Outsourcing and Offshoring of Professional Services:
Business Optimization in a Global Economy Amar Gupta University of Arizona, USA
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[email protected] Web site: http://www.igi-global.com and in the United Kingdom by Information Science Reference (an imprint of IGI Global) 3 Henrietta Street Covent Garden London WC2E 8LU Tel: 44 20 7240 0856 Fax: 44 20 7379 0609 Web site: http://www.eurospanbookstore.com Copyright © 2008 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark. Library of Congress Cataloging-in-Publication Data Outsourcing and offshoring of professional services : business optimization in a global economy / Amar Gupta, editor. p. cm. Summary: “This book discusses the considerations and implications surrounding the outsourcing and offshoring of professional services, such as software development computer-aided design, and healthcare, from multiple global perspectives. This book, offers industry professionals, policymakers, students, and educators with a balance between a broad overview and detailed analysis of offshore outsourcing, would make an invaluable addition to any reference library”--Provided by publisher. ISBN-13: 978-1-59904-972-4 (hbk.) ISBN-13: 978-1-59904-973-1 (e-book) 1. Offshore outsourcing. 2. Contracting out. I. Gupta, Amar. HD2365.O94157 2008 658.4’058--dc22 2007040900 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book set is original material. The views expressed in this book are those of the authors, but not necessarily of the publisher. If a library purchased a print copy of this publication, please go to http://www.igi-global.com/reference/assets/IGR-eAccess-agreement. pdf for information on activating the library's complimentary electronic access to this publication.
This book is dedicated to the Thomas R. Brown Foundation. In particular, I thank Sarah Smallhouse and Mary Brown, trustees of this foundation, for their unflagging support of my research and professional endeavors.
Table of Contents
Foreword . .......................................................................................................................................... xvii Preface . ................................................................................................................................................ xx Acknowledgment . ..........................................................................................................................xxviii
Section I Executive Highlight Chapter I Offshoring: The Transition from Economic Drivers Toward Strategic Global Partnership and the 24-Hour Knowledge Factory....................................................................................................... 1 Amar Gupta, University of Arizona, USA Satwik Seshasai, International Business Machines (IBM) Corp., USA Massachusettes Institute of Technology, USA Sourav Mukherji, The Indian Institute of Management, Bangalore Auroop Ganguly, Oak Ridge National Laboratory, USA
Section II Foundations and Frameworks Chapter II Evolving Relationship Between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations............................................................................................. 25 Amar Gupta, University of Arizona, USA David A. Gantz, University of Arizona, USA Devin Sreecharana, University of Arizona, USA Jeremy Kreyling, University of Arizona, USA
Section II Foundations and Frameworks Chapter II Evolving Relationship between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations............................................................................................. 25 Amar Gupta, University of Arizona, USA David A. Gantz, University of Arizona, USA Devin Sreecharana, University of Arizona, USA Jeremy Kreyling, University of Arizona, USA This chapter covers four issues. First, it examines evolving international conventions to determine whether countries, especially developed countries, can take any steps to inhibit offshoring with the objective of protecting jobs in their respective countries. Second, it looks at statistics from independent sources to see if outsourcing exceeds insourcing, or vice versa, in the case of the U.S. Third, it looks at trends in outsourcing in the legal arena. Fourth, it looks at the intellectual property aspects of outsourcing and presents a long-term vision on how this difficult issue is likely to be addressed in the long-term. Chapter III Information Technology/Systems Offshore Outsourcing: Key Risks and Success Factors.................. 50 Mahesh S. Raisinghani, Texas Woman's University, USA Brandi Starr, Texas Woman's University, USA Blake Hickerson, Texas Woman's University, USA Marshelle Morrison, Texas Woman's University, USA Michael Howard, Texas Woman's University, USA The offshore outsourcing of information technology and information systems (IT/IS) is being increasingly practiced among firms that are focusing on core competencies and cost-effectiveness. With the increase in offshore IT/IS operations, a growing number of companies are encountering negative experiences and unpredicted results. The analysis performed in this chapter reveals the possible risks and perceived success factors of companies outsourcing IT/IS operations offshore. The major points of interest are operational and strategic risks; legal contracts; cultural, security, and financial issues; and noted success factors by companies that participate in offshore outsourcing. The research indicates the importance of risk identification and the formulation of strategic plans that include preventive, detective, and corrective control methods of implementation and evaluation. Effective methods and metrics for measuring the success or failure of IT/IS offshore outsourcing operations is expected to be a continuing development with the increasing growth of this phenomenon.
Chapter III Information Technology/Systems Offshore Outsourcing: Key Risks and Success Factors.................. 50 Mahesh S. Raisinghani, Texas Woman's University, USA Brandi Starr, Texas Woman's University, USA Blake Hickerson, Texas Woman's University, USA Marshelle Morrison, Texas Woman's University, USA Michael Howard, Texas Woman's University, USA Chapter IV A Paradigmatic and Methodological Review of Research in Outsourcing............................................ 71 Vanita Yadav, Management Development Institute, India Rajen K. Gupta, Management Development Institute, India Chapter V An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing............................................................................................................................................ 89 John “Skip” Benamati, Miami University, USA T.M. Rajkumar, Miami University, USA
Section III Sectoral Applications and Case Studies Chapter VI Outsourcing in the Healthcare Industry: Information Technology, Intellectual Property and Allied Aspects...................................................................................................................................... 115 Amar Gupta, University of Arizona, USA Raj K. Goyal, VA Boston Health Care System, USA Keith A. Joiner, University of Arizona, USA Sanjay Saini, Harvard Medical School, USA Chapter VII Offshoring Entertainment and Media to India..................................................................................... 142 Alyssa D. Schwender, Lions Gate Entertainment, USA Christopher J. M. Leet, Intuit Corporation, USA Chapter VIII Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery...................................... 157 Shawna Sando, University of Arizona, USA
Chapter IX The Use of Outsourcing as a Business Strategy: A Case Study........................................................... 167 Ram B. Misra, Montclair State University, USA
Section IV National and Societal Implications Chapter X Changing IT Skills: The Impact of Sourcing Strategies on In-House Capability Requirements....................................................................................................................................... 180 Christine V. Bullen, Stevens Institute of Technology, USA Thomas Abraham, Kean University, USA Kevin Gallagher, Northern Kentucky University, USA Kate M. Kaiser, Marquette University, USA Judith Simon, University of Memphis, USA Chapter XI New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China............................................................................................................................................. 203 Suresh Sharma, JS3 Global, LLC Yuanyuan Chen, JS3 Global, LLC Chapter XII The Role of Prisons in Offshoring....................................................................................................... 215 Whitney Hollis, University of Arizona, USA
Section V Collaboration and the 24-Hour Knowledge Factory Chapter XIII The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory................................................................................................................................................. 226 Satwik Seshasai, International Business Machines (IBM) Corp., USA Massachusetts Institute of Technology, USA Amar Gupta, University of Arizona, USA Chapter XIV Outsourcing and Multi-Party Business Collaborations Modeling....................................................... 250 Lai Xu, Utrecht University, The Netherlands
Chapter XV Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies......................... 270 Nathan Denny, University of Arizona, USA Shivram Mani, University of Arizona, USA Ravi Sheshu Nadella, University of Arizona, USA Manish Swaminathan, University of Arizona, USA Jamie Samdal, University of Arizona, USA Chapter XVI Agile Software Processes for the 24-Hour Knowledge Factory Environment.................................... 287 Nathan Denny, University of Arizona, USA Igor Crk, University of Arizona, USA Ravi Sheshu Nadella, University of Arizona, USA
Section VI Adaptation Paradigms for Academia and Industry Chapter XVII Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum........................................................................................................................................... 303 William J. Tastle, University of Iceland, Iceland Ithaca College, USA Bruce A. White, Quinnipiac University, USA Ársaell Valfells, University of Iceland, Iceland Peter Shackleton, Victoria University, Australia Chapter XVIII Innovative Technological Paradigms for Corporate Offshoring.......................................................... 321 Tapasya Patki, University of Arizona, USA A. B. Patki, Department of Information Technology, India Chapter XIX Leveraging Knowledge Reuse and System Agility in the Outsourcing Era........................................ 342 Igor Crk, University of Arizona, USA Dane Sorensen, Raytheon Missile Systems, USA Amit Mitra, TCS Global Consulting Practice, USA
Compilation of References ............................................................................................................... 363 About the Contributors .................................................................................................................... 395 Index.................................................................................................................................................... 405
Detailed Table of Contents
Foreword . .......................................................................................................................................... xvii Preface . ................................................................................................................................................ xx Acknowledgment . ..........................................................................................................................xxviii
Section I Executive Highlight Chapter I Offshoring: The Transition from Economic Drivers Toward Strategic Global Partnership and the 24-Hour Knowledge Factory....................................................................................................... 1 Amar Gupta, University of Arizona, USA Satwik Seshasai, International Business Machines (IBM) Corp., USA Massachusettes Institute of Technology, USA Sourav Mukherji, The Indian Institute of Management, Bangalore Auroop Ganguly, Oak Ridge National Laboratory, USA The changing economic and labor conditions have motivated firms to outsource professional services activities to skilled personnel in less expensive labor markets. This offshoring phenomenon is studied from a political, economic, technological and strategic perspective. Next, an analytical model is developed for achieving strategic advantage from offshoring based on global partnerships. The model studies the impact of offshoring with respect to the complexity and strategic nature of the tasks and presents a decision strategy for obtaining value through offshoring of increasingly complex tasks. The result is an integrated “24-Hour Knowledge Factory” that is based on a sustainable global model rather than a short term fiscal model. This 24-hour paradigm embodies the shift-style workforce that evolved for the manufacturing sector during the Industrial Revolution and relies on a set of critical success factors in the current environment. A case example is provided from IBM to illustrate these underlying critical success factors.
Chapter IV A Paradigmatic and Methodological Review of Research in Outsourcing............................................ 71 Vanita Yadav, Management Development Institute, India Rajen K. Gupta, Management Development Institute, India Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment and synthesis of research activities to date. This chapter addresses this need and examines the academic literature on information systems outsourcing and business process outsourcing using a paradigmatic and methodological lens. The objective of this chapter is fourfold. Firstly, it examines the status of outsourcing research from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework. Thirdly, it compares and contrasts the outsourcing research work published in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and the directions for future research. Chapter V An Outsourcing Acceptance Model: An Application of TAM to Application Development Outsourcing............................................................................................................................................ 89 John “Skip” Benamati, Miami University, USA T.M. Rajkumar, Miami University, USA The use of outsourcing is expanding rapidly. This chapter empirically tests a model of application development outsourcing acceptance based on the technology acceptance model (TAM). TAM-suggested perceived usefulness and ease of use mediate the effects of other variables on users’ attitudes towards a technology. The model tested in this chapter suggests that perceived usefulness and ease of use of outsourcing mediate the effects of the external environment, prior outsourcing relationships, and risks on decision-makers’ attitude toward application development outsourcing. One hundred and sixty respondents to a survey sent to 3000 IT decision makers provided data to confirm the applicability of TAM and the influences of these external variables. Support for applying TAM in this alternative context was found. Three sub-dimensions of risk, project management, relationship, and employee risk emerged. Project management and employee risks along with prior relationships were found to significantly influence decision maker perceptions about application development outsourcing.
Section III Sectoral Applications and Case Studies Chapter VI Outsourcing in the Healthcare Industry: Information Technology, Intellectual Property and Allied Aspects...................................................................................................................................... 115 Amar Gupta, University of Arizona, USA Raj K. Goyal, VA Boston Health Care System, USA Keith A. Joiner, University of Arizona, USA Sanjay Saini, Harvard Medical School, USA
The healthcare industry is being impacted by advances in information technology in four major ways: first, a broad spectrum of tasks that were previously done manually can now be performed by computers; second, some tasks can be outsourced to other countries using inexpensive communications technology; third, longitudinal and societal healthcare data can now be analyzed in acceptable periods of time; and fourth, the best medical expertise can sometimes be made available without the need to transport the patient to the doctor or vice versa. The healthcare industry will increasingly use a portfolio approach comprised of three closely-coordinated components seamlessly interwoven together: healthcare tasks performed by humans on-site; healthcare tasks performed by humans off-site, including tasks performed in other countries; and healthcare tasks performed by computers without direct human involvement. Finally, this chapter deals with intellectual property and legal aspects related to the three-pronged healthcare services paradigm. Chapter VII Offshoring Entertainment and Media to India..................................................................................... 142 Alyssa D. Schwender, Lions Gate Entertainment, USA Christopher J. M. Leet, Intuit Corporation, USA This chapter explores opportunities for the offshoring of assorted processes in the global entertainment and media industry. Currently, this industry is experiencing incredible growth, much of it spurred by the increased digitalization of media production around the world. The rise of digital technology, faster global connectivity, an increased quality of downloads have been the driving factors behind this growth. The filmed entertainment, recorded music, and television networks and distribution sectors of the industry will undergo major technological changes in the coming years. These changes will provide opportunities for entrepreneurs to enter the global media industry. Using venture funding, startups are utilizing offshoring concepts to create a more efficient cost-effective means of doing business. The Asia Pacific market is currently the fastest-growing region, with India leading the way with offshoring of film functions. The industry will see a change from large media conglomerates as the sole owners of all media to smaller companies offering services, in which they specialize, to these larger companies, as digital media makes it easily accessible around the globe. Chapter VIII Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery...................................... 157 Shawna Sando, University of Arizona, USA With rising and often unreasonable costs in the U.S. healthcare system, Americans are becoming more inclined to seek cheaper alternatives. In some cases, Americans do not have to search for such alternatives on their own because their employers are offering them incentives to receive care from a foreign institution. Employees can go abroad to countries, such as India, in order to receive medical services for prices that are at least half of what the procedure would cost in the U.S. This emerging market seems to be beneficial to all involved except U.S. healthcare providers; however, this outsourcing of healthcare services sends a powerful international message. It seems that the U.S. has a healthcare system that cannot adequately serve all economic classes of the American public. In contrast, though India has the proper facilities and professionals, there are concerns regarding malpractice litigation, postoperative care, and possible negative effects on the Indian public. Having given consideration to all affected constituencies, it seems that the
outsourcing of medical procedures is in the best interest of lower- and middle-class Americans as well as medical professionals in India. In reality, though medical tourism is receiving much attention, it will most likely not be a pressing concern for the American market in the near future. A widening discrepancy in the Indian public may, however, be cause for nearer concern. This new trend does foreshadow a push for more preventative changes in the business of U.S. healthcare, such as the development of information technology specific to the growing international healthcare market. Whereas, it will initially be beneficial to send patients abroad, with the evolution of technology, the latter ideal will instead be to have medical professionals abroad that care for patients located in the U.S. Chapter IX The Use of Outsourcing as a Business Strategy: A Case Study........................................................... 167 Ram B. Misra, Montclair State University, USA In this chapter, we discuss how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both the short-term tactical goals as well as the long-term strategic goals. We present a framework consisting of seven factors that should be used by companies using outsourcing as a business strategy. This framework was used to analyze the outsourcing practices used by this company. The framework includes the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. We also present the challenges of making these things happen, what worked well, and the lessons learned.
