specialist companies to outsource aspects of their production work to specialist supplier firms within Europe (particularly in the UK, leader in the market for provision of outsourced information processing services in Europe). Focusing on ITEC, the cluster of technologies that form the cornerstone of the emerging knowledge-based society, the results of the first year STAR research on skills and employment show that, in most European countries, the proportion of ITEC professionals working in the ITEC sector expanded between 1997 and 1999 (Millar, 2001). However, the absence of comparable data in non-European countries prevents a distinction from being made between European and non-European countries. Signs of regional specificity in outsourcing location decisions (see Section 4.4) would suggest that the majority of trade in information processing work that is being generated by European firms is being retained within European borders. Indeed, there has been a historical reluctance among purchasers to source outside their local boundaries. However, this is beginning to break down as firms deploy ISTs more tactically in order reduce the interaction costs associated with distributing work across national boundaries, access silos of skills (specialist and more generic lower cost skills) in other countries and as customer and supplier experience with outsourcing grows. Within outsourcing arrangements, there is growing evidence of indirect trading relationships being established between service providers in Europe and service providers in non-European countries in order to maintain the competitiveness of their services, i.e. by routing lower-skilled, lower-cost, routine work to them, while protecting the value of their sophisticated and specialised skills. A survey of high value10 and established11 outsourcing contracts involving UK FTSE 100 clients found that ‘Larger service providers are actively sub-contracting to particular vertical service specialists and taking the management and contractual adherence overhead on themselves under sole-sourcing situations’ (Morgan-Chambers, 2001). For example, outsourcing providers in the UK are increasingly including offshore resources as part of their propositions to client firms. Service provider firms are assessing low cost capabilities, for example, that are located in India, by investing in alliances with (for example, Capita Group and Mastek, based in Mumbai) and through acquisition of (e.g. Xansa has acquired a 76% stake in IIS Infotech, based in New Delhi) Indian service providing companies or by organic growth (e.g. Logica has established bases in Bangalore, New Delhi and Mumbai). Similar patterns can be found in the US. However, according to one expert interviewee, firms are reluctant to disclose this information publicly. These findings contradict the results of research (e.g. Huws and O’Regan, 2001) that suggests that few European establishments include non-European regions, such as India, Russia, Western Australia, Japan and a number of US states, among the favoured regions to provide support for electronic work.

10 Contracts exceeding £1 million per annum. 11 Contracts extending over more than 2 years.



4.4. Trend 4: Intra-European Specialisation but Regional Polarisation

The findings of the EMERGENCE survey provide some support for the conclusion that ‘Far from distributing ICT-related employment more evenly, … the opportunities offered by the new Information Society technologies to relocate work are resulting in a more specialised global division of labour in which “like attracts like”, with a danger of increasing regional polarisation’ (Huws et al., 2001a). This conclusion and its implications for social exclusion are endorsed by the results of the STAR research into skills and employment which draws attention to the unbalanced distribution of opportunities for ITEC-related employment within Europe and to the regional - and gendered - clustering of certain types of ITEC professional skills (Millar, 2001). Research (EITO, 2002), endorsed by expert opinion, suggests that the UK is the largest and fastest growing market for software and services within Europe and, while the US outsourcing market is dominant overall, that the UK outsourcing market (in terms of customer revenues) is growing faster than the market in the US, Germany and Scandinavia (Molta, 2002). The UK outsourcing market, fostered by deregulation and the creation of an open employment environment that makes it relatively easy to transfer staff, is fuelled by investment from UK owned firms (notably, the Capita Group, IT.net and Xansa) and firms that have been able to establish a strong foothold in the UK from the US (such as EDS, IBM, Computer Sciences Corporation (CSC), and Accenture), Japan (for instance, Fujitsu Services), mainland Europe and Europe/US (including Schlumberger-Sema, Cap Gemini Ernst & Young, and Siemens). Growth of other European markets for outsourcing is being fuelled, in part, by the migration of UK staff overseas. 4.5. Trend 5: Overcoming Structural Obstacles to

Outsourcing? There are signs that the outsourcing market is emerging elsewhere in Europe, for example in Germany and France. However, rigidity in employment legislation, industrial and institutional structures and negative beliefs and opinions about outsourcing can limit international investment and obstruct market growth. In Germany, for example, organisational structures have tended to inhibit the development of outsourcing as a model for service production. The German IT industry is dominated by a small number of very large software vendors (such as SAP) and is fuelled by strong engineering skills and capabilities. In-house information systems departments in large German companies may provide ‘captive outsourcing’ services i.e. sell their services on the market. However, the majority of firms are smaller, are not service oriented and have been resistant to participating in outsourcing arrangements. Nevertheless, controversial policies are being introduced by the federal government that aim to open up the employment market in Germany, for example, by plans to issue green



cards to around 20,000 highly qualified foreign information and communication technology specialists from non-European countries. Outsourcing is being driven by the temporary need for specialist engineering skills in shortage occupations for example, in the software industry or in financial services, and by problems associated with skills shortages such as difficulties in maintaining quality and reducing time-to-market (Rombach, 2001). Complementary proposals from state governments and industry to expand training opportunities within industry, to intensify basic and supplementary training measures in information technology areas, and to monitor trends in employment and skill in order to adjust immigration policies, may alleviate fears of job displacement in the local economy. 4.6. Trend 6: Balancing the Market - The Role of