Section IV National and Societal Implications Chapter X Changing IT Skills: The Impact Of Sourcing Strategies On In-House Capability Requirements....................................................................................................................................... 180 Christine V. Bullen, Stevens Institute of Technology, USA Thomas Abraham, Kean University, USA Kevin Gallagher, Northern Kentucky University, USA Kate M. Kaiser, Marquette University, USA Judith Simon, University of Memphis, USA The increasingly global sourcing of IT work and other socio-economic trends are prompting fundamental changes in the availability of IT skills needed in both client and vendor organizations. This chapter analyzes the results of a survey conducted in 2005, in which IT executives were asked to describe the skills they felt were critical to keep in house now and in 2008. The top ten current skills included three in project management, five in business domain and three in technical. In 2008, the top five emerging skills are almost all business domain while the top five exiting skills are all technical. Our findings indicate that the critical skills to keep in-house are primarily client-facing skills, even when they are
technical. Findings indicate that IT professionals need to have a balance that demonstrates a foundation in the traditional “hard skills” and experience with “softer” business-oriented skills. Chapter XI New Trends in Global Offshore Outsourcing: A Comparative Assessment of India and China............................................................................................................................................. 203 Suresh Sharma, JS3 Global, LLC Yuanyuan Chen, JS3 Global, LLC With the rapid rise of globalization, the challenge of global outsourcing today is not “Why and what to outsource?” but “How to outsource?” The theme today is “Let us do it right the first time.” The barriers to outsourcing are companies’ own mind-sets, local regulations, and the robustness of their internal processes. The domain knowledge in many industries has gone fully global. Likewise, new product development and R&D must be global in order to compete in emerging economies and to tap into global talent to compete globally. Software development and IT outsourcing can be done from anywhere, virtually! The availability of mobile technology and superior digital infrastructure is giving way to “distributed IT,” making “homes” as the future nodes of outsourcing factories. China and India have emerged as the major leaders in this industry due to their capacity, talent pool, and lower cost structure. This chapter compares their strengths, challenges, and growth potential based on the authors’ own hands-on experience of doing outsourcing in these countries for the past 15 years. Chapter XII The Role of Prisons in Offshoring....................................................................................................... 215 Whitney Hollis, University of Arizona, USA Outsourcing and offshoring are popular (and often controversial) trends in American business, yet not all outsourcing is done in foreign countries; many jobs are being sent to prisons, where inmates can provide low-cost, locally based labor. This trend has extended from a role in manufacturing to white-collar jobs, like telemarketing. This chapter analyzes this type of outsourcing in terms of the costs and benefits for business and consumers, as well as the social implications.
Section V Collaboration and the 24-Hour Knowledge Factory Chapter XIII The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory................................................................................................................................................. 226 Satwik Seshasai, International Business Machines (IBM) Corp., USA Massachusetts Institute of Technology, USA Amar Gupta, University of Arizona, USA The term 24-Hour Knowledge Factory connotes a globally distributed work environment in which teammates work on a project around the clock. The 24-Hour Knowledge Factory is a special case of a
globally distributed team in which the different teams work on a sequential basis that has been clearly defined in advance. Whereas a manufactured item was the end product in the case of the factory which emerged as a consequence of the industrial revolution, knowledge-based services and knowledge-based products are the end deliverables in the case of the current information revolution; hence, the term 24Hour Knowledge Factory. Work can be decomposed by task style or by organizational style, and allows for greater specialization of workers. A case study from IBM details surprising differences between colocated and distributed teams, and leads to a future state analysis for organizations seeking to study or implement the 24-Hour Knowledge Factory. Chapter XIV Outsourcing and Multi-Party Business Collaborations Modeling....................................................... 250 Lai Xu, Utrecht University, The Netherlands To remain competitive, enterprises have to integrate their business processes with their customers, suppliers, and business partners. Increasing collaboration includes not only a global multi-national enterprise, but also an organization with its relationship to and business processes with its business partners. Standards and technologies permit business partners to exchange information, collaborate, and carry out business transactions in a pervasive Web environment. There is however still very limited research activity on modeling multi-party business collaboration underlying semantics. In this chapter, we demonstrate that an in-house business process has been gradually outsourced to third parties and analyze how task delegations cause commitments between multiple business parties. Finally, we provide process semantics for modeling multi-party collaborations. Chapter XV Hybrid Offshoring: Composite Personae and Evolving Collaboration Technologies......................... 270 Nathan Denny, University of Arizona, USA Shivram Mani, Yahoo! Inc., USA Ravi Sheshu Nadella, University of Arizona, USA Manish Swaminathan, University of Arizona, USA Jamie Samdal, University of Arizona, USA Inspired by round-the-clock manufacturing, the 24-Hour Knowledge Factory endeavors to transform the production of software and other intangibles into a process of continuous development. While the concept of offshore software development is well established, few enterprises are currently able to develop the same code artifacts around the clock. We discuss the benefits of applying the 24-Hour Knowledge Factory to software development. We also present a representative scenario highlighting the problems of asynchronous communication in current offshore software development practices. Further, we introduce the notion of composite persona as a potential collaboration model within the 24-Hour Knowledge Factory and explain its ability to mitigate problems arising from communicating across cultures, languages, and time zones. Finally, we present a suite of new collaboration tools and techniques that are being developed specifically for use by composite personae in the 24-Hour Knowledge Factory.
Chapter XVI Agile Software Processes for the 24-Hour Knowledge Factory Environment.................................... 287 Nathan Denny, University of Arizona, USA Igor Crk, University of Arizona, USA Ravi Sheshu Nadella, University of Arizona, USA The growing adoption of outsourcing and offshoring concepts is presenting new opportunities for distributed software development. Inspired by the paradigm of round-the-clock manufacturing, the concept of the 24-Hour Knowledge Factory (24HrKF) attempts to make similar transformations in the arena of IS: specifically to transform the production of software and allied intangibles to benefit from the notion of continuous development by establishing multiple collaborating sites at strategically selected locations around the globe. As the sun sets on one site, it rises on another site with the day’s work being handed off from the closing site to the opening site. In order to enable such hand offs to occur in an effective manner, new agile and distributed software processes are needed, as delineated in this chapter.
Section VI Adaptation Paradigms for Academia and Industry Chapter XVII Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum........................................................................................................................................... 303 William J. Tastle, University of Iceland, Iceland Ithaca College, USA Bruce A. White, Quinnipiac University, USA Ársaell Valfells, University of Iceland, Iceland Peter Shackleton, Victoria University, Australia Offshore outsourcing has been a growing phenomenon in recent years. Rarely will an IT professional pick up a trade publication or journal without some article relating to outsourcing or offshore outsourcing. This in turn raises the question for IS educators—what should we be doing to better prepare our graduates for a future where offshore outsourcing is a reality? This chapter looks at the following topics as they relate to IS curriculum matters for outsourcing: Offshore outsourcing and success factors, the skills needed to effective manage offshore outsourcing, a look at offshore outsourcing and the IS2002 model curriculum, suggested changes to IS2002 to incorporate offshore outsourcing education, and what skills from IS2002 are vital in preparing students for the future. Chapter XVIII Innovative Technological Paradigms for Corporate Offshoring.......................................................... 321 Tapasya Patki, University of Arizona, USA A. B. Patki, Department of Information Technology, India Internet technology has impelled us to develop faith in the modern practices of business, commerce, and trade. Offshoring has been viewed as a global phenomenon on the economic frontier. While new
technologies need to be framed, stopgap arrangements in the form of transient solutions to upgrade the current systems are also desired. Newer regulations and multi-jurisdictional compliance have profound impacts on the growth of outsourcing projects. The development of new technological solutions must challenge the myth that legislation and statutory practices are the only possible mechanisms to counter the unscrupulous activities in the context of outsourcing. A change in the outlook toward such methodologies is essential to shed away the technological inertia and latency. This chapter opens up discussion issues in the perspective of hardware and software requirements for efficient offshoring. The aim is to achieve higher precision, protection, and throughput by applying core-computing techniques to the existing practices of outsourcing. Chapter XIX Leveraging Knowledge Reuse and System Agility in the Outsourcing Era........................................ 342 Igor Crk, University of Arizona, USA Dane Sorensen, Raytheon Missile Systems, USA Amit Mitra, TCS Global Consulting Practice, USA Collaborative work groups that span multiple locations and time zones, or “follow the sun,” create a growing demand for creating new technologies and methodologies that enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. The hurdles faced by members of such virtual teams are in three key areas: differences in concepts and terminologies used by the different teams; differences in understanding the problem domain under consideration; and differences in training, knowledge, and skills that exist across the teams. These reasons provide some of the basis for the delineation of new architectural approaches that can normalize knowledge and provide reusable artifacts in a knowledge repository.
Compilation of References ............................................................................................................... 363 About the Contributors .................................................................................................................... 395 Index.................................................................................................................................................... 405
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Foreword Lester C. Thurow Jerome and Dorothy Lemelson professor of Management and Economics Former Dean MIT Sloan School of Management
The secret to higher GDP per person is working smarter, not harder. Two realities, a personal observation and what I learned as a professional economist, lead to this conclusion. As an economist working in Pakistan in the early 1970s, I saw Pakistani peasants working hard the way no American does. Yet they had per capita GDP just a fraction of that in the U.S. Second reality: economic historians believe that as late as 1700, there was no significant difference between countries in terms of their per capita GDPs. The richest country was close to being the poorest country. Most people, 98% or more, were farmers and everyone did their farming in the same way: human or animal power, seeds collected from the last crop, and human or animal manure. Today the income ratios between the richest countries and the poorest are at least 120 to 1. In between these two realities, three industrial revolutions, opportunities to work smarter, occurred. The steam revolution occurred in the late 1700s; in the late 1900s, the electrification revolution and the R&D revolution occurred. Today, we are in the midst of the third industrial revolution: new technologies, globalization, and the end of communism or socialism are producing a new economy. This is a book about globalization and the emergence of the 24-Hour Knowledge Factory. Here the opportunity is not to make the thing cheaper by outsourcing (although that might happen), but to make things much faster by taking advantage of differences in the world’s time zones to do one’s R&D or production around the world so that the time to market, the time it takes to reach the consumer is much shorter than it was. In this global economy, the question is not what “can be” moved abroad (everything “can” be moved abroad), but what “should” be moved abroad. One can judge a developing country is good or bad at taking advantage of the third industrial revolution, by what fraction of foreign direct investment (FDI) it gets. This is a number that includes the developed world’s investments in commodities such as oil. China is the best country in terms of attracting FDI. It gets $60 billon out of a total of $100 billion although it has few investments in commodities. It has the best educated population in the developing world. In a few years, it will have more university educated engineers than the U.S. Further, it can easily move 500 million people out of farming and into industry. India, another rapidly growing developing county with even lower wages, by contrast, gets only a few billion in FDI. Yet it still dominates outsourcing in services because it has millions of educated Indians who speak English and work for very low wages. More than 80% of Americans work in service companies. Eventually almost everyone will work in services. Services are what I call a garbage category. One carefully defines farming, manufacturing, and mining. Everything else, obtained by subtraction, is a service. India may get very little FDI, but it is in a growth sector. Countries can prevent FDI in themselves; Central Africa has, but to stop FDI is to stop development.
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Central Africa has almost no contact with the outside world. Other than commodities, it gets almost no FDI. It has few exports except raw materials. Not surprisingly, it is one of the few places in the world that has a falling per capita GDP. Central Africa has gone from being an area that had a per capita income above that of Asia to an area that has a per capita income below that of Asia. As Central Africa demonstrates, to stop globalization in one’s own country is to stop economic development in one’s own country. The attempt to stop globalization on a world scale (the death of the Doha WTO negotiations) does no better. By wishing to protect its farmers, the wealthy world gives up its chances to get a global system of intellectual rights protection (IPR) protection from the developing world. We kill the new economy (new firms with new products protected by IPR) to protect the old economy (farms). The question is not what “can be” moved abroad, but what “should be” moved abroad. In the end, the question is not who is willing to move what abroad, but who is willing to innovate. A recent outside study involving the institution where I teach, MIT, illustrates the importance of innovation. MIT graduates have founded 4,000 firms that provide 1.1 million new jobs. And this study looks just at American firms. It does not count firms such as MITSUI in Japan (founded by an MIT graduate) that have created many more. While it is fashionable to talk about the new economy, we still live in an economy dominated by the old. If one looks at the Fortune Global 500, 9 of the 10 largest companies depend on oil (oil and auto companies). The oil companies look for and produce oil much the way they did 100 years ago, and the auto companies make cars (the assembly lines) and sell cars much the way they did 80 yeas ago. The one non-oil company in the top ten is “Wal-Mart.” But it also sells goods much as department stores did 80 years ago. The old economy is very much alive and well. Are you in the old economy or the new economy? This book helps you to find out. It is also fashionable to talk about listening to the consumer. While this advice is often right, it is not always right. Think of the cell phone! It was invented by the old AT&T: yet it sold the rights to the cell phone cheap because it thought that the cell phone had no future. The consumer cannot tell you whether he or she likes something that has not yet been invented or used. Products have to be introduced and tried before the consumer knows whether he or she does or does not like them. This book helps one to figure out whether one should create a new product or service, in such situations, by optimizing the R&D and production processes using resources in multiple countries. The globalized economy produces inequality. The income of the rich goes up vis-a-vis that of the middle class. This is exactly what economic theory predicts. The factor abundant in the world economy falls in wage, and the factor scarce in the world economy rises. In the global economy, middle-skill people are much more abundant than high-skill people. As such, the wages of the mid-skilled persons fall and the wages of the high-skilled individuals rise. Since the rich (the high skilled) also own capital (the factor in the world economy that is in scariest supply), the returns to capital rise and the rich gain doubly. Their wages rise, and their return to capital also rises. When one adds factors such as health care (part of wages as seen from the perspective of the employer) to wages, the middle class has to take a big cut in wages to get down to world levels. The auto parts maker, Delphi, has told its bankruptcy judge that it needs a cut in wages from $66 per hour to $16 per hour in order to be competitive. Countries, as well as companies, have to learn some new lessons in the new global economy. Countries have to learn that in the world of the 24-Hour Knowledge Factory, they can collect only two taxes, the value added tax (VAT) and the personal income tax. They know where a person lives so they can collect personal income taxes. They also must rebate taxes on exports to keep their products competitive in world markets. At the same time, they must collect taxes to help pay the cost of government programs. The answer is a VAT tax on imports. German products may be made in China, but German taxes must be paid when they are sold in Germany.
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Countries that realize this reality quickly win (think of Ireland) and those who recognize this reality late (think of England) lose. In the late 20th century and for the first time in history, Ireland has a per capita GDP above that of England. And it got there quickly (since the early 1970s) by changing its tax system, specifically by getting rid of the corporate income tax. Foreign corporations, mostly American, made big investments in Ireland (they produce 80% of the Irish GDP) to get the low taxes and to service the European market. If England were to now adopt the Irish tax system, few of these firms would move to the UK. England loses! Finding your way around the global economy requires a guide. It cannot be done by instinct (another term for knowledge gained from past experience or history). The 24-Hour Knowledge Factory is such a guide for the era of globalization and outsourcing!
Lester Thurow has been a professor of management and economics at MIT for more than 30 years, beginning in 1968. He was dean of the MIT Sloan School of Management from 1987 until 1993. A 1960 graduate of Williams College, Thurow received his MA in 1962 on a Rhodes Scholarship at Balliol College (Oxford), and his PhD in Economics from Harvard University in 1964. He taught at Harvard from 1966 to 1968 after a term as a staff economist on President Lyndon Johnson’s Council of Economic Advisers.His formal academic work focuses on globalization, economic instability, and the distribution of income and wealth. He writes for the general public in a number of American and international newspapers. He has been featured twice on 60 Minutes and has been on the cover of Atlantic magazine. A prolific writer, Thurow is the author of several books, three of them New York Times best sellers, aimed at a general audience. Head to Head: The Coming Economic Battle Among Japan, Europe and America, 1992, looked at the nature of the global economic competition. It was on the New York Times bestseller list for more than 6 months. His 1996 book, The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World, looked at the forces changing the structure of the world economy. And his latest book, Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy analyzes how the new knowledge-based economy works. In the past, Dr. Thurow has served on the Editorial Board of the New York Times, as a contributing editor for Newsweek, and as a member of Time magazine’s Board of Economists. He is a fellow of the American Academy of Arts and Sciences, and served as vice president of the American Economics Association in 1993.