Informal Professional Communities In the UK - the lead provider of outsourced information processing services in Europe, electronic networks are being used to create professional communities out of voluntary associations between independent IT specialists. For example, the Professional Contractors Group (PCG), established in 1999 on the Internet, now represents about 15,000 independent IT professionals in the UK and the group is being extended across Europe (e.g. recently, a new branch has been created in the Netherlands). Such networked communities can exert pressure on local governments to intervene and direct the Information Society in various ways and introduce balance in what is currently a buyers market. For example, the PCG is petitioning the UK government to protect the value of their members’ skills and to sustain their ability to enter into contracted employment. There are two main elements to this petition. First, the group claims that the impact of recent changes to the tax status of independent contractors (under the Inland Revenue’s IR35 legislation12), which, for justifiable taxation reasons, has meant that they are no longer considered as ‘small businesses’ but instead are treated as employees, has reduced their ability to claim tax relief against the considerable investment that they need to make in education and training in order to maintain and develop their knowledge and expertise. Second, that national immigration policy, and particularly the work permit scheme set up to enable foreign workers with scarce skills to enter the country and work in shortage occupations, is outdated13, is not being appropriately monitored and, some members allege, is being exploited by firms to relieve the cost of investment in developing local talent. In particular, under Tier 1 of the scheme involving the intra-company transfers (ICTs), multinational companies can move staff between their offices in different countries on 6-month contracts. Firms employing staff under these arrangements do not have to pay employers national insurance in the UK as it is assumed that it is paid in their country

12 Contractors, who usually pay income tax at 40%, are required to pay employers national insurance (at 12%

- soon to increase to 13%) as well as employees national insurance (at 10%). For employment protection purposes, however, they are not considered as employees.

13 That identified skill needs and shortage occupations no longer reflect those in the industry.



of residence. Foreign workers from these countries are considerably cheaper to employ than local staff, including contractors. Together, the PCG claims, these initiatives undermine the knowledge economy in the UK by depleting the skill base and reducing the incentives for firms and individuals to invest in training and re-training in order to develop local skills and capabilities. Their concerns, particularly regarding immigration policy and the need to balance the tension between developing local capabilities and supporting international solidarity are echoed, for instance, in the US (West et al., 2000) and in Germany (Nicholson, 2001). 4.7. Trend 7: Growing International Competition The globally expanding capacity to engage in electronic trade in information processing work raises questions about the extent to which European information processing jobs are vulnerable to international competition. Companies based in non-European countries are setting up global networked operations in order to route trade with the end-users of their services through them. However, as Millar (2000) cautions, these intermediary institutions can introduce distance between customer and supplier companies and tend to buck the trend towards the requirement for more intimate, relationship building, arrangements for outsourcing. In addition, European (and US) service providers are setting up operations in non-European countries to engage in trade with establishments in those countries and to offer offshore services as part of their service offering to customers. Clients are also demanding some offshore service provision within service contracts in order to remain competitive. Arguments premised on the high and growing global demand for information processing work and the inability of the stocks of skilled professional workers in advanced countries to fulfil this need tend to present the trend towards globalisation as a win-win situation - increases in the total number of opportunities for employment can be met through international cooperation. In addition, there is a potential for suppliers in advanced industrial countries to satisfy demand efficiently (and generate increased profits) by exercising selectivity in deciding which tasks to retain and which to distribute and by managing these allocations. Most analysts concur that outsourcing deals with providers in lower-income and developing countries involve labour intensive, routine and repetitive work (like data entry, coding and testing) on mature, well understood systems, for example, associated with the maintenance of legacy systems, that are outside the companies’ critical value generation chain. Therefore, as argued in Section 4.3, there is likely to be a growing concentration of higher value added skills within Europe. It is generally assumed that lack of common ground (i.e. shared context, culture and knowledge of the market) and low skills among data entry staff14 will militate against the enhancement of professional capabilities located in low-income or developing countries. For example, in order to conduct ‘symbolic-analytical’ services remotely, it is necessary to

14 In India, the brightest and the best graduates compete hotly for software-related positions in the top ranking

firms. Given the high and growing rate of graduation from ITEC-related courses in India, lower-salaried positions, e.g. for data entry clerks, may be filled by staff who have attained ITEC qualifications from the ‘less prestigious’ universities.



be able to establish and analyse the requirements of a customer that may be located in a very different geographical and cultural context. To put it bluntly, it is unlikely that these staff will compete with professionals in industrialised countries for symbolic-analytical work. However, shifts in outsourcing practice in favour of relationship-building arrangements between suppliers and customers aim to build trust between partners and develop capabilities for the provision of services that meet clients’ standards and requirements. The demand for cost reduction influences the location of international investment decisions. In addition, advanced ISTs are being developed that aim to assist collaboration and coordinate work among distributed teams. Combinations of technologies are being strategically deployed to help create common ground and the exchange of staff between establishments is being used to incubate and develop shared values and objectives. In effect, outsourcing alliances are developing into rich learning environments where clients and suppliers alike are working together to overcome tensions between distance and proximity involved in the exchange of information processing work. In these circumstances, particularly if direct outsourcing relationships between, for example, US or European customers and suppliers in lower-income or developing countries, become established best practice, it would be arrogant in the extreme to predict that the skills of professionals in Europe would continue to be invulnerable to international competition. Reports are beginning to emerge that show that initial small projects outsourced to firms in India can be expanded into mainstream application development work (Selbeck, 2002). There are ethical issues involved here too. The pace and intensity of international competition for trade in low value added services is fierce. Competition is based on cost and electronic outsourcing is being introduced to cut costs still further. At the same time software development is becoming increasingly capital intensive and clients are shedding many of the risks involved in service provision to supplier firms. This has increased the cost, in terms of access to technology including software development tools, techniques and methods, as well as technological capabilities, of market entry and participation. Over time and with progressive experience, the labour rates of IT professionals escalate. For example, anecdotal evidence drawn from informal conversations with representatives from client firms in industrialised countries raises a concern about the rapidly rising cost of Indian labour and indicate a desire to source low cost skills elsewhere (e.g. China or Romania). In this buyer’s market, trade in low-value added services is not a sustainable option for many. In addition, further advances in automation technologies (e.g. automatic code generation) may lead to contraction in the market for some programming skills. 4.8. Trend 8: Climbing through Windows of

Opportunity? Experts are divided about the potential for firms in countries that are not engaged in international information processing trade (for example, in some Eastern-European countries) to enter the market. Some consider that firms in early entrant low-income countries, such as India, have established the viability of the model and have provided a



template for others to follow. There are grounds for this view. For example, and assuming the continued popularity of international outsourcing as a complete or partial solution to the service needs of customers, continued growth in the outsourcing market for infrastructure management and expansion of the currently emerging market for business application services would result in more opportunities for market entry. Others are more sceptical and believe that these firms will suffer from the first mover advantages of companies in India, for example. They believe that there is only a temporary window of opportunity to compete for low-value cost-sensitive information processing work. Whichever of these views proves to be correct, the strategy for entry into the market for low-value, low cost work should be combined with an active search for partnership with established suppliers or within a multi-supplier network – i.e. through participation in supply web and virtual network configurations. For example, should relationships between Indian service providers and their European and US customers become more complex, these providers might externalise the lower-value components of information processing work to late entrants. The preference among Indian suppliers is likely to be toward establishing partnership with firms elsewhere in the country, for example, in one of the growing number of Software Technology Parks that are being established by the government to stimulate the development of small enterprises in the sector in the country. Nevertheless, before the recent contraction in the market, the ability of India to meet the continued and rapidly growing demand for qualified professionals was coming under strain. 4.9. Trend 9: Emerging Skill Needs This literature review has revealed a number of critical functions that are vital to the further development of the market for outsourcing information processing services in Europe and that are likely to complement the growing sophistication of outsourcing practices. Most important, among purchasers and increasingly among service providers, is the capability to strategically identify a particular information processing function (i.e. one that does not involve abandoning the skills and processes that distinguish the firm in the marketplace), select a suitable supplier, broker a contract and build and evolve a relationship with them. These functions are based on established skills in change management, technical and operational and planning and delivery. However, they also demand that new skills are developed to support the enhanced roles that commercial awareness (scanning beyond the boundaries of the firm and the market), communications, relationship management, negotiation, financial management, risk management and legal expertise play in outsourcing (Morgan-Chambers, 2001). New ‘lateral leadership’ capabilities are also required to arrange and coordinate work that is distributed across organisational boundaries, to manage increasingly complex production processes that involve the collaborative activities of multi-skilled or cross



functional teams and to build team spirit and relational capital among them. Where relationships become more intimate, acquisition and post-merger management skills are vital. As with any change programme, the capability to influence senior management and to command and sustain their support for the initiative is vital. The credibility of outsourcing managers is based on their seniority and experience – and firms are actively recruiting these skills. The continued demand for specialist technical skills is less certain. While technical expertise is critical, growth in outsourcing and an increased concentration of symbolic-analytical skills in Europe require the development of hybrid skills that combine technical expertise with business and market knowledge and strong communication skills. Some companies have introduced a ‘grow or go’ culture within which technical specialists are expected to develop these additional competences. Some opt to exit the firm and become independent contractors. 4.10. Summary – Reviewing the Trends This section has summarised, on the basis of an extensive review and analysis of literature combined with interview with selected experts, a number of trends in information processing services outsourcing practice. It has examined their potential implications for employment and the accumulation of skills in Europe. The main thrust of these trends is a shift in outsourcing practice toward cooperative and relationship-building arrangements, enhanced management knowledge and the creation and strategic deployment of advanced ISTs. These combine to assist in the development of alternative institutional forms that reduce the interaction costs of coordinating information processing work. Clearly, the market is developing in the customer’s favour. However, there are some signs of supplier resistance, for example, to the creation of immigration policies to facilitate the inflow of foreign professionals to fill shortage occupations. This is because they are not based on an accurate reflection of skill needs and shortage occupations in a country and, in practice, introduce competition between local and non-local professionals for high-value work. As a result, they might undermine the growth of local knowledge-economies by removing incentives for individuals and companies to invest in education and training. Perhaps, most striking is a tendency towards institutional agility, as evidenced by the experimental use of various configurations of labour and technology in order to overcome problems and improve support for distributed cooperative working. Obvious examples of the use of ISTs to create new organisational arrangements can be seen in new institutional arrangements that blur the boundaries between firms, for example, the creation of supply webs and virtual networks and in the development of institutional forms that enable relational capital to be built up between members of professional communities, e.g. the Professional Contractors Group.