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Preface
Overview Outsourcing refers to the phenomenon of having someone else do the work for you. Offshoring refers to the situation when such work is performed in a different country. If you go out to a restaurant, this is outsourcing; somebody else spent the time and energy to provide the meal to you. If you call a company for a loan and get connected to an operator in a call center located in another country, then this is a case of offshoring. With the advent of high bandwidth telecommunications links and the diminishing costs of computers and telecommunications infrastructure, a growing number of companies are opting to perform increasing types of professional services in foreign countries. To some, this represents an unprecedented opportunity to reduce costs and to nucleate new strategic relationships. To others, the new phenomenon represents a major threat to current prosperity and levels of employment. Outsourcing, especially offshoring, of professional services is receiving increasing attention at all levels: business, technical, political, strategic, and economic. At the strategic level, we need to explore new models of operation, and delineate the optimal model for adapting to the changing operating environments in which business partners work together in a geographically dispersed environment. At the organizational level, we must research new relationships between suppliers and buyers. At the technical level, we need to analyze new paradigms for effective collaboration that can mitigate the current overheads involved in geographically dispersed work centers. At the economic level, we need to conduct objective analysis of costs and benefits that accrue to the individual worker, to the host environment, to the sponsoring company, to the operating company, and to the concerned states and countries.
Relevance of Topic in Today’s World In 1980, the author of this book was completing a master’s degree in management and a doctorate in computer science, both in parallel. Potential employers were interested in the former degree or the latter degree, but not both. During an interview with a very large international banking company in New York, he mooted the idea of that company hiring him to do software development activities in India. The country vice president who was interviewing the author reacted, “This is the most ridiculous idea that I have heard in my life.” Among the many reasons that he gave for this opinion, the vice president said, “I thought that you were completing a doctorate in computer science. You should know that when programmers are located near the users in New York, they have great difficulty in understanding what the users want; increasing the separation by thousands of miles will greatly aggravate the problems…. and the difference in time makes your proposition even more unrealistic.” Despite such strong initial reservations, this multinational company holds the honor of being the first financial organization to establish software development facilities in Asia!
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Now there are numerous examples of offshoring of services. The innovations in communications technology, the advent of voice-over-IP technology, and the drastic reductions in prices for such technologies are all facilitating the process of offshoring. Information technologies provide the foundation for offshoring of professional activities. Conversely, offshoring of projects is catalyzing new information technologies and methodologies. By conducting projects on a global basis, one can reduce costs as well as gain access to greater numbers of qualified and trained professionals. The outsourcing of professional services across corporate and national boundaries became feasible by rapid advances in several technologies. In particular, Internet technology is the pivotal technology that allows sponsor organizations in one country to exchange information synchronously or asynchronously with host organizations in other countries at negligible costs. Further, Internet technology serves as the backbone for Internet telephony, which links corporate personnel to customers and clients, located in other continents, via telephone. The rapid adoption of offshoring concepts has been catalyzed by four major unrelated factors. First is the growing disparity of wages for similar work across countries. When such imbalance took place in previous centuries, individuals would move from lower-wage countries to higher-wage countries. The wages in the former set of countries would gradually increase, and the wages in the latter set of countries would gradually decrease. The increasing prevalence of barriers to immigration and the growing requirement for work visas have eroded the traditional means for wage equalization, creating significant disparity in wages that, in turn, encourages offshoring to take place. The second major reason is entirely incidental. In year 1999, companies in many countries were scrambling to take care of the Y2K problem. This was an endeavor on which no extensions in time were possible; all work had to be completed by December 31, 1999. This inflexibility in the time schedule forced countries and companies to become more flexible in terms of utilizing foreign workers. Two mechanisms were adopted: the immigration barriers were temporarily lowered to allow foreign workers to come in and help, on a temporary basis; and the offshoring of applications, including ones previously deemed to be too critical, for being made Y2K compliant by a company located in another country. When the Y2K work was successfully completed in time, the sponsor companies felt that the new work models could be used to address other types of work as well. The third key reason is related to the European Economic Community making the critical decision to move from multiple national currencies to the Euro. This conversion was unprecedented, both in terms of the number of countries involved and the very small time mandated for the change. Companies, government agencies, and other organizations had to make transformations very fast in order to continue with their respective operations. In essence, this had the same net effect as the one described in the previous paragraph. The fourth major factor was the concerted effort made by several countries, mostly developed countries, during the nineties to eliminate or drastically reduce the tariff and non-tariff barriers to the movement of computer and communications equipment across national boundaries. The availability of inexpensive computer hardware from foreign countries had the initial impact of decimating the domestic industries of the importing countries. However, over time, this same hardware has enabled such countries to become more competitive in terms of producing software and other knowledge-based services for the global market, including the countries that produced the concerned hardware in the first place. This in turn has led to a round of introspection in developed countries. In the 2004 United States Presidential election, outsourcing was a popular and controversial issue. Focusing on the consequences for the domestic workforce, companies were criticized for offshore outsourcing and the implications of such arrangements for taxes and the transfer of labor to external entities. Based on earlier experience, offshore outsourcing is likely to witness greater attention during future election years.
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Offshoring was initially motivated by considerations of attaining lower costs. Now, offshoring operations are evolving from short term “tactical” relationships into more mature, long-term “strategic” partnerships. These may evolve to become “24-Hour Knowledge Factories” that will involve three or more centers around the world collaborating closely in a continuous cyclic manner. As the sun sets on one collaborating work center, that center turns off. At the same time, the sun rises on the next work center; the latter center turns on and continues the work of the previous center. Just as the Industrial Revolution of the 18th and 19th centuries led to many major innovations, the 24-Hour Knowledge Factory holds the potential to shape the future of business, culture, and even nations.
Organization of Sections and Chapters This book is organized as a set of six sections in order to address the full breadth of issues that characterize outsourcing. The headings of each section, as well as the contents of each section, are summarized in the following paragraphs.
Section I: Executive Highlight This section delineates the major theme of this book: while the notion of offshoring was initially embraced to benefit from lower costs of labor, the motivation for offshoring will be increasingly driven by strategic considerations. In the sole chapter that comprises this section, Gupta, Seshasai, Mukherji, and Ganguly highlight that the nature of offshoring is evolving from an emphasis on savings in cost of labor to new, more complex, and longer-lasting strategic partnerships. They proceed to develop an analytical model that demonstrates the superior returns on strategic offshore partnerships as compared to the typical low-cost service centers that are currently prevalent. In this context, the authors introduce the 24-Hour Knowledge Factory, a new multinational organizational structure that better exploits geographic distribution for mutual benefit of the participating parties. Finally, a case study provides insights into the operations of a globally distributed work environment.
Section II: Foundations and Frameworks This section of the book focuses on the forces that govern the offshoring arena and the new paradigms that are emerging to help understand the dynamics of the evolving trends. In the first chapter of this section, Gupta, Gantz, Sreecharana, and Kreyling cover four issues. First, they examine evolving international conventions to determine whether countries, especially developed countries, can take any steps to inhibit offshoring with the objective of protecting jobs in their respective countries. Second, it looks at statistics from independent sources to see if outsourcing exceeds insourcing, or vice versa, in the case of the US. Third, it looks at trends in outsourcing in the legal arena. Fourth, it looks at the intellectual property aspects of outsourcing and presents a long-term vision on how this difficult issue is likely to be addressed in the long-term. In the second chapter, Raisinghani and his co-authors note that the increase in offshore operations is leading to negative experiences and unpredicted results at a number of companies. Their analysis focuses on operational and strategic risks and success factors. Their research reaffirms the importance of risk identification and the formulation of strategic plans that include preventive, detective, and corrective control methods of implementation and evaluation.
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In the third chapter, Yadav and Gupta apply a paradigmatic and methodological approach to analyze the academic literature on information systems (IS) outsourcing and business process (BP) outsourcing. First, they examine the status of outsourcing research over 10 years (1995 to 2005) in eight leading academic journals, with the objective of comparing the current research trends with earlier research directions. Second, they analyze the research paradigms delineated in these research papers using an Operations Research Paradigm framework. Third, they compare and contrast the outsourcing research work published in three leading European Journals with the work published in three leading American journals. In the fourth and concluding chapter of this section, Benamati and Rajkumar describe their model of Application Development Outsourcing Acceptance, which is based on the technology acceptance model (TAM). The model is based on the contention that the perceived usefulness and ease of use of outsourcing mediate the effects of the external environment, prior outsourcing relationships, and risks on decision-makers’ attitudes toward application development outsourcing. Of the 3,000 decision makers who were contacted, 160 respondents provided data to confirm the applicability of TAM and the influences of these external variables. Three subdimensions of risk, project management, relationship, and employee risk, emerged.
Section III: Sectoral Applications and Case Studies This section of the book focuses on how offshoring is leading to new trends in different sectors of the economy. The growth of offshoring is impacting major sectors and it is possible to consider only a subset of them. The sectors chosen for this section were selected based on the unique characteristics of these sectors. Several of these sectors have not been considered in any book that has been published so far. In the first chapter of this section, Gupta, Goyal, Joiner, and Saini present a vision of how the healthcare industry will be transformed by advances in offshoring and information resource management. After analyzing several healthcare scenarios in detail, the authors conclude that healthcare will increasingly use a portfolio approach comprised of three closely coordinated components seamlessly interwoven together: healthcare tasks performed by humans on-site; healthcare tasks performed by humans off-site, including tasks performed in other countries; and healthcare tasks performed by computers without direct human involvement. Organizations that impede or otherwise restrict the use of this multifaceted approach will see higher healthcare costs, and will gradually become less competitive in the global marketplace, as is happening with non-adapting organizations in several other sectors of the economy. Finally, this chapter deals with intellectual property and legal aspects related to the three-pronged healthcare services paradigm. In the second chapter, Sando contends that with rising and often unreasonable costs associated with the U.S. healthcare system, Americans are becoming more inclined to seek cheaper alternatives. In some cases, their employers are offering them incentives to receive medical care at foreign institutions. Individuals can go abroad to countries and can receive medical services at prices that are half of what the procedure would cost in the U.S. After considering all affected constituencies, she concludes that the outsourcing of medical procedures is in the interest of lower- and middle-class Americans. This new trend foreshadows a push for changes in the business of U.S. healthcare. While in the initial phase, the patients need to travel abroad, the evolution of newer telesurgery concepts will enable medical professionals located abroad to perform medical procedures on patients located in the U.S. In the third chapter, Schwender and Leet examine the benefits of offshore outsourcing processes in the global entertainment and media industry, both to reduce costs as well as to better manage the quality
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and the time-to-market of entertainment industry products, such as films. Citing the rise of digitalization and faster global connectivity, they assert that global accessibility and advances in IT technology are the driving forces for the growing reliance on Asia-Pacific’s burgeoning media production industry. This chapter shows that increasing subsets of the media and the entertainment industry will be offshored over time, and that such offshoring will be in multiple directions in terms of both countries and companies. In the fourth and concluding chapter of this section, Misra describes the use of outsourcing as a business strategy at a leading telecommunications software development company. He presents a framework consisting of seven factors that can be used by companies that intend to utilize outsourcing as a business strategy. This framework includes the driving forces for offshore outsourcing, as well as the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure). He also presents details of what worked well, what did not, and the lessons learned.
Section IV: National and Societal Implications This section of the book focuses on the impact that offshoring is having, and will have, on nations and societies. It also examines the growing importance of India and China. Partly with the objective of decreasing the costs of U.S. labor, some states in the U.S. are beginning to use prison labor to perform call center work and allied tasks. This trend is also analyzed in this section of the book. Job loss is a pivotal issue facing organizations that are engaged in offshoring. Many people view jobs sent abroad as detrimental to the domestic economy, a programmer in India replaces a programmer in the U.S. However, these assumptions may not be true, according to experts in the field. In the first chapter of this section, Bullen, Abraham, Gallagher, Kaiser, and Simon present an analysis of a survey of IT executives. The authors find that domestic jobs will not be lost, but will experience a movement further up the value chain. The authors stress the perceived growing importance of client-facing skills and effective project management. From this analysis, the authors recommend a course of action for mid-level workers, as well as a reform of domestic IT education policies and curriculum. The second chapter provides a comparative assessment of India and China. Sharma and Chen contend that the challenge of the global outsourcing today is not “Why and what to outsource?” but “How to outsource?”. The current theme is “Let us do it right the first time.” The availability of mobile technology and superior digital infrastructure is giving way to “distributed IT,” making “homes” as the future nodes of outsourcing factories. The barriers to outsourcing are companies’ own mind-sets, local regulations, and the lack of robustness of their internal processes. The authors compare the relative strengths, challenges, and growth potential of China and India, based on their hands-on experience of offshoring to these countries over the past 15 years. The third and concluding chapter of this section examines the role and impact of prisons in offshoring. After visiting a call center at a prison in Arizona and talking with several concerned persons, Hollis observes that the outsourcing phenomenon should not be viewed in the context of foreign countries only; many jobs are being sent to prisons in the U.S., where inmates can provide low-cost, locally based labor. While prison labor has been utilized in manufacturing activities in the past, the new trend is to extend this notion to white-collar jobs, like telemarketing. This chapter analyzes this new type of outsourcing in terms of the costs and benefits for business and consumers, as well as the underlying social implications.
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Section V: Collaboration and the 24-Hour Knowledge Factory This section of the book attempts to delineate the end scenario of the ongoing advances in technologies and approaches to offshoring. Today, offshoring is viewed as an “us” (in the U.S.) vs. “they” (in lowcost countries) issue. Over time, we will individuals from multiple countries collaborating to create a “win-win” situation. The steady state will be characterized by a hybrid offshoring model that involves multiple sets of workers, based in multiple continents. Such workers could be employed in a sequential manner to create the appearance of non-stop work, as in the case of the 24-Hour Knowledge Factory paradigm. The latter concept, akin to the concept of shifts in the manufacturing industry, can significantly reduce development time and costs. In the first chapter of this section, Seshasai and Gupta introduce the 24-Hour Knowledge Factory as a global work environment where work is passed between individuals in other time zones on a daily basis. The evolution of this model is described from its foundation in manufacturing to an example implementation in software development. A pilot study, conducted at IBM, utilized a set of advanced tools for gathering social and technical data from repositories as diverse as source control systems and team meeting minutes. This pilot study provides good insights into how the 24-Hour Knowledge Factory concept will operate in a commercial setting. The chapter concludes with a set of recommendations for leveraging information resources to achieve the ideal 24-Hour Knowledge Factory. In the second chapter, Xu emphasizes that in order to be competitive, enterprises must integrate their business processes with those of their customers, suppliers, and business partners. However, very limited research activity has occurred so far on modeling multiparty business collaboration underlying semantics. To address this void, Xu introduces a semantic modeling language that can describe the structure, commitments, and behavior of multiple collaborating parties. She describes this modeling language by references to speech act theory, and includes an interesting example of how it can be applied within a business, as it gradually outsources some of its functions. In the third and fourth chapters, Denny and his coauthors provide a blueprint of the final stable-state scenario for offshoring. This scenario will involve both onshoring and offshoring, and can therefore be termed as hybrid offshoring. The 24-Hour Knowledge Factory will use three or more strategically located centers to transform the production of software and other intangibles into a process of continuous development. In the third chapter, the authors introduce the notion of composite persona as a potential collaboration model, and highlight its capabilities to mitigate problems arising from communicating across cultures, languages, and time zones. In the fourth chapter, the authors look at the issues involved when work-in-progress is handed off from one site to another. In order to enable such hand-offs to occur in an effective manner, new agile and distributed software processes are needed, as delineated in this concluding chapter of this section.
Section VI: Adaptation Paradigms for Academia and Industry This section of the book looks at options that academia and industry can and should take to address the realities of a global economy based on extensive offshoring. In particular, the first chapter of this section looks at options for the academic arena, and the concluding chapter contains pragmatic suggestions on how industry can create agile outsourcing structures, leverage available knowledge on a repetitive and incremental basis, and nurture the capability to move from one host environment to another, as and when needed. In the first chapter of this section, Tastle, White, Valfells, and Shackleton propose changes to the current IS2002 curriculum to incorporate offshore outsourcing education. They identify four options
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for successfully integrating offshore outsourcing education in the current curriculum. The authors argue that such education will benefit small- or medium-sized companies too, due to the growing complexity of contract law, contract management, and negotiation in the evolving outsourcing environment. In the second chapter, Patki and Patki profess that technical solutions should be sought for integration with current systems and practices. They present a broad collection of problems that they frame in the context of fuzzy logic and rough set theory. Based on the theoretical framework, they present insights into how these methods of reasoning can be utilized to make outsourcing more reliable and secure. In the third and concluding chapter, Crk, Sorensen, and Mitra consider collaborative work groups that span multiple locations and time zones, in terms of the underlying hurdles such as differences in concepts and terminologies between teams; difficulties in understanding the common problem under consideration; and differences in training, knowledge, and skills between teams. They propose an architectural approach for normalizing knowledge and for providing reusable artifacts in a knowledge repository. A framework for knowledge object management is also presented and compared to existing common frameworks showing that that the proposed framework represents a superset of existing frameworks and facilitates greater expressiveness and agility.
Contribution to Subject Matter In the spring of 2004, the first course on outsourcing of professional activities was taught at the MIT Sloan School of Management by the author and Professor Lester Thurow, with support from four graduate teaching assistants. Subsequently, courses of this topic have been introduced at several other universities. Faced with the shortage of independent research on economic aspects of offshoring and a general paucity of literature on professional outsourcing activities, the author and one of his teaching assistants (Satwik Seshasai) wrote a proposal for a special issue of ACM Transactions on Internet Technology that was devoted to “The Internet and Outsourcing”. After the proposal was accepted, the author found that while the technical aspects could be discussed in the special issue of ACM Transactions on Internet Technology, additional mechanisms were needed to provide coverage of business, economic, policy, and other aspects of outsourcing and offshoring. Accordingly, additional special issues and sections of several journals have been published, all devoted to offshoring. Offshore outsourcing raises interesting issues, from an academic perspective, at multiple dimensions. Alternative models of operation and adaptation to a changing global business environment are necessary at the strategic level. The organizational level holds different challenges as new relationships between buyers and suppliers are defined. At the technical level, the overheads involved in cooperating between geographically dispersed work centers have to be mitigated with novel collaboration paradigms. At the economic level, one needs to conduct an objective analysis of costs and benefits accrued to each worker, host environment, operating company, and states or countries involved in the effort. This book includes a very select group of manuscripts on diverse aspects of offshoring written by individuals with varied backgrounds. Each of them sees offshoring from a different vantage point. Initially, authors were invited to submit manuscripts based on their own feelings. This resulted in some key aspects of offshoring receiving great attention, and others getting neglected. In areas that were covered by multiple manuscripts, a multi-tier process was utilized to select the best subset and to further enhance the quality of papers in that particular subset. In the case of topics that were not adequately addressed in manuscripts submitted for consideration, personal invitations were sent to relevant domain experts to write on very specific issues. Most of such authors responded positively to the invitation. The material provided by such authors has been included in this book, and has not been published elsewhere.
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This book reflects the culmination of work performed over a 4-year period. It presents both the pros and cons of offshoring, provides multiple frameworks and paradigms, and encourages the reader to conduct a customized analysis on what is appropriate and optimal in a given situation. It also projects that the “us” vs. “they” syndrome will be gradually replaced by hybrid offshoring models that will involve close collaboration among workers in different countries and that will provide mutual benefits to the concerned individuals, organizations, and other entities. In particular, just as the industrial revolution had a major and lasting impact on nations, the 24-Hour Knowledge Factory model will lead to a similar restructuring of the global work environment. Amar Gupta University of Arizona
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Acknowledgment
Nearly 100 persons have contributed in some form to this book. Many of the authors of chapters in this book served as reviewers of manuscripts submitted by their peers. The list of additional reviewers includes the following experts: Manish Agrawal (University of South Florida) Kirk Arnett (Mississippi State University) Ravi Aron (University of Southern California) Shoey Au (State University of New York Upstate Medical University) Elisa Bertino (Purdue University) Subrata Chakrabarty (Mays Business School, Texas A&M University) Peter Chen (Louisiana State University) Rafiq Dossani (Stanford University) Patrick Fan (Virginia Polytechnic Institute) Mark Gaynor (Boston University) Heiko Gewald (Johann Wolfgang Goethe-Universität) Mukul Gupta (University of Texas, San Antonio) Shane Greenstein (Northwestern University) Lorin Hitt (University of Pennsylvania) Jeevan Jaisingh (Hong Kong University of Science and Technology) Arjun Kalyanpur (Teleradiology Solutions) Elizabeth A. Krupinski (University of Arizona) Stephen Lane (Infosys) Moustapha Lemine (IBM) Chuck Litecky (Southern Illinois University) Motiwalla Luvai (University of Massachusetts Lowell) Harvey Meislin (University of Arizona) Steve Moulton (Boston University) Benson S. Munger (University of Arizona) Sham Mysore (IBM Corporation) S. P. Raj (Cornell University) H. R. Rao (SUNY Buffalo) Indrakshi Ray (Colorado State University) Robert Rieger (University of Arizona) Vinayak Sambargi (University of Arizona) Ramesh Sankaranarayanan (University of Connecticut)
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Surendra Sarnikar (Dakota State University) Mohan Sawhney (Northwestern University) Shu Schiller (Wright State University) E. Sridharan (University of Pennsylvania) N. Venkatraman (Boston University) Phil Verghis (The Verghis Group) Dwayne Whitten (Texas A&M University) Gio Wiederhold (Stanford University) Jack Woodburn (University of Arizona) Li Xiong (Emory University) Wei Yue (University of Texas, Dallas) I am indebted to all of the above individuals for their time and effort. I also thank David Smith and several others who assisted me in the overall endeavor between 2004 and 2008. Work on this book was performed by me at the University of Arizona and at MIT. I thank both these educational institutions for facilitating my professional endeavors. Finally, I am indebted to nearly a dozen individuals at IGI Publishing for their continuing support of my publishing activities, both in terms of books and special issues of journals. Amar Gupta University of Arizona
Section I
Executive Highlight
Chapter I
Offshoring:
The Transition from Economic Drivers Toward Strategic Global Partnership and the 24-Hour Knowledge Factory Amar Gupta University of Arizona, USA Satwik Seshasai International Business Machines (IBM) Corp., USA Massachusettes Institute of Technology, USA Sourav Mukherji The Indian Institute of Management, Bangalore Auroop Ganguly Oak Ridge National Laboratory, USA
Abstract The changing economic and labor conditions have motivated firms to outsource professional services activities to skilled personnel in less expensive labor markets. This offshoring phenomenon is studied from a political, economic, technological and strategic perspective. Next, an analytical model is developed for achieving strategic advantage from offshoring based on global partnerships. The model studies the impact of offshoring with respect to the complexity and strategic nature of the tasks and presents a decision strategy for obtaining value through offshoring of increasingly complex tasks. The result is an integrated “24-Hour Knowledge Factory” that is based on a sustainable global model rather than a short term fiscal model. This 24-hour paradigm embodies the shift-style workforce that evolved for the manufacturing sector during the Industrial Revolution and relies on a set of critical success factors in the current environment. A case example is provided from IBM to illustrate these underlying critical success factors.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Offshoring
PROLOGUE The idea of Citibank developing software in India makes no sense at all. Software needs to be developed by people who can meet frequently with the persons who will use the software, so that frequent interaction can occur among the concerned persons at all stages: prior to development, during development, and after development. Even if we assume that such interaction could occur without frequent face-to-face meetings (and I don’t agree with this at all), the time difference between India and the U.S. will make it impossible for the concerned persons to talk by phone. Further, Citibank has virtually no presence in India, and doing business in India is very difficult; so if computer software has to be developed in Asia, we would probably do it in the Philippines where we have significant business presence and there are trained programmers who can interact well in India. In the context of our banking business, the cost on computers is very small. We are not looking for reductions in cost; we are looking for ways to expand our banking business. The previous opinion was conveyed by the then vice president of Citibank, Korea, in a meeting at the corporate headquarters of Citibank in early 1980s to one of the authors (Gupta) of this chapter. At that time, the latter was completing his MBA at MIT Sloan School and his doctorate in computer science. Based on his prior experience of working in India, he was trying to convince multinational companies about establishing new business endeavors in non-traditional host environments. If U.S. is the ideal place to produce certain kinds of goods and Japan is the right place for others, then India should be a good place to develop software on the basis of its core competency of having inexpensive, highly educated, English-speaking programmers. After the previous interaction with Citibank in New York, the concerned author met with the top executives of Citibank in India and the idea progressed further. While the particular author opted not to join Citibank as an employee,
the idea eventually blossomed into Citibank Overseas Software Limited.
CURRENT SITUATION With a growing labor market abroad and a challenging economic situation in U.S. and several other developed countries, large and small firms are making the push to outsource professional services to highly skilled personnel in less expensive labor markets abroad. A Nasscom-McKinsey study cited a 34% increase in Indian software and services export from 2004 to 2005, from $12.8 billion to $17.2 billion (Nasscom-McKinsey, 2005). This study states that by 2010, the U.S. IT and BPO offshoring market will be $55 billion. The current situation of reduction in costs vs. loss of jobs, at least in the short-run, bears some similarity to the dilemma faced by the automotive industry in the early eighties when some of the parts began to be manufactured in lower cost countries such as Mexico. At the time, some observers perceived that too many U.S. jobs were being sent offshore, and that the impact to the U.S. economy would certainly be negative. However, a detailed analysis of that situation highlighted the danger of adopting a restrictive policy. This analysis revealed that increasing global competition required the United States automobile companies to outsource manufacturing to a certain degree, or to risk losing the world market to other countries that could produce cars cheaper and better. As Lester Thurow puts it: “There were only two long-term viable alternatives: either half the car is produced in Detroit and the other half in Mexico, or the whole car is produced in Japan. By attempting to use legislative measures to tilt the balance in favor of Detroit over Mexico, one would in fact be tilting the balance in favor of Japan (Thurow, 2003).” The subsequent events have validated this assertion and the efficacy of the hybrid model.
Offshoring
Professional services, especially IT services such as software development and technical support, are at a similar stage, with some constituencies of the society using cost and time considerations to encourage outsourcing while other segments of the society applying pressure to maintain jobs within the U.S. Reports from leading industry groups on offshoring contain a base assumption that offshoring is a cost-driven activity. A 2006 Association of Computing Machinery (ACM) report describes opportunities for nations to benefit from offshoring due to comparative advantage but does not discuss the potential of a global workforce (Asprey, Mayadas, & Vardi, 2006). The report does describe the opportunities for all nations to benefit due to economic theories of comparative advantage, however it does not discuss the opportunity to utilize a globally distributed workforce to transform the dynamic within which offshoring is conducted. Similar reports from the Institute of Electrical and Electronics Engineers (IEEE) and the National Society of Professional Engineers (NSPE) also describe offshoring in the context of cost-savings and advocate offshoring only when talent is not available in the U.S. as well as training programs to improve talent in the U.S. (IEEE, 2004). Of the approximately $1.45-$1.47 of value derived from every dollar spent offshore, U.S. firms receive $1.12-$1.14, while foreign firms receive only 33 cents of the value (McKinsey, 2003). Further, if income taxes paid by H1-B visa holders, and software and service imports by India are considered, outsourcing provides an aggregate benefit to the U.S. economy of $16.8 billion (Endleman, 2003). Another factor to be considered is that the average age of the U.S. working population is declining, and the U.S. Census figures indicate that the U.S. will require an additional 15.6 million workers to maintain the current working population in 2015 (Economic Times, 2003). The 24-Hour Knowledge Factory concept described at the end of this chapter broadens the
view of offshoring from a cost-savings exercise to a strategic optimization of globally distributed workforce. We describe a framework for transforming to a strategic global partnership and employing a 24-hour model of continuous work on knowledge-based deliverables (Seshasai, Gupta, & Kumar, 2005; Gupta, 2007).
POLITICAL PERSPECTIVE In November 2003, Governor Joe Kernan of Indiana canceled a $15.2 million contract with Tata America International Corp., a New Yorkbased subsidiary of Tata Consultancy Services (TCS). The Tata entity had won the contract over competing bids from Accenture LLP and Deloitte Consulting LP; its own proposal was $8.1 million to $23.3 million less than those of its competitors. The late Governor Frank O’Bannon had approved the contract before his death in September 2003. Up to 65 contract employees were stipulated to work alongside 18 state workers. All work was to be done at the Indiana Government Center, but the selected vendor was free to bring in additional workers from anywhere and pay them as it deemed fit. No Indiana-based companies had submitted proposals. Governor Kernan stressed that his decision to cancel the contract did not reflect on the ability of TCS to complete the job or any other shortcomings. Stuart Anderson of the National Foundation for American Policy and Cesar V. Conda, former domestic policy adviser for Vice President Cheney, highlight the fact that the impact of this reversal on Indiana taxpayers will be very significant (Anderson & Conda, 2003). In this case, the next lowest bidder was $8.1 million more than Tata’s bid. Since the contract involved about 65 employees and since TCS was obligated to retain the existing Indiana workers, choosing a U.S. firm would impact a maximum of about 50 jobs. Assuming the extreme scenario that all these 50
Offshoring
jobs would now go to residents of Indiana, this still implies that the taxpayers of Indiana will now bear a cost $162,500 per new employee-a cost that most taxpayers would probably be unwilling to pay. Furthermore, as Anderson and Conda point out, by limiting the bidding to instate contractors, policy-makers are ignoring the economic principle of comparative advantage, and increasing the cost of future contracts since there will be fewer competitors. Contrast this with a parallel development in the city of Springfield, Massachusetts. Its mayor decided that all drugs for city employees would henceforth be bought in Canada where the prevailing prices are between one-fifth to one-half of the comparable prices in the U.S. This would save the city millions of dollars each year. This aspect acquires special importance under the current economic conditions when many state and local governments are facing significant financial problems. Bills proposed over the recent years at the federal and state levels in the U.S. have attempted to use the government’s authority in granting H1-B and L1 visas to combat companies who had replaced American jobs with offshore workers (Nanda, 2003). These bills were considered even though a GAO report had stated that more study was required to determine the true effects of the H1-B visa program on the American workforce, and the impact cannot yet be fully understood (U.S. GAO, 2003). Several states in the U.S. have pending bills that would prevent the outsourcing of government IT jobs to abroad. Other bills would require call center employees to identify themselves by their real name and the location they are based in (thereby discouraging outsourcing of technical support and other types of customer support). Many of the pending bills seek to use the power of government contracts to curb outsourcing. The proposed pieces of legislation usually fail to consider the
long-term impact on citizens, shareholders, and taxpayers. For example, keeping IT jobs in the United States is likely to be more expensive, and these costs ultimately will be transferred to citizens, either in the form of increased taxes or reduced corporate dividends. The proposed legislative actions are gaining attention and are partially fueled by the desire to capture the attention of the unemployed persons. While these proposed laws might offer some shortterm benefits to some persons, they fail to consider the long-term impact on the broader population or present the full picture to the electorate. For example, if one asks the voters to choose between retaining 1000 jobs in a particular state or letting them go abroad, virtually all voters would opt for the former option. What happens if one asks a more relevant question—“Do you prefer that 1000 jobs stay in the state or do you prefer a tax reduction of $150 per year?”—the latter benefit would occur if these jobs are permitted to go outside the state.” In this case, many voters may opt for the reduction in their taxes, even if the two numbers were different from these hypothetical numbers for their respective states From a labor perspective, most professional service workers are not unionized, though several observers have cited this possibility as being a likely trend, especially in the software industry. Groups such as the IBM union and the Seattle union represent the rights of a subset of software workers and advocate leaving American jobs in America. If an increasing number of professional workers enroll in unions, the new labor unions may impact the larger political landscape and alter the existing balance between management and labor. In order to mitigate the types of pressures previously described, one needs to think of new hybrid work paradigms that yield the best cost performance ratios by having part of the work performed in the U.S. and other parts abroad.