However, there are also indications of change within organisational structures. For example, alterations to work content and the boundaries between occupations, changes in the configuration and distribution of jobs within and between organisations and a revision to the roles and responsibilities of people in those jobs. These changes give rise to new roles and responsibilities, some within firms and others that span the boundaries between firms and countries, for example, that are associated with the development of new governance structures and management responsibilities (e.g. co-management) for outsourcing relations. The metaphor of the beehive, ‘some kind of centre, with many people buzzing around on the outside, sometimes coming in, then flying out’ (Mitchell, 2002) seems to capture the essence of trends in organisation in information processing services. The implications for skills and employment in Europe are less clear-cut. Certainly there is a trend toward accumulating sophisticated, high-value skills to fill more strategic functions in countries where the outsourcing market is relatively mature and a tendency among firms in these countries to prefer their staff to have hybrid skills, i.e. that combine both technical and business expertise. However, these skills could become vulnerable to international competition should direct outsourcing relationships be established, for example, between US or European customers and suppliers in low-income and developing countries and should these relationships become more complex, e.g. through developing intimacy and the accumulation of learning and relational-capital between partners (customers and suppliers). In other European countries, however, where employment legislation is more rigid, outsourcing markets are still in their infancy. Although service providers in some European countries (e.g. France and Germany) are adapting to the habits of dominant firms in the US and the UK, there is insufficient evidence to identify any clear pattern. For those firms that are not currently participating in the outsourcing market, opportunities for market entry might arise, for instance, from an expansion of the emerging market for business application services. However, the first mover advantages of firms in India, for example, might mean that this window of opportunity is only open for a short time. However, should relationships between existing service providers and their customers become more complex, there might be opportunities for new entrants to receive outsourced work from entering into supply web relationships with existing suppliers or into virtual network relationships between suppliers and customers. Fundamental questions remain to be addressed. For example, how does outsourcing practice evolve in different environmental, organisational and inter-institutional contexts? How do the characteristics of production, including features of tasks, functions, and technologies affect the division of labour in outsourcing arrangements? And how do managers and staff (permanent staff and contractors) adjust to, and further influence, developments in outsourcing practice? The next section sets out the analytical framework that is used to interpret the results of original, in-depth case-study research into outsourcing practice in Issue Report No. 28 (Millar, 2002).



5. Analytical Framework This section outlines an analytical framework for original empirical (case-study) research into the coordination of information processing services work in outsourcing arrangements, particularly in institutional structures that have been created in order to exploit the potential for ISTs to remove barriers of distance and externalise production internationally and that involve the use of techniques that enables customers to engage in cooperative agreements with other institutions or individuals. It builds on previous research to understand inter-institutional cooperation by creating a synthesis between insights from evolutionary and new institutional economies, sociology and social economics, organisational behaviour and knowledge management, psychology and cognitive science (Millar et al., 1997). The focus is on how the knowledge inputs to information processing services work are coordinated among cooperating institutions that are involved in outsourcing and the factors that influence the evolution of these practices and inter-institutional forms. One theme running through this report is that organisational structure, coordination, and ISTs are closely linked to international transactions for labour resources and influence local opportunities for employment and the accumulation of information processing-related skills. Previous sections have shown that outsourced information processing work increasingly occurs in inter-organisational arrangements among clusters of firms (customer and suppliers) that are telematically linked and that cooperate for service production. Four dominant influences have mutually reinforced this trend in coordination: the increasingly pervasive penetration of ISTs, the transition to a global knowledge-based economy (and the consequent interconnectedness of people and nations), a set of process changes (toward standardisation and modularity) and the requirements to access scarce skills (ideally, at low cost). At the organisational level, these influences are experienced in conjunction with the need to enhance competitiveness (by acquiring scarce skills, improving the speed and accuracy of service delivery, achieving flexibility and responsiveness in the market and by continuous process improvements), improve efficiency (i.e. by economising on costs) and improve perceptions of corporate worth on the market and among shareholders. These features have encouraged organisations to bind together into new institutional forms and have increased the knowledge intensity of work in information processing services. Service production is becoming critically dependent on communication in order, for example, to coordinate knowledge inputs from a range of specialisms and from sources in distinct geographical regions. Communication relies heavily on knowledge sharing and learning among and between those (permanent staff as well as contractors) working in customer and supplier firms. Learning is an interaction-intensive process and is responsible for the continual evolution of the service.



Surprisingly, given the significance of organisational diversity for employment and skill, only very superficial details are known about the processes that are responsible for the emergence and evolution of new institutional forms. They are influenced by the need to reduce interaction costs and involve social processes but there is a lack of knowledge about how these processes are articulated in different service settings and what the implications might be for the distribution of employment and skill. The purpose of this analytical framework is to provide some insight into these processes. 5.1. Outsourcing information processing services: a

service in context perspective This section outlines a service-in-context analytical framework within which the production of information processing services in inter-organisational outsourcing arrangements can be located. This framework provides the interpretive scheme that will be used in the analysis of data from original case-study research into outsourcing arrangements supporting the delivery of information processing services in Europe. This framework is sensitive to particular situational influences and to the context-specificities of different types of knowledge that contribute to service production. The framework includes abstracted descriptions of services – i.e. the outputs of production activities. These represent a context dependent mix of technological object and production process. Learning during service production is understood to involve coordinated interactions between features of the service and those of the context. This framework is premised on three features of services, contexts and production processes. First, descriptions of the information processing service and of contexts can treated as a set of variables that may influence coordination and affect characteristics of the output. Services can be considered, for example, according to variables that are defined in terms of the specialisation of the skills that contribute to them (e.g. that span the axes from symbolic-analytical to routine production). Other variables include the number of tasks involved (e.g. from business analysis and requirements specification to data entry, testing and validation). They may relate to configurational complexity (i.e. involving work on a system that has a large or a small number of intersecting technologies or components). They may reflect their novelty or maturity, risk or aspects that are defined in terms of their intended use (from specific to general purpose). These different aspects, or variables, of a service can be seen as parameters of management processes. So, for instance, the management processes involved in the production of symbolic-analytical services will be different from those that result in routine and repetitive services. Similarly, management issues involved in the production of general-purpose services (such as billing or payroll) are expected to be different from those that influence the production of specific services (such as proprietary client-server applications). Similarly, different measures of context might be identified. For example, degrees of constraint arising from contract specifications, company size, the number of companies involved in service production, the structure of these institutions, their technological sophistication, connectedness, familiarity with the technology or the market and the



nature of coordination and control over production. However, not all variables relating to either service or context will be relevant to every instance of outsourced information processing work. Case study research is needed to discover systematic relations between those factors that may explain particular phenomena, such as, the evolution of particular outsourcing models. Second, it appears that any characteristic of a service is, in principle, orthogonal to a measure of context (Figure 7). Figure 7 The Service in Context Space

Context

Service

The OutsourcingManagement

Process

However, the extent to which these orthogonal dimensions may be symmetrical is unclear. Symmetry would arise, for instance, if all measures of service and of context could be paired in order to provide a description of the service-in-context space. An example might be derived from the orthogonal descriptions of service complexity (described in terms of the number of intersecting components or technologies) and context complexity described in terms of the number of independent companies involved in the outsourcing arrangement (Figure 8). Orthogonality also protects against confounding variables and enables independence to be maintained between the different attributes and their associated strengths and weaknesses that mediate the evolution of the outsourcing process. Third, the area between the service and context axes describes a further orthogonal space within which the outsourcing process is managed. This process might be measured in terms of its phase (described in Figure 8 as running from initial to final).



Figure 8 Representing Complexity in a Service in Context Framework

Serv

ice

Context

Com

plex

ity

Low

H

igh

Number of companies Low High

Initial

Final

Phase

Source: Built on Millar, Demaid and Quintas, 1997

The service-in-context analytical framework enables outsourcing practice within particular information processing functions and tasks to be classified in terms of their prevailing features. It allows for a focus on the relationships that aim to achieve coordination between critical aspects of service functions and of the context within which they are located and that are responsible for mediating service production in inter-organisational outsourcing arrangements. Various expressions of these features, and interactions between them, have different implications for learning during inter-organisational production. They may result in alternative management solutions to production problems. These diverse solutions may influence changes in the outsourcing model, in the allocation of labour within the model and in the roles and responsibilities among service providers and customers. They are likely to have a distinct impact on interaction costs, affect knowledge sharing, and variously influence the production of coherent and usable services. Understanding these relationships is essential to determining how alternative institutional forms to support outsourcing practices are created and evolve.



5.2. Summary This section has presented an outline of the analytical framework that will be applied to the analysis of the results of in-depth case study research into the coordination of information processing services in outsourcing alliances in Europe described in Issue Report No. 28 (Millar, 2002). The framework enables a focus on the creation and evolution of new inter-organisational forms and the new divisions of labour within them that are responsible for the distribution of employment and skill. It gives priority to the managed interaction and learning processes that, ultimately, are responsible for the viability and sustainability of an outsourcing arrangement. Further, it enables the identification of a range of factors that might influence the existence and evolution of alternative outsourcing models and inter-organisational forms within institutions and society and provides insight into the implications of organisational diversity for employment and skill in Europe.



6. Conclusions This report focuses on the rapidly growing global market for outsourced information processing services. The report summarises, on the basis of an extensive review and analysis of the literature combined with interview with selected experts, the main factors influencing growth in the market and a range of interdependent trends in outsourcing practice that are influencing the evolution of the market, the location of opportunities for employment and the pattern of skills accumulation in Europe. Organisations need to grow their competitive position (by gaining access to scarce skills, improving the speed and quality of their services, improving their agility and flexibility in the market and their responsiveness to customer needs and upgrading service quality by continuous process improvements), improving efficiency (i.e. by economising on costs) and enhancing perceptions of corporate worth on the market and among shareholders. These general factors have encouraged companies to bind together into new institutional forms and have increased the knowledge intensity of their work. Outsourcing is one way that the competitive need to do more with less, faster and better can be achieved. This review of the literature shows that firms appear to believe that outsourcing will help them to reduce labour and procurement costs, cut capital investment costs and develop economies of scale, predict costs more accurately; convert fixed costs into variable costs; decentralise cumbersome bureaucratic structures and revise the ways that information processing service activities are coordinated; enhance asset management; increase speed and efficiency; provide access to silos of scarce skills and capabilities in other countries; achieve process efficiencies by gaining access to best practice; share or shed risks; enhance flexibility and control; enhance the accuracy and the quality of services; and focus on core business. The early market was characterised by large total outsourcing deals. Influenced by the desire to focus on their ‘core business’, firms in information intensive business sectors (such as financial services) outsourced all of their information systems by establishing long term, fixed fee contracts with service specialists. The problems with the total outsourcing model are now legendary. However, the birth of the market for information processing services has changed managers’ perceptions of information systems and developed their knowledge about how to externalise information processing work and buy back the output. The market for outsourcing might be considered to be in transition to a second stage. The main characteristics of this transition are a shift in outsourcing practice toward cooperative and relationship-building arrangements, enhanced management knowledge and the creation and strategic deployment of advanced ISTs. Together, these may foster the development of alternative institutional designs that increase the efficiency of, and reduce the interaction costs of coordinating, globally distributed information processing work. Customers and service providers are actively experimenting with a range of outsourcing models and associated institutional arrangements and are using the Internet to distribute their experiences.