Offshoring
TECHNOLOGICAL PERSPECTIVE A survey of over 50 software executives participating in offshoring concluded that “offshoring will live or die based on the ability of everyone involved to communicate with each other.” (Sand Hill, 2003) Richer collaboration technologies need to become available in order to enable simultaneous use of video, audio, and other messaging capabilities to link geographically and temporally separated personnel. The outsourcing of professional services requires firms to transfer knowledge via formal and informal channels within their organizations, as well as to establish and preserve knowledge repositories both for offshore teams to come up to speed on new tasks and for onshore teams to learn what is being done offshore. Such efforts require deep understanding of evolving technology and business needs. A Merrill Lynch report concludes that India is the most preferred destination for outsourcing (Subramanian, 2002). The key is to educate the concerned individuals both on the opportunities as well as on the process, and to use technology to develop an understanding of what is best done in the U.S. and what is best done offshore. The delineation of what components of jobs should be performed in developed vs. developing environments requires an intimate appreciation of the cultural and social issues such as language and education; this also involves understanding the technical requirements of each type of job. Certain jobs that are communications intensive, or have significant hardware or infrastructure requirements, may be more suited for one location vs. another. As countries begin to appreciate this aspect, they may make critical investments in nurturing new technologies to support emerging market needs. Plambeck and Taylor’s (2005) model of original equipment manufacturers (OEMs) pooling capacity with other OEMs, as opposed to using contract manufacturers (CMs), in an effort to invest in innovation, could be used to demonstrate the importance of integrating the
various phases of the design and development process in industries such as software.
NATIONAL POLICY CHALLENGES IN A GLOBAL ECONOMY The potential distribution of work across geographic and temporal boundaries requires careful delineation of the economic ramifications of alternative distribution models in order to elicit the optimal benefits from the outsourced model. While some lessons can be learned from the experiences of globalization in manufacturing industries, the inherent distributed nature of the new paradigm presents new challenges. In testimony before the U.S. House of Representatives Committee on Small Business, Assistant Secretary for Technology Policy Bruce Mehlman has cited the United States policy strategy to be based on an investment in education, infrastructure, innovation, and to highlight existing benefits such as intellectual property protection (Mehlman, 2003). Such a strategy suggests that the most sustainable model will be to prepare U.S. professional service workers to perform higher-level tasks and allow tasks, which require less education, training, and infrastructure to be performed abroad. Rather than use these strategies to build a legislative wall around the United States, tasks will be performed much more efficiently because the U.S. engineers will be equipped to handle the more specialized parts of the shared onshore-offshore projects. The benefits of onshore and offshore engagements, as reported by the U.S. Department of Commerce Office of Technology Policy after convening business, university, and government leaders, are summarized in Table 1.1 (Mehlman, 2003). The report of the U.S. Department of Commerce entitled “Education and Training for the Information Technology Workforce” states that IT employers are looking for a specific blend of
Offshoring
Table 1.1 Onshore Benefits
Offshore Benefits
People
Talent pool is unmatched
Untapped talent pool
Business Climate
Entrepreneurial, market-based, easy access to capital
Less burdensome taxation, regulation, litigation
Infrastructure
Telecom, energy, transport
New global clusters created
Market Access
Innovation in largest market
Untapped markets
Intellectual Property
Commitment to patents
Government
Political stability
Quality of Life
Freedom, health care, security, environment
Cost
Talent, facilities cost less
Proximity to manufacturing
Plants are already offshore
technical and business skills, and that they prioritize a minimal amount of training (Meares & Sargent, 2003). This notion of flexible training that will allow workers to succeed in a changing marketplace for professional services is useful in determining the strategic direction for both onshore and offshore firms. In outsourcing of professional services, the set of relevant stakeholders involves include parties from both developed and developing nations. Now, companies in developing nations themselves are beginning to outsource to other markets to spread their labor costs. Another emerging issue relates to the digital divide created by enclaves of digitally enabled citizens benefiting from the outsourced opportunities living in close proximity to much poorer fellow citizens. The disparity in living standards creates potential political, social, and organizational risks. This is a matter of concern for governments of developing nations hosting the outsourced contracts; it is also a matter of concern for governments of nations such as the U.S. that are witnessing increasing investing in regions over which they have little control. Based on the latter concern, it may be in the interest of the U.S. government and industry to invest in the educational and economic improvement of developing nations. But this is a tough politically sustainable
strategy since the apparent goal of such investment would be to provide more opportunities for foreign workers to acquire U.S. jobs. The relationship between these stakeholders is complex. On one side, we have the workers and the need to retain professional service jobs remain within the United States; on the other, we have significant cost savings accruing to the firms who are hiring the foreign labor. Long-term solutions such as better education, better infrastructure, and better intellectual property protection, as suggested by Mehlman, are irrelevant in the short-term in terms of their ability to resolve the issues faced by these stakeholders.
CREATING NEW STRATEGIC GLOBAL PARTNERSHIPS The sustainability of offshore outsourcing practices depends critically on their ability to satisfy the needs of the stakeholders, from the dual perspectives of the offshorer and the offshoree. Emotive debates apart, dispassionate academic studies focusing on this global phenomenon have been limited. This chapter focuses on organization-level profitability resulting from offshoring activities, with respect to the complexity of the
Offshoring
Table 1.2 Outsourcing Nations
Host Nations
Professional service workers losing jobs Firms hiring foreign labor Legislators responsible for economy Regulators Government procurement Customers of professional services
Professional service workers being hired Firms providing outsourcing service Policy makers responsible for economy Citizens not being hired for professional services
tasks that are offshored. Based on insights from the literature and real-world experiences, an analytical model is created; the model demonstrates that offshoring of complex and strategic tasks can result in increased profitability and larger market share, compared to offshoring of simpler and more tactical tasks. The evolution of the business model and process capability is becoming of the mechanism for achieving strategic advantage in offshoring (Athreye, 2005). Indian firms especially are found to be moving up the value chain into strategic partnerships (Arora et al., 2001). These findings indicate that to reap the full benefits from offshoring and to develop sustainable models, one needs to treat offshore vendors as strategic partners rather than as mere low cost service providers.
Building on the Foundation of Offshoring The global phenomenon of offshoring refers to “offshore in-sourcing” (where an organization moves parts of its operations to offshore locations) or “offshore outsourcing” (where an organization assigns specific jobs or projects to other offshore companies). Offshoring can be studied at three levels: micro or individual level, meso or organizational level, and macro or national and global level. While debates concerning micro and macro levels frequently garner significant visibility in the media, this section of the chapter focuses on the organization (meso) level and proposes an analytical model to understand how the complexity
of the offshored tasks relates to the sustainability of the offshoring model. While there is a general understanding that organizations typically outsource non-core activities in order to gain from labor arbitrage, evidence from research suggests that it is often more profitable, from the client perspective, to outsource projects that are more complex and strategic in nature (Gopal, Sivaramakrishnan, Krishnan, & Mukhopadhyay, 2003). As such, there is need to develop a long-term partnership between the client and the vendor/service provider, instead of maintaining an arms length contractual relationship between them (Choudhury & Sabherwal, 2003; Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). The performance of more strategic services translates into greater revenue and greater “customer-stickiness” for the vendor (and hence, lesser associated risks); in addition, there is evidence that more strategic projects yield greater profitability for the client, and results in a win-win relationship that is sustainable on a long-run basis (Plambeck & Taylor, 2005). Cachon and Harker (2002) argue that by leveraging scale economies, outsourcing contracts can create economic value, both for the client and the vendor, even in the absence of other cost benefits. Accordingly, the outsourcing argument seems to be transiting from pure “cost savings from labor arbitrage” to that of “value creation through leveraging of resources”—a more sustainable proposition, only if clients and vendors are prepared to get into a strategic, longterm relationship.
Offshoring
Our real-world experiences seem to validate the previous. One of the authors (Ganguly) was employed with a couple of companies in the U.S. where he witnessed offshoring of simple and tactical tasks as well as complex and strategic tasks. The first company was a giant software vendor specializing in database and enterprise-scale applications development, and the author oversaw offshoring of simple, tactical tasks in the area of demand planning software to the company’s Indian subsidiary; the offshoring of relatively simpler tasks led to nominal returns on investments, and the offshore unit was treated as mere low-cost service provider. The second company was a venture-backed niche software vendor in demand planning and related areas, and the author oversaw offshoring of strategic, complex tasks to the company’s unit in Israel; the strategic relationship facilitated disparate skills to be leveraged almost round the clock in an efficient and cost-effective manner, and the employees of the offshore unit to be treated at par in terms of benefits and remunerations, after allowing for currency and living cost differentials. Oracle Corporation’s Indian subsidiary initially performed “low-end” routine tasks like maintenance of legacy applications; gradually, it became an integral part of team involved in developing Universal Server—Oracle’s flagship database product. The migration paths of “foreign factories” to higher strategic roles have been documented in cases of Motorola’s Singapore pager unit, Alcatel Bell’s unit in Shanghai, 3M’s operations in Bangalore, India, and HP subsidiary in Guadalajara, Mexico (Ferdows, 1997).
ANALYTICAL MODEL TO GUIDE TRANSITION TO STRATEGIC PARTNERSHIPS In this section, an analytical model is developed based on previous work of two of the authors (Mukherji & Ganguly, 2004), to study the im-
pact of offshoring specifically with respect to the complexity and strategic nature of the tasks offshored. This is done in two steps. First, the impact of project complexity on profitability is considered by developing a “two-country model.” This is followed with a “decision model” that incorporates project complexity and time duration of relationship as determinants of cost savings and risk-perception. The underlying assumptions in the analytical formulations are illustrated in Figures 1.1 and 1.2, and described in the following paragraphs. The traditional wisdom in offshoring is that vendors prefer to execute complex projects while clients prefer to offshore outsource simpler projects. The preference of the vendors stem from a desire to “move up the value chain” and to facilitate retention of employees with higher levels of core competence. The perspective of the clients is dominated by factors like the minimization of downside losses, the perception that cost benefits are maximal from offshoring simple tasks, possible compromise on product quality, and the lack of “end user” interactions of the vendors. The twocountry model explores the traditional wisdom based on a grossly simplified, but nonetheless interesting, analytical formulation. Real life outsourcing decisions can be modeled as a trade-off between cost savings and enhanced risks. Both of these are functions of the strategic nature of the project or the project complexity and the duration of relationship between client and the vendor. The simplified decision model presented here rests on four key hypotheses about the nature of the offshoring processes: (i) Marginal costs savings from outsourcing increase with the complexity of tasks; the saving from simple tasks is small, it increases linearly with complexity and approaches a limit; (ii) Marginal cost savings from outsourcing for a given task decrease with time; (iii) The perceived risks of outsourcing increase rapidly with the complexity or strategic nature of the tasks; and (iv) The perceived risks of outsourcing for a given task decrease rapidly with time.
Offshoring
Figure 1.1. A two-country model
A TWO-COUNTRY MODEL Client in country 1: Developed nation
Vendor in country 2: Developing nation % of task offshored: x
Assumptions • Single task • Complexity index : z • Cost of production is an increasing function of complexity f(z) • Constant of proportionality has greater value in country 1 • Coordination costs proportional to % task outsourced x
η = α f (z) (00-x) η = α f (z) x 0
C
Total Cost : η = α f (z) – α f (z)x + χx, Revenue
ρ = γ g(z)
where
α = α – α > 0
Profitability
P = (m + m 2 ){γg ( z1) − (α 1 f ( z ) − αxf ( z ) + χx)}
Figure 1.1 depicts the two-country model. It considers a single task, of which x% is offshored, and for which a complexity index (z) can be defined depending upon the complex and strategic nature of the task. The costs of production are assumed to be constantly proportional to an increasing function of complexity, f(z), with the constant of proportionality having a higher value in the country from where the project is offshored. The coordination task is assumed to be proportional to the percent of the task offshored. These lead to: η1=α1 f(z)
(1a)
η2=α2 f(z)
(1b)
χ
= χx
C0=χ
(1c)
η=α1 f(z)-αfx(z)+ χχ
(1d)
In (1d), η is the total unit production cost and α is the difference in the constants of pro-
portionality, reflecting the currency and other cost differentials. An implicit assumption of the model is that the dependence of the coordination cost on the complexity of the tasks offshored is considerable weaker than the dependence of the production costs on complexity. For constant market size assumption, we obtain the following set of equations: Unit revenue ρ=γg(z)
(2a)
Profit P= (m1+m2){γg(z)–(α1 f(z)– αfx(z)+ χχ)} (2b) The unit revenue is also assumed to be proportional to an increasing function of the complexity (or strategic nature) of the product. Note that we assume for simplicity that the unit revenue is identical for the same task in the two markets (even though the market sizes for the task might differ), and obtain an expression for profit of the
Offshoring
organization. Profit is differentiated with respect to the percent offshored x to understand the unit gain from offshoring, and differentiated once more with respect to the complexity index z to obtain the change in the unit gain as a function of the complexity of the task. Thus, we obtain:
margin and linear price elastic market assumptions. There, the first differential yields market share as an increasing function of percentage outsourced x, and the second differential shows market share per unit increase in percentage offshored as an increasing function of complexity.
Px =∂P/∂x=(m1+m2)(αf(z)–χ)
• (3a)
∂Px/∂x= (m1+m2)[αf'(z)]
(3b)
The right-hand side of 3a is positive as long as the cost reduction due to offshoring of a portion of the task from country 1 to country 2 exceeds the cost of coordination a pre-requisite for the offshoring to be initiated. The simple model results in increasing profits with the percent offshored. The change in the profit with change in unit offshored is itself an increasing function of the complexity, as seen from (3b). Since f (z) is an increasing function of z, f / (z) is positive. Similar calculations can be made for constant
Decision model: In real life decision-making situations, the benefits of cost saving is likely to be deflated by perceptions of risks. Thus, we develop a decision model outlined in Figure 1.2 that incorporates potential cost savings, as well as the risk potential from offshoring activities as a function of time. The model comprises of the following assumptions: 1.
The marginal cost saving potential due to offshoring, as a function of the degree of complexity (or strategic nature) of the tasks for a single time period, can be represented in the form of a logistic, as shown in the top left
Figure 1.2. A decision model
Simple Tactical
Small Cost Saving
Small Cost Saving
Task Complexity Strategic Requirements
Enhanced Risk Due to Offshoring
High Risk
10
Time Index High Risk
Complex Start Strategic Time
Low Risk
Elapsed Time
Large Cost Saving
Complex Start Strategic Time
Simple Tactical
Elapsed Time
Marginal Cost Saving Potential from Offshoring
Large Cost Saving
Enhanced Risk Due to Offshoring
Marginal Cost Saving Potential from Offshoring
COMBINING COST SAVINGS WITH RISK PERCEPTIONS: GRAPHICAL REPRESENTATION
Low Risk
Offshoring
2.
3.
4.
of Figure 1.1. This implies that the cost saving potential from tactical and simple tasks is small (asymptotically approaching zero); then as tasks get more complex or strategic, the cost saving potential increases linearly with the degree of complexity, and finally beyond a certain level of complexity, the cost saving asymptotically approaches a limit. The enhanced risk from offshoring, as a function of the degree of complexity of the task offshored for a single time period, can be represented as an exponential function, as shown in the bottom left of Figure 1.2. This implies that risks increase exponentially with the complexity or strategic nature of the tasks offshored. The cost saving potential from offshoring for a given task decreases with time in a near linear fashion with a small slope as shown in the top right portion of Figure 1.2. The functional form used there is the exponential asymptotic function, which starts from an asymptotic limit, decays almost linearly, and then asymptotically approaches a smaller limit. The enhanced risk from offshoring, for a given task, decreases with time in an exponential fashion as shown in the bottom right portion of Figure 1.2.