It seems that the outsourcing market is developing in the customer’s favour. However, there are some signs of resistance from suppliers. For example independent professionals are collaborating over the Internet to protest against the inadvertent affects of their policies and to lobby government to intervene and protect the value and mobility of their skills in the knowledge-economy. Perhaps the most striking trend in outsourcing practice is the variety of institutional arrangements being adopted and the agility with which institutions are deploying different configurations of labour and technology in order to overcome problems and adapt to cooperative work. Obvious examples include the use of ISTs to create new organisational arrangements that blur the boundaries between firms, for example, the creation of supply webs and virtual networks and the use of the Internet to develop relational capital among professional communities. Indications of change occur within institutional structures that support outsourcing too. For example, alterations to the division of labour within and between cooperating firms, changes in the configuration and content of work, shifts in the boundaries between occupations and changes in occupational practices. These changes are generating new functions, tasks, roles and responsibilities, for instance, associated with the development of new governance structures and management responsibilities - some are located within firms and others span the boundaries between firms and countries. In Europe the implications of change in outsourcing practice for information processing skills and employment are less obvious. There would appear to be a trend toward the accumulation of sophisticated, high-value skills and the demand for capabilities to fill strategic management functions at the technology-business interface in countries where the outsourcing market is relatively mature and there is a tendency among firms in these countries to recruit and retain hybrid skilled individuals who combine business and technical expertise. However, the dominant model of outsourcing practice is based on intimacy and the accumulation of learning and relational-capital between partners (customers and suppliers). Direct outsourcing arrangements between US or European customers and suppliers in low-income and developing countries, should they become established best practice, will place the high-value skills in Europe under international competition. In other countries, however, where employment legislation is more rigid, the outsourcing market is in its infancy. While service providers in some European countries (e.g. France and Germany) appear to be adapting to the habits of the market leaders (i.e. firms in the US and the UK) there is insufficient evidence to identify any clear pattern. It might be possible for late-entrants, for example, firms in low-income transition and developing countries, to enter the outsourcing market if they offer low-cost, low-value added information processing work associated with business application services. However, opportunities for market entry are likely to be limited and unsustainable. In established outsourcing markets, late-entrants could suffer from the first mover



advantages of firms in other countries (such as India) but they might also benefit by entering into outsourcing relationships with them. Fundamental questions remain about the structure, dynamics and evolution of arrangements for outsourcing and their implications for employment, occupations and skills. These questions cut to the quick of the organisational dilemma in the digital economy – how to coordinate and control information processing work. They directly address the need for a better understanding among policy makers of the relationship between the creation of institutional diversity and the capacity of the Information Society to adapt to change. They are also fundamental to the unfolding dynamics of the relationship between organisational diversity under conditions of socio-economic uncertainty, the location and distribution of opportunities for career development and the creation of national policies to support the accumulation of relevant skills for employment in the Information Society. 6.1. Policy Implications This interim stage of the second year of STAR research into outsourcing information processing services has exposed a number of issues that require policy attention. European countries are liberalising their employment markets and adapting their immigration policies in order to encourage the inflow of professionals and fuel competitiveness. There is a need to accurately define and regularly monitor emerging shortage occupations and skill needs. There is an urgent need to establish mechanisms to ensure that the shortage occupations included in these initiatives and the skill needs that are identified are kept up to date and monitored and accurately reflect industry requirements. Complementary initiatives are also required to build the required skills in local economies, for instance, by providing incentives (and removing disincentives) among firms and individuals to invest in training, re-training and cross training. The creation of opportunities for the development of hybrid skills at the technology/business interface requires governments to work more closely with industry in order to set, monitor and adjust the curricula of technology-focused courses. The expansion of technical course contents to include business and management components and the inclusion of industry visits, industry-related project assignments and industrial placement schemes might promote the integration of technical and business skills that are learned in academic environments and establish the relevance of these skills to commerce. The provision of initial start-up funds might encourage individuals and small groups to build virtual communities in order to share knowledge and experience and increase the mobility and value of local talent. Insights drawn from existing and thriving networks, such as the Professional Contractors Group and the Busygirl network, that aims to build relational-capital among women in the information sector and to support their members’



abilities to manage their careers and negotiate entry into employment, might be pooled to provide a template for network creation and growth that could be extended to create networked communities among senior level managers, for example. This could help to meet the need for cross-industry knowledge and experience in outsourcing management. Encouragement for the establishment of inter-European supplier webs, particularly those that include participation of established service providers and new entrants, might contribute towards the wider participation of European firms in the outsourcing market.



7. References Aoki M. 1990. The Participatory Generation

of Information Rents and the Theory of the Firm. In M Aoki, B Gustafsson, OE Williamson (Eds.), The Firm as a Nexus of Treaties: 26-52. Sage Publications: London

Aubert BA, Dussault S, Patry M, Rivard S.

1998. Managing the Risk of IT Outsourcing, CIRANO Scientific Series: 20: Montreal

Auguste BG, Hao Y, Singer M, Wiegand M.

2002. The Other Side of Outsourcing, McKinsey Quarterly, Vol. 1:

Battin RD, Cocker R, Kreidler J. 2001.

Leveraging Resources in Global Software Development. IEEE Software: 70-77

Beck U. 2000. The Brave New World of

Work. Polity Press: Cambridge Bolisani E, Scarso E. 2000. Electronic

Communication and Knowledge Transfer. International Journal of Technology Management 20(1/2): 116-133

BusinessJournal. 2001. Outsourcing

expected to increase, Vol. 2001. http://www.sanjose.bizjournals.com/sanjose/stories/2001/08/27/daily32.htm

Butler P, Hall TW, Hanna AM, Mendonca L,

Auguste B, Manyika J, Sahay A. 1997. A Revolution in Interaction, McKinsey Quarterly, Vol. 1: 4-23.