The curves assumed in this formulation are based on dual considerations of intuitive business sense and ease of analytical manipulation. The basic shapes can be justified from the insights obtained earlier from the literature review section. However, the conclusions presented here are generalizable to more complex curves. Further, the parameters of the curves can be changed to adjust the relative scales.
The decision model considers two decision parameters that indicate the desirability, in terms of offshoring for the organization of any given type of task, as measured by the complexity index at any given time. The first decision parameter computes the decision function as a time-varying combination of the risk potential and the cost saving where the risk potential is weighed more heavily during initial stages (i.e., when the clientvendor experience is low, but getting less weight with time). The second computes the decision function as a time-invariant function of the cost savings and risks. Figures 1.3 and 1.4 show the decision variables (higher values of these variables indicate desirability of offshoring) as a function of the complexity of the tasks and the time elapsed. The decision model considers two decision parameters to arrive at desirability of outsourcing of a given task. Additive formulations have been used for the simulations after normalization. Higher values of decision variables indicate desirability of offshoring. Here the decision metric corresponding to a time-varying function has been displayed. This function allows the risk potential to have higher weights initially caused by managerial perceptions. The decision metric shows that during the initiation of the offshoring process, complex tasks are low in the list of priorities to be offshored since the perceived or real risks are higher. The extremely simple or tactical tasks have low values initially as well caused by the lower cost benefits. The presence of an optimal task complexity is therefore a possibility even during the early phases of offshoring. This is demonstrated through the decision metric at low values of the time index. However, as the time index moves forward and the offshoring processes mature, the decision metric clearly demonstrates that the desirability of offshoring the more complex or strategic tasks increases. Figure 1.4 is similar to Figure 1.3 with the exception that the decision metric corresponding to a time-invariant function has been displayed
11
Offshoring
Figure 1.3. Time-variant decision variable
decision Metric a Time-variant cost versus risk balance
optimal
More complex tasks gets low points since risks are high
Tactical points low since cost benefits are low
With time, more complex tasks become optimal
complexity of Tasks strategic for business
Time index
Figure 1.4. Time-invariant decision variable
decision Metric b Time-invariant cost versus risk balance
Even without weighing the risk dimensions more, the direction suggests better returns from more complex projects, over time
complexity of Tasks strategic for business
12
Time index
Offshoring
here. This function keeps the risk potential constant over time to emphasize the influence of other variables. The decision metric demonstrates that even without weighing the risk dimension more over time, the desirability of offshoring the more complex or strategic tasks increases. The results from our analytical model, as seen from Figures 1.3 and 1.4, indicate that with elapsed time (i.e., more client-vendor experience), offshoring more complex and strategic projects become more desirable. Initially, the decision variable does not appear to optimally favor either the most strategic or the most tactical task, but a balance that is dictated by the nature of the curves (and parameters) selected. However, with time and experience, strategic tasks are increasingly favored.
Completion of Transition to Strategic Partnership The simulations suggest the possibility that, contrary to common wisdom in some quarters, but perhaps in line with what some experts/academicians have said, one might be able to get significant value out of offshoring tasks that are not just tactical or “simple” in nature. The possibility of an “optimal” level of complexity that maximizes the return from offshoring, at any given time period or experience level, under given situations is also suggested, within the constraint of our assumptions. In addition, the simulations indicate that the offshoring of more strategic tasks leads to higher profitability and sustainability. Accordingly, both the client and the vendor need to reinforce their efforts to explore how tasks of strategic nature can be identified and selected for offshoring, and how closer ties can be established over time between the vendor and the client. We emphasize that the managerial insights from this study are dependent on the validity of the assumptions. An interesting line of future research would be to explore the offshoring strategies from a game theoretic perspective, where clients and
vendors, as well as offshoring and offshoree nations with their respective legislative bodies, are the key players. We hypothesize, without proof, the possibility of Nash-like equilibria where the equilibrium points shift from tactical to strategic partnerships as the offshoring processes mature. The maturity of the offshoring process needs to be modeled and quantified both in terms of the tactical client-vendor relationships and in terms of strategic perceptions among the stakeholders. Advances in communication technologies and the ubiquity of the Internet, as well as the breaking of traditional cultural and linguistic barriers, are key issues influencing the maturity of the tactical client-vendor relationships. The maturity of strategic perceptions will depend on various geo-political, economic, cultural, and social considerations. The concept of the 24-Hour Knowledge Factory has the potential of influencing both the tactical relationships and the strategic perceptions.
CONCEPT OF the 24-HOUR KNOWLEDGE FACTORY The 24-Hour Knowledge Factory attempts to establish a virtually seamless relationship between the vendor and the client; this may involve one organization in a developed country as one entity, and two or more organizational entities located in other continents. The paradigm includes situations where all the collaborating entities are part of one large organization, such as IBM or Oracle. In such a model, a global team is used to work on a project around the clock; each member of the team works the normal workday hours that pertain to his or her time zone and transfers work nightly to others on the team. The 24-Hour Knowledge Factory paradigm can be applied to a broad range of white-collar activities ranging from medical services to logistics planning, and from financial analysis to product design (Gupta, 2007). The notion of the 24-Hour Knowledge Factory builds on the shift-style factory model developed
13
Offshoring
in the Industrial Revolution. Given limitations on equipment, shifts were used to optimize the productivity realized from a given set of machines. The advent of the Internet led to a similar notion that individuals working at different times could operate on the same work product--call centers are an early example. Now, it is possible to extend this model to any environment where work is primarily knowledge-based and can be passed among team members on a nightly basis (Gupta & Seshasai, 2004). The 24-Hour Knowledge Factory will involve “offshoring” of part of the endeavor. Today, offshoring is done mainly to reduce costs as discussed in preceding sections of this chapter. Over time, the growth in offshoring will be fueled more by the potential to achieve drastic reductions in turnaround times for major endeavors, as depicted in Figure 1.5 (Seshasai, Gupta, & Kumar, 2005). In a “24-hour development environment” that encompasses three or more development centers located around the world, the distributed team is envisaged to concentrate on the same problem and to perform the same function (whether it be development of code or testing of subsystem) on
a successive basis, with each collaborating center retaining ownership of the endeavor for 8-hour periods in every 24-hour cycle. A large number of industries, including the software industry, are characterized by a development cycle that relies heavily on sequential performance of specific functions such as development, testing, and verification. In a traditional software development environment where all parties are located in the same geographic area, a code developer typically waits until a fully functional portion of the product is available before passing it on to an engineer to test it. However, with the potential for receiving testing feedback overnight, the developer now has the unprecedented opportunity to build portions of the product on an incremental basis (Gupta & Seshasai, 2007).
Critical Success Factors for the 24-Hour Knowledge Factory Based on discussions with experts in a number of relevant areas, a number of critical success factors (CSFs) were identified. These CSFs are depicted in Figure 1.6. The array of short- and long-term
Figure 1.5. 24-hour global knowledge factory Singapore
California
0:00-0:00 GMT
:00-0:00 GMT
London 0:00-:00 GMT
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Offshoring
Figure 1.6. Critical success factors for 24-Hour Knowledge Factory National education system
Labor Language
Onshore Labor skills
National Labor markets
Internal Buy-in
Cultural differences Organzational model
Labor costs Communication Technology Geopolitical stability
Long-term productivity
Demand Management Diversifying investments
Political barriers
Knowledge Product
Dynamic task re-allocation
Location Choice Offshore Labor skills
factors must be assessed in their individual context, as well as in context of relationship to each other. Some of the key factors are discussed in the following paragraphs.
Demand Management A 24-Hour Knowledge Factory model allows for better management of customer demand, faster time to market for products, and superior ability to adapt quickly to changing market conditions; this is because of the lower labor costs, the greater flexibility to reallocate and reassign resources, and the ability to provide customers with access to skills that they may not already have (Srinivasan, 2004). As offshore knowledge workers gain experience and move up the learning curve, their experience interacting with customers will allow them to broaden the scope in which they serve customer demand and provide for 24-hour availability of high value resources (Suh, 2004). One example of the latter phenomenon is a company that employs home-based workers in India to perform medical transcription. As these workers
Location Time zone
Offshore value chain
move up the value chain, their home-based work environment continues to allow them to be readily accessible. Accordingly, these workers can work longer hours, as necessary, concurrently with family obligations at home, thereby serving as “agile” knowledge workers in the knowledge factory in real-time (Malhotra, 2004).
Long-Term Productivity The use of hybrid work models can provide access to higher skilled labor for tasks that previously only were done by lower skilled workers. For example, highly skilled radiologists in the United States are much less likely to prefer reading X-ray results while in India, a highly skilled radiologist will see employment by a U.S. hospital as a high-value position regardless of the task. When moving toward a 24-Hour Knowledge Factory model, factors such as ability to grow in size, quality management, and the added communication and coordination costs must be incorporated into the calculation of the improved productivity (Shah, 2004).
15
Offshoring
Integrated Value Chain
Barriers Within Firm
The application of the 24-Hour Knowledge Factory paradigm explicitly implies partial offshoring. While the initial effects of such offshoring will be an increase in productivity, the offshore workers will gradually move up the value-chain and provide a great deal of higher-value services. According to Accenture, for IT offshoring, 51.9% is in IT services such as maintaining computer networks, 36.7% is in solutions development such as building Web sites, and 11.4% is in leadership and managing projects (Christensen, 2001). The general progression can be characterized as a movement from efficiency to innovation to growth, with production moving from commodities to services to solutions, as vendors begin to do similar work for multiple customers (Barney, 1999). The movement up the value chain is not reserved simply for the offshore workers, as in the example of radiology, U.S. doctors can move to higher value tasks if X-Ray reading is done offshore.
Significant barriers to employing the 24-Hour Knowledge Factory concept exist within typical firms; several of them need to be addressed as part of the initial decision process rather than as a corrective measure at a subsequent stage. Internal resistance, especially due to a loss of control, may hinder a proposed project. Furthermore, cultural, language, and trust issues need to be approached in an upfront manner, recognizing the impact with respect to the interaction required between knowledge workers in the 24-Hour Knowledge Factory. Even if the desire exists at all levels to pursue the globally collaborative engagement, the firm should plan on process changes such as longer project planning cycles, more explicit definition of requirements and communication methods and the effects of ill-informed hiring decisions.
Organizational Models In order to maintain flexibility, one needs dynamic models that can evolve as market conditions change and learning curves impact skill levels. In choosing a model, it is important to judge the complexity of the work required and determine the right locations for each particular skill required (Christensen, 2001). This may lead to a model where the same function or skill is located in multiple geographic locations; this may involve higher management overhead but may lead to greater returns especially when taken in the context of the 24-Hour Knowledge Factory. Two matrices upon which the organizational models can be judged are coordination vs. effort, and complexity vs. project size (Barney, 1999).
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Location Choice Different geopolitical locations possess their own characteristics that impact their current and future place on the value chain. For example, China has lagged behind India in knowledge-based offshoring because of a lack of English speaking citizens, but as English becomes a more common language in China, the vast size of the labor pool will allow it to rapidly move up the value chain (Baxter, 2004). In Russia, highly skilled scientists and engineers saw a dramatic drop in high skill tasks after the Cold War; these domain experts are now making a dramatic transition into highvalue services such as optics design at a much lower cost to outsourcing firms (DiRomualdo, 1998). The hiring process is a major factor in moving firms up the value chain, as a constant reevaluation is required of whether the foreign employees are indeed the highest skilled in their area (Andre, 2004). Regardless of the locations being considered, factors to consider include the
Offshoring
geopolitical stability of the country, the investment in education, labor and skill set of citizens, and the business environment in the country, including levels of corruption and ease of setting up businesses (Lacity, Willcocks, & Feeny 1995).
•
•
CASE STUDY AT IBM INVOLVING TWO PARALLEL WORK TEAMS Two teams of workers at IBM were studied to provide an example of the relative pros and cons of the 24-Hour Knowledge Factory model. While the two teams were equal in all relevant structural and technical respects, one team was geographically separated between the U.S. and India while the other was collocated on the same hallway in the U.S. A one-year timeframe was used to cover the entire lifecycle of the teams’ software deliverable. Whereas the overall performance was found to be very similar in the two cases, there were interesting differences at the micro level. Specific forms of data were collected and analyzed, as follows: •
•
Personal interviews were conducted with each of the developers on each team, for both qualitative and quantitative insight. Developers were asked about frequency of informal vs. formal interaction, percent time spent in various communication vehicles (phone, instant messaging, and face to face), the number of tactical vs. strategic decisions made informally, and which specific developers involved interactions. Software problem reports (SPR) were process forms used to track fixes or requests to change the code. Weekly analysis of these SPRs provided insight into the reliance on structured forms for knowledge tracking and daily communication, average time to resolution of issues, and the number of developers handling each issue.
•
Weekly meeting minutes were analyzed with a coding system for strategic vs. tactical task assignments and status requests. This provided insight into formal knowledge sharing on a group-wide basis for each team. The source code control system was used by each team to log the modifications made to each element of the source code for the team’s product. The source control system stores the date, the time, the name of the developer making the change, and a comment regarding the particular change. The data provide a representation of the technical dependencies between developers on the teams by looking at number of developers interacting with each code element, and the rate of technical collaboration within the teams by looking at the number of logged modifications. Group e-mail exchanges were analyzed with a software tool that calculated statistics on individual messages and “threads” containing a set of messages written in response to an initial message. The data collected involved frequency of messages, number of messages per thread, and number of developers per thread.
Use of Electronic Mail for Asynchronous Discussion The data revealed that the distributed team made much greater use of electronic mail (e-mail) as a forum for discussion. This usage peaked during the time periods following project deadlines and was relatively constant in the periods of steady work well before the milestone. The collocated team relied on e-mail as an announcement mechanism for broadcasting a message to the general set of developers, but relied on other means for back and forth discussion. The e-mails, which were tabulated for each week of the year, and only those e-mails which were sent to the entire group were tabulated.
17
Offshoring
Overall, e-mail was used as a means for extended discussion on the distributed team, while it is primarily used for one-message announcements on the collocated team. A developer on the collocated team stated that many of the one-message announcements from the collocated team are announcements that a particular individual is heading out of the office, even for a period of just an hour. This demonstrates a significant difference in team culture on both teams. On the collocated team, face-to-face discussion is so important that team members feel the need to inform each other if they are going to be unavailable for a short period of time. On the distributed team, long discussions are done over e-mail and often last days because of the time zone differences. A developer on the distributed team cited one of the benefits of having discussions done over e-mail is that team members can take the time to think about their responses and often provide more detailed input into the discussion. The members of the distributed team also stated that when discussions reach a significant length, they are moved to a discussion forum database where responses can be better tracked and archived. When reviewing the design of a feature to be included in a product release, it was common for the U.S. portion of the team to hold a meeting with a presentation to discuss the design. Later that day, after the U.S. workday was complete, the Indian portion of the team would review the slides from the presentation and provide feedback in an organized and written manner. Both forms of feedback--immediate faceto-face and asynchronous written--were useful in the end product and neither would have been achieved if operating in the other framework. The setting of ground rules was acknowledged by all team members as an important factor in both overcoming cultural differences and encouraging uses of the different technologies discussed in this chapter. The manager of both teams stated that the discussion forum database is common to both teams; however, the distributed team is more prone to use it. This is a likely result of
18
the distributed team's familiarity with having to carry out discussions by typing their responses in e-mail format. The collocated team had more e-mail threads created, but many of these threads had just one contributor. The distributed team had less number of threads, but with a high degree of collaboration on each thread. This confirmed the anecdotal evidence from the interviews that the nature of e-mail use and the nature of knowledge based discussions on both teams is profoundly different.