Cairncross F. 2001. The Death of Distance

2.0. Texere Publishing Limited: London Cairncross F. 2002. The Company of the

Future: meeting the management challenges of the communications revolution. Profile Books Limited: London

Cascio WF. 2000. Managing a Virtual

Workplace. Academy of Management Executive 14(3): 81-90

Castells M. 1996. The Rise of the Network

Society. Blackwell Publishers: Oxford Castells M. 2001. The Internet Galaxy:

Reflections on the Internet, Business and Society. Oxford University Press: Oxford

Chiesa V, Manzini R, Tecilla F. 2000.

Selecting Sourcing Strategies for Technological Innovation: an empirical case study. International Journal of Operations & Production Management 20(9): 1017-1037

Currie WL. 1996. Outsourcing in the Private

and Public Sectors: an unpredictable IT strategy. European Journal of Information Systems 4: 226-236

Cushing K. 2002. Outsourcing: The Good,

the bad and the ugly, Vol. 21 March. http://www.cw360.com

Davenport TH. 1993. Process Innovation:

Re-engineering Work through Information Technology. Harvard Business School Press: Boston

EITO. 2002. European Information

Technology Observatory: Frankfurt/Main, Germany

Foss K. 2001. Organizing Technological

Interdependencies: a Co-ordination Perspective on the Firm. Industrial and Corporate Change 10(1): 151-178

Frater S. 2001. Virtual meetings increase,

but there are still doubters, Vol. 2001. http://specials.ft.com/businessoftravel/nov2001/FT3M8Z9VJUC.html

Gareis K. 2001. The Electronic Freelancing

Economy: Myth or Reality? An Overview of Evidence. STAR Issue Report No. 9. Empirica: Bonn

Goolsby, K. 2001. Gain Control of Your

Computing Environment, Getronics White Paper, August

Hacki R, Lighton J. 2001. The Future of the

Networked Company, McKinsey Quarterly, Vol. 3.

Hagel H, Singer M. 2000. Unbundling the

Corporation, McKinsey Quarterly, 3 ed., Vol. 2002. http://www.mckinseyquarterly.com/article_page?tk=193286:1069:21&ar=1069&L2=21&L3=37

Hamel G. 2000. Leading the Revolution.

Harvard Business School Press: Boston Hannan MT, Freeman J. 1989.

Organizational Ecology. Harvard University Press: Cambridge, MA

Howells J. 2000. Computer Services: The

Dynamics of a Knowledge-Intensive Sector. In B Andersen, J Howells, R Hull, I Miles, J Roberts (Eds.), Knowledge and Innovation in the New Service Economy: 121-141. Edward Elgar: Cheltenham.

Dynamics of innovation towards e-commerce: the case of France ENST Draft v2

STAR Issue Report N.6 – June 2001 40

Huws U, Jagger N, Bates P. 2001a. Where the Butterfly Alights: the Global Location of eWork. The Institute for Employment Studies: Brighton

Huws U, O'Regan S. 2001b. eWork in

Europe - the EMERGENCE 18-Country Employer Survey. The Institute for Employment Studies: Brighton

ILO. 2001. World Employment Report: Life at

Work in the Information Economy. International Labour Office: Geneva

Kelly K. 1999. New Rules for the New

Economy. Fourth Estate: London Lacity MC, Willcocks LP. 2001. Global

Information Technology Outsourcing: In Search of Business Advantage. John Wiley & Sons Ltd.: Chichester

Laubacher RJ, Malone TW. 2001. Two

Scenarios for 21st Century Organizations: Shifting Networks of Small Firms or All-Encompassing "Virtual Communities", MIT Initiative on Inventing the Organizations of the 21st Century: 1-32. Sloan School of Management, Massachusetts Institute of Technology: Cambridge, MA

Leadbeater C. 1999. Living on Thin Air.

Penguin Books: London Madon S. 1997. Information-based Global

Economy and Socioeconomic Development: The Case of Bangalore. The Information Society 13: 227-243

Malone TW, Crowston K. 2001. The

Interdisciplinary Study of Coordination. In GM Olson, TW Malone, JB Smith (Eds.), Coordination Theory and Collaboration Technology: 7-50. Lawrence Erlbaum Associates: New Jersey

Millar J. 2000. Sustaining Software Teletrade

in Bangalore: Fostering Market Agility through Economic Competence. Economic and Political Weekly: 2253-2262

Millar J. 2001. ITEC Skills and Employment -

assessing the supply and demand: an empirical analysis. STAR Issue Report No. 11. SPRU - Science and Technology Policy Research: Brighton

Millar, J. 2002. The Globalisation of

Information Processing Services? The implications of outsourcing for employment and skills in Europe. STAR Issue Report No. 28. SPRU - Science and Technology Policy Research: Brighton

Millar J, Demaid A, Quintas P. 1997. Trans-organizational Innovation: a framework for research. Technology Analysis and Strategic Management 9(4): 399-418

Millar JE. 1996. Interactive Learning in

Situated Software Practice; Factors Mediating the New Production of Knowledge During iCASE Technology Interchange, Science Policy Research Unit: 248. University of Sussex: Brighton

Mitchell W. 2002. Expert View: The Limits of

Decentralization, Vol. 2002. http://www.cioinsight.com/article/0,3658,s%253D0%2526a%253D22085,00.asp

Molta D. 2002. In Through The Outsourcing

Door, Vol. 2002. http://www.networkcomputing.com/821/821colmolta.html

Morgan-Chambers. 2001. Outsourcing in the

FTSE 100: The definitive study. Episode 1: The UK plc. Morgan Chambers: London

Nicholson B. 2001. Global Software

Outsourcing: The solution to the IT skills gap. Manchester School of Accounting and Finance, University of Manchester: Manchester

Ody P. 2001. Supply chain collaboration:

Users Focus Sharply on Cost Cuts and Flexibility, Vol. 2001. http://specials.ft.com/ftit/december2001/FT371351RUC.html

Olson GM, Malone TW, Smith JB (Eds.).

2001a. Coordination Theory and Collaboration Technology. Lawrence Erlbaum Associates: New Jersey

Olson GM, Olson JS. 2000. Distance

Matters. Human-Computer Interaction 15: 130-178

Olson GM, Olson JS. 2001b. Technology

Support for Collaborative Workgroups. In GM Olson, TW Malone, JB Smith (Eds.), Coordination Theory and Collaboration Technology: 559-584. Lawrence Erlbaum Associates: New Jersey

Orlikowski W, Yates J. 1998. Genre

Systems: Structuring Interaction through Communicative Norms: 1-14. MIT Sloan School of Management: Cambridge, MA

Powell WW. 1990. Neither Market nor

Hierarchy: Network Forms of Organization. Research in Organizational Behaviour 12: 295-336

Purdy L, Safayeni F. 2000. Strategies for

Supplier Evaluation: A Framework for

Dynamics of innovation towards e-commerce: the case of France ENST Draft v2

STAR Issue Report N.6 – June 2001 41

Potential Advantages and Limitations. IEEE Transactions on Engineering Management 47(4): 435-443

Reich RB. 1992. The Work of Nations.

Vintage Books: New York Rifkin J. 2000. The End of Work. Penguin

Books: London Rombach D. 2001. Analysis and Evaluation

of Software Development in Germany, 2nd ITEA Symposium: Berlin

Selbeck P. 2002. Application development

Outsourcing to India - From Small Works to Mainstream Application Development, The Outsourcing Project - Volume 1: http://www.outsourcingproject.com/documents.asp?grID=260&dID=1042

Sommerville I. 1992. Software Engineering

(4th edition ed.). Addison-Wesley Publishing Company: Wokingham

Spina G, Zotteri G. 2000. The

Implementation Process of Customer-Supplier Partnerships: lessons from a clinical perspective. International Journal of Operations & Production Management 20(10): 1164-1182

Walker G, Kogut B, Shan W. 2000. Social

Capital, Structural Holes and the Formation of an Industry Network. In EL Lesser (Ed.), Knowledge and Social Capital: 225-254. Butterworth-Heinemann: Boston

Webster M, Muhlemann AP, Alder C. 2000.

Decision Support for the Scheduling of Subcontract Manufacture. International Journal of Operations & Production Management 20(10): 1218-1235

West LA, Bogumil WA. 2000. Foreign

Knowledge Workers as a Strategic Staffing Option. Academy of Management Executive 14(4): 71-84

Wier E, Holder C. 2002. Don't just sign on

the dotted line, Vol. 2002. http://www.cw360.com

Willcocks LP, Lacity MC. 1999. IT

Outsourcing in Insurance Services: risk, creative outsourcing and business advantage. Information Systems Journal 9: 163-180

Williamson OE. 1990. The Firm as a Nexus

of Treaties: an Introduction. In M Aoki, B Gustafsson, OE Williamson (Eds.), The Firm as a Nexus of Treaties: 1-25. Sage Publications: London.

STAR PROJECT YEAR 2

List of Issue Reports - Publication 2002 Research Area C European E-Commerce: Developing the Evidence Base No. 20 Emerging Trends in Customer Relation Management Using ICT: the Retail Trade

Industry, by ENST No. 21 Emerging Trends in Customer Relation Management Using ICT: the Financial Services,

by Databank Consulting No. 22 Emerging Trends in Customer Relation Management Using ICT: the Travel Industry, by

NTUA No. 23 Customer Relations in the Information Society, by SPRU No. 24 Customer Relations Management and its Impacts on the Employment, by Empirica No. 25 French Cyberspace of Online Services: The Dynamics of the Learning Experience from

Minitel to Internet, by ENST Research Area D Trends in New Ways of Working No. 26 “The Winners are…Multi-Practitioners!” Determinants of Success in e-Business and New

Ways of Working in Selected European Countries, by Empirica Research Area E Skills Evolution & the Digital Economy No. 27 Outsourcing Practices in Europe, by SPRU No. 28 The Globalisation of Information Processing Services: the Implications of Outsourcing for

Employment and Skills in Europe, by SPRU Research Area F Market Developments No. 29 Internet Diffusion Dynamics in Europe: Demand Scenarios and the Digital Divide, by

Databank Consulting Research Area G Techno-Economic and Policy Developments No. 30 ICTs and Improved Consumer Control on Content Supply: the Case of the

Entertainment, Video games and Software Industries, by ENST Research Area H Balanced Growth and Sustainable Development No. 31 ‘Civilising’ Technologies in Healthcare Provision: Experiences and Prospects for Europe,

by NTUA

Project STAR c/o Databank Consulting

Corso Italia 8 • 20122 Milano Tel. +39 0272107.1 • Fax +39 0272107.402 Contact STAR partners at [email protected] See STAR reports at www.databank.it/star

outsourcing practices in europe - unimore

Documents