Technical Collaboration Through Shared Source Code Detailed analysis of the data showed that the two teams reacted differently to project deadlines; the level of activity in the collocated team was more controlled before the feature freeze date, but increased afterwards. The collocated team was found to have a higher degree of collaboration with respect to specific code elements; while the distributed team kept the code they modified separate from each other. The weekly averages for code changes for different time periods of the project were calculated to provide a picture of how each team reacted to different parts of the project. Both teams handled the steady state before a deadline in the same manner. However, before a deadline, the collocated team was able to handle the collaboration in a steadier manner--the interviews with the collocated team speculated that this was due to questions being resolved face to face with individual developers consulting others before submitting a code modification. Multiple team members on the distributed team cited the fact that they had drawn clear lines between code elements and make an explicit attempt to only modify certain elements of the code. In contrast, when the collocated team assigned particular functional areas of the product to different developers, they often reassigned particular SPRs based on workload and felt com-
Offshoring
fortable with any developer modifying any part of the product. While the data suggested greater technical collaboration on the collocated team, there were code elements on the distributed team that involved more than one developer. Thus, even when distributed, the software developers did reach out to others for help when certain threshold barriers for requiring higher levels of collaboration were reached.
Nature of Team Meetings The team meetings held by the distributed team were found to be more tactical and task oriented than the collocated teams, further demonstrating that each team had adapted similar processes in different ways to their own geographic structure. The two team’s meeting minutes were controlled by many factors that allowed data collection to proceed with confidence. All meetings on both teams were held by the same project manager, who kept detailed minutes of each meeting in the same format. The categories for the agenda changed over the year to fit the stage of the project schedule, but were generally found to be consistent between the teams. The distributed team devoted a larger number of items in the meeting minutes to tactical issues. Items were designated as tactical if they were short term in nature and all knowledge related to completion of the item was already acquired. The meeting minutes were analyzed by inspection, and all items in the meeting minutes were designated as strategic or tactical; no other categories were used. Examples of tactical items found in both teams’ meetings included issues related to the “build” (a compilation of source code into an intermediate internal product release to be sent for testing), issues related to a particular SPR, or issues related to scheduling. Examples of strategic items found in both teams’ meetings included discussion of feature plans for the next release, discussion of major customer issues, and discussion of cross-team collaboration with other teams
in the company. The collocated team found ways of handling the tactical issues outside of the formal meeting structure, because opportunities for synchronous communication were available.
Using Technology to Update Work Item Status Data from the software problem report database were useful in demonstrating how technology was used to update work item status. SPRs represent the core work items for these software development teams, outside of feature level work. When any work is required on the source code—either a bug found by the testing team, an enhancement requested by a customer, or a feature—an SPR is logged and is used to track the status of the work. Each team was found to use the SPR system in a unique manner. While e-mail data described the social network on both teams and source control data described the technical network on both teams, these SPR data acted as a bridge between the social and technical networks. Both teams shipped a final product release in the first quarter of the year, and thus this high period of activity in the early part of the year represents the SPR “clean-up” activity, which occurred for the distributed team as they were updating status on all of the work which had been done for the release. The outliers in the data highlighted that the collocated team required a major focused one-time cleanup immediately preceding the product release, and immediately preceding the feature freeze date. When team members were not available to consult with immediately, they added updates to SPRs in the context of the particular issue and waited for a reply in the form of another action taken on the SPR. With the collocated team, since answers were available immediately, it was not useful for them to take the time to update the formal SPR system when sharing knowledge around a particular SPR.
19
Offshoring
This demonstration of adapting available technologies in different ways has positive and negative points. The positive aspects are that the team has naturally innovated and found new uses for an existing infrastructure. However, with this innovative use comes the caveat for managers that tracking results on a system such as the SPR system will not yield similar reports for teams, which use the system differently. The collocated team had more individuals modifying particular elements of the source control system while the distributed team had more individuals modifying particular elements of the SPR system. This suggests that there are certain thresholds for collaboration and different geographic structures can lead to different levels of social and technical collaboration.
24-HOUR KNOWLEDGE FACTORY: IMPACT ASSESSMENT
•
•
The variance in the data between the two teams encourages discussion of the impacts of geographic distribution of knowledge-based teams at various levels--individual, team, organizational, institutional, and national. •
20
Individuals: Individuals who work in a knowledge-based industry have the power to make choices about the global working environment. They possess the potential to use software tools similar to those used in this study to educate themselves on the work of their own teams and to become more capable in terms of the ability to work in a distributed work environment. Individuals in such environments may need to alter their work hours to spend a few minutes in their off-hours to use the telephone or instant messaging to communicate with colleagues working in a different time zone. A change in work styles may require more effort to be placed in explicit informal communication
•
on a distributed team, or in more formal documentation of informal decisions on a collocated team. Teams: At the team level, an understanding of the socio-technical forces, which impact knowledge sharing on a software team can impact the success of both the project and the product. Software tools that continually collect and display information can be useful in attaining optimal productivity in a decentralized environments. Building and implementing such tools would provide access to data, which resides in distributed and heterogeneous sources and is not currently used by managers to guide decisions. One example of the utility of such a “dash board” is in assessing the technical dependencies between members of a team by looking at the SPR and source control data. Organizations: At the organizational level, the data collected in this study demonstrates the potential for organizations to assess the tacit knowledge capital that is not readily quantifiable. Organizations currently assess knowledge capital by counting the number of patents filed or tabulating features on existing products. With new data capture tools, organizations can assess knowledge capital at a much more granular level. One can now assess the dependency on one development site or another, and on one developer or another. This is especially important in a domain such as software engineering where knowledge flows so dynamically between geographic locations. Institutions: A number of institutions are impacted by the introduction of granular knowledge sharing data analysis in globally dispersed teams. The laws and regulations that govern labor and trade are not yet built to handle redefinitions in work requirements and intellectual property sharing, which occur instantly and across geographic borders. Unions and professional associations, which
Offshoring
•
represent one region of technical knowledge workers can act as both enabling and threatened institutions. They can enable the success of global software teams by training their members to build the capabilities necessary to operate in a geographically distributed environment, and also by expanding their regional scope so that their incentives are aligned with those of the multi-national firms which employ them. However they can also act as a threatened institution by deciding that the work models, regional job opportunities, and technical expertise requirements will be negatively impacted by the distribution of work. In all of these cases, the notion that knowledge sharing can be analyzed and leveraged is important in assuring that institutions impacted are able to adapt appropriately to the changing realities of the workplace. Nations: New national policies need to be developed for training and preparing workers for globally distributed work, and also for dealing with issues related to sharing of intellectual property. In the case of the 24-Hour Knowledge Factory, intellectual property will be imported, leveraged, and exported on a daily basis. As public policy evolves to valuate and regulate exports at this level of granularity, the ability of nations to exploit wage differences would be significantly limited. This reinforces our pivotal theme that future offshoring endeavors will be fueled, not by considerations of cost savings, but by strategic considerations.
CONCLUSION From an analytic viewpoint, the authors believe that significant opportunity exists for developing theoretical and analytical models for offshoring practices. By rising above the emotive arguments based on anecdotal evidences that currently
tend to dominate debates and discussions on IS outsourcing, we can take a more comprehensive view of the situation. So far, analytical models focusing on offshoring practices have been few in number. A new generation of comprehensive analytical model needs to be created to investigate the emergent phenomenon of offshoring at a global scale. From a business viewpoint, the concept of offshoring was originally fueled primarily by considerations of reduction of labor costs. Companies continue to proceed with plans to outsource with the benefits accruing primarily to their shareholders and their customers; however, government agencies have adopted diverse practices primarily because of concern for feelings of the voting population. Based on a variety of reasons, decisions made by companies on the issue of outsourcing of professional services will increasingly be driven by strategic considerations than by considerations of cost savings. This hypothesis has been validated in this chapter using a mathematical model. In practical terms, the need to bring new products and services earlier to the market may outweigh the considerations of cost and where the work will be performed. Over time, workers will be retrained and will acquire new jobs that are more suitable for their respective background and location, both in developed and developing countries. One now has the opportunity to move towards the “24-hour global knowledge factory” where outsourcing means active engagement on knowledge intensive tasks for 24 hours a day. Already, an increasing number of companies are using the notion of two geographically work centers to improve the pace and the quality of the work; these serve as harbingers of paradigms involving three work centers configured as a 24-Hour Knowledge Factory. A detailed case study was conducted at IBM to study the relative performance of distributed and co-located work teams. The results of the case study reinforce the main points raised in this chapter. As firms, governments, and individual workers gradually
21
Offshoring
embrace the growing realities of the marketplace, offshoring could become a “win-win” situation for all, leading to the globalized world of 24-Hour Knowledge Factories.
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Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, (14) 3. DiRomualdo, A., & Gurbaxani, V. (1998). Strategic intent for IT outsourcing. Sloan Management Review, 67-80. Endleman, G. (2003, September). Fall guy: U.S. Immigration and the myth of offshoring. National Association of Software and Service Companies (NASSCOM) Media Room Retrieved from http:// www.nasscom.org Ferdows, K. (1997, March-April). Making the most of Foreign factories. Harvard Business Review. Gopal, A., Sivaramakrishnan, K., Krishnan, M. S., & Mukhopadhyay, T. (2003). Contracts in offshore software development: An empirical analysis. Management Science, (49), 12. Gupta, A. (2007). Expanding the 24-Hour workplace. The Wall Street Journal. September 15th, 2007. Gupta, A., & Seshasai, S. (2004). A knowledge based approach to facilitate engineering design. Journal of Spacecraft and Rockets, 41(1), 2938. Gupta, A., & Seshasai, S. (2007). 24-Hour Knowledge Factory: Using internet technology to leverage spatial and temporal separations. ACM Transactions on Internet Technology, 7(3), 1-22. “IEEE Position Statement on Offshore Outsourcing.” IEEE-USA Career and Workforce Policy Committee. Mar. 2004. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing: Insights from a longitudinal study. Communications of the ACM, (46) 12. Lacity, M., Willcocks, D., & Feeny, D. (1995, MayJune). IT outsourcing: Maximize flexibility and control. Harvard Business Review, 84-93.
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Malhotra, R. (2004, April). Unique business model. Presentation to MIT Special Seminar on International Management. Meares, C. A., & Sargent, J. F. (2003, June). Education and training for the information technology workforce. Report to Congress from the Secretary of Commerce. Mehlman, B. C. (2003, June). Testimony before the U.S. House of Representatives Committee on Small Business. United States Department of Commerce. Mukherji, S., & Ganguly, A.R. (July 2004). Sustaining the offshore outsourcing boom for software development: Transitioning from low cost service provider to strategic partners for information systems. In Proceedings of the 9th International Symposium on Logistics, 559-564. Bangalore, India.
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This work was previously published in the Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. Khosrow-Pour, pp. 1-23, copyright 2007 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Section II
Foundations and Frameworks
25
Chapter II
Evolving Relationship Between Law, Offshoring of Professional Services, Intellectual Property, and International Organizations Amar Gupta University of Arizona, USA David A. Gantz University of Arizona, USA Devin Sreecharana University of Arizona, USA Jeremy Kreyling University of Arizona, USA
Abstract This chapter covers four issues. First, it examines evolving international conventions to determine whether countries, especially developed countries, can take any steps to inhibit offshoring with the objective of protecting jobs in their respective countries. Second, it looks at statistics from independent sources to see if outsourcing exceeds insourcing, or vice versa, in the case of the U.S. Third, it looks at trends in outsourcing in the legal arena. Fourth, it looks at the intellectual property aspects of outsourcing and presents a long-term vision on how this ticklish issue is likely to be addressed in the long-term.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Evolving Relationships
Introduction “Outsourcing” is a relatively new term for something that has been happening in the United States for at least 40 years, namely, the shifting of production of goods (and, more recently, services) to nations where wages are lower than in the United States. The most obvious example is textiles and apparel, in which factories located in New England moved to the southeast beginning shortly after World War II, in search of lowerwage, non-unionized labor and low cost electric power. Beginning in the 1960s or earlier, some producers and consumers shifted their sourcing to Asia and to Latin America, particularly to Mexico, Japan, and later South Korea, Taiwan, and Hong Kong. More recently, China, Pakistan, India, Bangladesh, Sri Lanka, and Vietnam have become popular locations, among others, for textile and apparel production. The outsourcing of service industry jobs from the United States (and Canada, the EU, and Japan, among others) is somewhat more recent, as it is only viable with very low-priced telephone and Internet communications worldwide, a feature of the fiber optic cable construction in the 1990s. Shifting of low-wage telephone service positions (for computer technical support, airline reservations, etc.) did not seem to raise a good deal of controversy in the United States, except perhaps in the communities which lost the service centers (including Tucson), and among the labor unions. Even the outsourcing, particularly from Silicon Valley, of routine computer software work seemingly raised relatively few alarms. However, the newest outsourcing phenomenon—mostly to India—is far more troubling both economically and politically to U.S. policymakers. The prospect of widespread outsourcing of relatively high wage professional services positions—software development, banking and brokerage as well as, medical, and legal services—is
26
creating a good deal of concern, and there have been various proposals to curb such trends, by legislation or otherwise. The first question this chapter addresses is what the United States can do under international trading rules to discourage outsourcing. There may be some tax laws and policies that could be modified, primarily to reduce tax incentives for production abroad and to encourage the investments supporting outsourcing to stay home. Some in Congress have suggested trying to prevent U.S. firms from investing abroad, but in most cases this would be questionable under investment treaties in the unlikely event the Congress tried to impose such restrictions, and would in any event be impossible to enforce against multinational enterprises. There is relatively little action the U.S. could take to reduce the outsourcing process that would not run afoul of international trading rules, which are designed first of all to make it possible for any consumer of goods or services to purchase the best available at the lowest prices, without interference from tariff or non-tariff barriers. The second question this chapter addresses is whether the United States is a net beneficiary or net loser when outsourcing occurs. This analysis has been done by others at various levels: at the national level, at the company level, and at the individual level. Companies adopt outsourcing practices because they of lower costs and other benefits. At an individual level, if a person loses a job, he or she is a loser. However, at the national level, the analysis needs more careful attention: outsourcing leads to jobs moving from the U.S. to other countries, and jobs moving from other countries to the U.S. The third question this chapter addresses is how outsourcing will impact the legal community in the short-run and in the long-run. Specific examples are considered. The fourth and final question is how intellectual property can be equitably protected in an economy that involves growing levels of offshoring.
Evolving Relationships
Outsourcing under international trading rules Virtually any nation that accedes to the World Trade Organization (WTO) agreements is required to take a number of specific steps toward facilitating freer trade. Most of these involve the reduction or elimination of trade barriers and opening of domestic markets and trading opportunities to foreign-owned firms. Acceding members in recent accessions have made such commitments for almost all product sectors and many service sectors as well. Again, for most nations, agreeing to take these steps through an international treaty necessarily requires a variety of modifications to domestic law and the domestic legal system.
GATT 1994 are unconditional ‘most-favored-nation’ (MFN) treatment among members (Art. I), non-discrimination and national treatment (Art. III), and a prohibition against most quantitative restraints (Art. XI). Most trade restrictions, other than tariffs, particularly quantitative restraints and non-tariff barriers, are essentially prohibited, although there are many important exceptions. Of course, the proper implementation of these principles, and the use of the exceptions to restrict imports, has become a very complex and oftencontroversial process, the subject of numerous disputes among the GATT contracting parties and, now, the WTO member states. •
MFN treatment: Under MFN treatment (“NTR” or “normal trade relations” only under United States law), each member country automatically extends the benefits afforded to any other member country to all WTO members:
With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges. ..any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. (Art. I)
Core GATT Principles Although it is an over-simplification, it is nevertheless helpful to visualize the generalized agreement on trade and tariffs (GATT)—the original 1947 version and the version adopted as part of the “Uruguay Round” negotiations in 1994, primarily as a mechanism for reducing trade barriers and increasing market access. The GATT does not prevent the use of import duties (taxes on imports), but provides a mechanism (used for eight negotiating “rounds” since 1947) for reducing such duties among member nations. One of the more unusual aspects of the GATT/WTO system—virtually unique in the international law arena—is that the WTO provides for binding third party dispute resolution of trade disputes, with sanctions for members that fail to comply with the rulings of the WTO’s dispute settlement body (DSB). More than 365 disputes have been referred to the DSB in the first nearly 13 years of the WTO’s existence. Probably the most important GATT/WTO principle is the principle of nondiscrimination, both as among members of the WTO and between foreign and domestic producers of goods and providers of services. The core principles of
For example, if the United States were to negotiate with Japan a tariff reduction from 10% to 5% on television receivers from Japan, presumably as part of a package in which Japan made other tariff concessions of importance to the United States, under the MFN principle the 5% rate would be applicable to televisions imported into the United
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States from other GATT/WTO member nations as well, without those nations having to make any further concessions in return. •
•
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Tariff bindings: GATT Article II provides a framework for multilateral negotiations for the reduction of import tariffs and assurance that once tariffs are reduced they will not be raised again in the future. When a member agrees to specific tariff commitments or reductions, either as part of a WTO negotiation or upon accession, they are incorporated in a country-specific schedule or annex, which is part of the legal agreement. Bound duties average about 3-5% for developed countries like the U.S. and Japan, but may exceed 30% for some poorer countries. Even among developed nations, some duties are much higher; U.S. duties on some apparel are in excess of 20%, and on some “plastic” footwear, over 70%. Once tariffs are reduced and “bound” at a given level, they normally cannot be increased, although there are certain exceptions. National treatment and non-discrimination: The national treatment and nondiscrimination principles embodied in Article III are designed to assure that imported goods are treated in the same manner as domestic goods, particularly with regard to a country’s internal taxation and regulation: The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1 [so as to avoid protection for domestic production].
The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations, and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution, or use…
For example, if the United States imposes a 5% excise tax on imported petroleum, it must impose the same tax on domestically produced petroleum. The GATT/WTO is designed to reduce tariffs and non-tariff barriers, recognizing that tariff reductions become ineffective if they are merely replaced with quantitative restrictions or other non-tariff barriers. •
Ban on quantitative restrictions: In most instances, quotas, embargoes, and other quantitative restraints are prohibited. Even where quantitative restrictions may otherwise be permitted, they must be applied on a non-discriminatory basis under Articles XI and XIII:
No prohibitions or restrictions other than duties, taxes, or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.
This means that quotas (whether applicable to imports or exports) are prohibited unless they are authorized by a specified exception to Article XI, as with safeguards measures under GATT Article XIX.
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GATT Exceptions There are, of course, many exceptions to these principles in GATT 1994. The most important include articles VI and XVI (antidumping and countervailing duties), XII and XVIII (balance of payments) XIX (emergency action), XII (restrictions to safeguard the balance of payments), XX (general exceptions), XXI (national security), and XXIV (free trade areas and customs unions). These exceptions reflect recognition that in certain hopefully limited circumstances nations must preserve the right to depart from the principle of nondiscrimination against foreign goods. However, even where departures are permitted, they are narrowly drawn and have been interpreted narrowly by GATT and WTO panels. •
•
Balance of payments: Article XII provides that “Notwithstanding the provisions of paragraph 1 of Article XI, any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported, subject to the provisions of the following paragraphs of this Article.” This provision recognizes that under some emergency situations—where, for example, a country’s foreign exchange reserves become dangerously low—special consideration in the form of temporary exceptions to tariff level obligations must be recognized. However, Article XII has been interpreted narrowly to prevent abuses. Article XVIII: 2 provides developing countries with greater leeway in protecting their balance of payments. Developing nations: The GATT itself provides only limited “special and differential” treatment for developing nations. Under the WTO agreements, special treatment is provided with regard to subsidies, intellectual property rights, investment, and safeguards, among others. In most instances, develop-
•
ing countries were given additional time to comply with the specific obligations of the WTO agreements, or are exempted from trade remedy proceedings if the volume of their exports of the affected product to the importing state are small. For example, India and other lesser developed countries were given 10 years from 1995 to comply with the requirements of the agreement on traderelated intellectual property (TRIPs). General exceptions: Other so-called “general exceptions” to the core GATT applications are provided, in Article XX: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: a. necessary to protect public morals; b. necessary to protect human, animal or plant life or health; c. relating to the importations or exportations of gold or silver; d. necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices; e. relating to the products of prison labor; j. mposed for the protection of national treasures of artistic, historic or archaeological value;
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g.
h.
relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and not disapproved by them or which is itself so submitted and not so disapproved.
These provisions permit a GATT member to deviate from certain GATT obligations under the circumstances listed but only consistently with the “Chapeau” requiring that the exceptions not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade . . . .” For example, on occasion the United States has barred the importation of certain products from China, because it was demonstrated that they had been made with prison labor. The WTO’s Appellate Body has interpreted Article XX exceptions narrowly. •
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National security: There is also an exception for certain actions taken by GATT members on the grounds of national security (Art. XXI). These include preserving confidential information; “taking any action which it considers necessary for the protection of its essential security interests;” actions relating to nuclear materials; measures relating to the prevention of “traffic in arms, ammunition and implements of war...;” actions “taken in time of war or other emergency in international relations; and those relating to compliance with obligations under the U.N. Charter.” These exceptions have been used rarely.
GATT also provides an exception from MFN and the non-discrimination principle for free trade areas such as NAFTA and AFTA and ChinaAFTA, and customs unions such as Mercosur and the European Union (Art. XXIV) (a free trade agreement liberalizes trade among its members, but leaves its members free to set their own tariffs on trade with the rest of the world. A customs union not only liberalizes intra-regional trade, but provides for a common external tariff on members’ trade with the rest of the world). Under Article XXIV, only FTAs and customs unions that meet GATT Article XXIV standards are permitted, but WTO oversight and enforcement of FTAs is weak. There is more lenient treatment of regional trade agreements among developing countries under the 1979 GATT “Enabling Clause,” which also permits developed country members to offer nonreciprocal trade benefits, such as those provided under the generalized system of preferences.
Limits on the Use of Subsidies and Other Trade-Restrictive Measures The WTO agreement on subsidies and countervailing measures (“SCM Agreement”) imposes significant limitations on the use by governments of subsidies. It a subsidy as a financial contribution by a government or public body involving (1) a direct transfer of funds, (2) the foregoing of government revenue, (3) the provision of goods or services other than general infrastructure, or (4) payments made to a funding mechanism—including a private body—to undertake actions within (1), (2), or (3), provided in each of the four instances that a benefit is conferred on the recipient company (Art. 1.1; “yellow light” subsidies). In general, a subsidy is not actionable under a member country’s countervailing duty laws unless it is “specific,” in that it is provided to a specific industry or industry group, rather than generally. The subsidies agreement explicitly prohibits export subsidies and subsidies conditioned on use of domestic rather than imported materials
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(often termed “red light” subsidies), except for the least developed countries (Art. 3). Certain types of otherwise actionable subsidies—research and development grants, regional development programs, and environmental cleanup programs (termed “green light” subsidies)—were for 5 years after 1995 specifically exempt (Art. 8). Regional development subsidies are used by many developing nations to encourage industrialization in regions with high unemployment or limited infrastructure. The WTO exception for such subsidies—when generally available to industries within the disadvantaged regions—protects these nations from countervailing duty actions against such exports. The exemption has not been renewed, but presumably will be continued in some form at the conclusion of the Doha Round negotiations. The subsidies agreement contemplates two often-parallel means for dealing with illegal subsidies. First, as noted, private parties in a member nation may bring administrative countervailing duty actions under domestic law, resulting in the imposition of offsetting or countervailing duties if all the procedural and legal requirements discussed in detail in this section are met (SCM Agreement, Part V). However, a member government may also seek redress through the WTO dispute settlement body. If the action is against prohibited export subsidies, it is sufficient to show the existence of the subsidy (SCM Agreement, Part II). Where the action is against actionable when it believes that another member’s use of subsidies is causing (1) injury to one of its domestic industries, (2) “nullification or impairment” of its rights under the subsidies agreement, or (3) “serious prejudice” to any industry in its territory (Part III, Arts. 5, 6). Should the complaining member prevail, the subsidizing country would have the usual choice of complying with the decision by eliminating the subsidy or accepting trade sanctions. There are other trade remedies available to WTO Members. Most significantly, the WTO agreement on implementation of Article VI of
the GATT 1994 (anti-dumping agreement or “AD agreement”) permits members to impose antidumping duties (additional import taxes) on foreign goods that are sold in the export market at “less than fair value” and as a result cause or threaten material injury to a domestic industry. Effectively, the rules punish international price discrimination when the product at issue is sold at a lower ex factory price in the export market than in the home market. The agreement on safeguards (“safeguards agreement”) allows the “temporary” re-imposition of customs duties or quantitative restraints when increasing imports are shown to cause or threaten “serious injury” to domestic producers. The agreement on trade-related investment measures (TRIMS) effectively precludes most types of performance requirements. For example, it is generally illegal for a country to require a local manufacturer to use local parts and materials rather than parts and materials imported from another country, or to provide government benefits conditioned on exporting a certain volume of production.
Applicability to Outsourcing of Goods How can a nation such as the United States counter the use of imported goods over domestically produced goods? This is very difficult prospect. In most cases, raising tariff above agreed (MFN) levels is prohibited. Tariffs bound under GATT Article II at, say, 4%, cannot be raised to 10%. Quantitative restraints (quotas) as noted cannot normally be imposed. Most other non-tariff barriers, such as bogus health and safety standards, can be challenged in the WTO’s dispute settlement body. If excise taxes are assessed on foreign goods, taxes at the same rate must be assessed on domestic goods under GATT Article III. If foreign goods are dumped—sold at lower adjusted prices in the U.S. than in the exporting countries—dumping duties can be assessed to
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offset the difference; this may occur much more, since national administering authorities have broad discretion. The U.S., for example, routinely applies high anti-dumping duties on steel, orange juice, softwood lumber, cement, anti-friction bearings, and other products, including many from China. Imposition of dumping duties has become the remedy of choice for the U.S. and more than 100 other WTO member nations, including China and India, since most other protectionists actions are foreclosed or require compensation (as with safeguards). This is of course one way of discouraging outsourcing, although it tends to be used most often against unrelated foreign producers rather than against U.S. subsidiaries abroad. If foreign goods are recipients of government subsidies, similar penalty duties may be imposed. Safeguards in theory may be imposed where there is serious injury, usually for no more than 4 years. However, U.S. or other WTO member actions are subject to legal review under WTO procedures, and many such actions are overturned by the dispute settlement body. For example, safeguards have been challenged at the WTO in at least five instances, and in each of these cases, the protection afforded to the domestic industries was ruled illegal. Should the United States decide to subsidize certain industries in an effect to make production in the United States more financially attractive by reducing manufacturing costs, such subsidies could be subject to challenge by other WTO members as a violation of WTO rules. Nor, under TRIMS, could the U.S. government require U.S. producers to use domestic parts and components rather than foreign ones. This would be counterproductive anyway, as it would encourage the domestic manufacturer to move its entire production abroad.
Trade in Services The objective of the general agreement on trade in services (“GATS”) is simple: over time, to assure that the basic disciplines that have applied to 32
international trade in non-agricultural products for more than half a century—MFN treatment, national treatment, subsidies, transparency, and so forth—are applied to services, with a minimum of exceptions. GATS provides a series of legal rules governing market access and national treatment restrictions. GATS rules apply to regional and local as well as national governments. Members of the WTO agree through a “positive list” approach to restrict use of market access and national treatment restrictions; obligations under GATS, except as noted, are defined largely by members’ individual schedules of commitments. Services obligations are largely divided into three types: •
•
• •
Mode 1: cross-border services, such as when a Tucson, Arizona lawyer sends a legal opinion by e-mail or courier to Bombay Mode 2: consumption abroad, as when an Indian lawyer or engineer travels to the University of Arizona to attend a graduate degree program Mode 3: commercial presence, as when a U.S. bank opens a branch in Shanghai Mode 4: presence of a natural person, as when an Australian attorney travels to Vietnam to open up a travel agency
GATS provides coverage of all services other than those afforded in the exercise of governmental authority, national treatment (barring discrimination in favor of domestic suppliers), and most favored nation treatment. However, these obligations, unlike parallel ones in GATT, incorporate important exceptions: •
National treatment commitments are not universal, but are limited by each government to the services specifically designated by that government; this contrasts with the GATT 1994, where national treatment is binding once the goods have entered the national market.
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•
•
The degree of market access and national treatment can be limited, for example, by permitting foreign banks to own only 49% of a subsidiary. EvenMFNtreatmentwassubjecttoexceptions for up to 10 years, with an initial review of the exceptions after 5 years, or beginning in 2000.
GATS also has other important provisions: transparency; reasonable regulations subject to judicial review; absence or restrictions on international payments for services which may not be restricted except for balance of payments difficulties; difficulties, and; built in schedule for further negotiations. •
•
Financial services: By December 1997, GATS members were able to agree on a broader and much improved series of financial services commitments, totaling 56 schedules representing 70 member governments. A total of 104 GATS members made commitments under the Fifth Protocol. Nations representing over 95% of trade in financial services participated in the agreement. Specific commitments for banks, securities firms, and insurance firms incorporate dozens of pages. However, in general they include: fewer regulatory requirements for foreign commercial presence; “Grand fathering” existing operations that are currently majority owned, even if subsequent limitations have been tightened, and; broad coverage of insurance, reinsurance, brokerage, agency services, actuarial services, and all banking and stock brokerage functions. Telecommunications services: Telecommunications is another key services sector where negotiations could not be completed in 1994. Negotiations continued until February 1997, at which time 69 governments made market-opening commitments as part of the “Fourth Protocol” to the GATS
or Basic Telecommunications Agreement. More than 95% of the global telecommunications market was covered. While commitments in the sector are generally offered on an MFN basis, several countries took MFN reservations (e.g., U.S., one-way satellite transmission; Brazil, distribution of radio/TV programming to consumers; Turkey, transit land connections and satellite ground station use by neighboring countries; Bangladesh, Pakistan, India, Sri Lanka, Turkey, application of differential measures by governments in setting rates; Antigua, Barbuda, national treatment only for other CARICOM members, etc.). The coverage of GATS, unlike GATT rules relating to trade in goods, is still incomplete, and is under further negotiation in the now-stalled “Doha Development Round” of WTO negotiations taking place in Geneva from November 2001 to mid-2006, and sporadically thereafter. The focus of these negotiations, like those relating to telecommunications and financial services earlier, has been to eliminate market access restrictions, not to create such restrictions. Among the other gaps is very limited coverage of subsidies of services activities. GATS contemplates provisions for emergency safeguards and to restrict subsidies of services providers by host governments, but they were to be negotiated after 1995, and those negotiations have not yet succeeded. A provision exists to guard against balance of payments problems, but it has seldom if ever been used, in part because U.S. services providers are the ones which are effectively importing the benefits of the services into the United States.
Implications of GATS for Services Outsourcing The implementation of GATS has effectively made it easier for developed members such as the
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United States to outsource services jobs, since it becomes very easy, for example, for a United States firm to open a subsidiary abroad to provide brokerage back office services (often, perhaps most frequently, the U.S. firm contracts with the service provider in India or elsewhere, rather than owning and controlling the foreign operation). Market access provided by India and other countries in the GATS schedules or in through national legislation fostering foreign investment and business activity generally has also been a significant driving force for outsourcing in the last decade or so. Also, the GATS contains no effective provisions on dumping or subsidization of services. Moreover, the “product” resulting from a foreign service provider—answering your telephone query about a Microsoft computer program or receiving electronically the draft of a legal document or code for a software program—is generally not subject to any kind of effective border controls or other restriction in the importing country. The entire thrust of the development of freer trade worldwide in goods (since 1947) and in services (since 1995) has been to remove restrictions that would otherwise prevent market forces for determining sourcing decisions. The members of the GATT/WTO have achieved a high level of success in this endeavor, even though many trade restrictions and unfinished business remain. Thus, efforts to restrict such trade in the name of outsourcing are likely to violate binding WTO obligations. Should the U.S. Congress enact WTO — illegal restrictions on outsourcing or imports from certain nations (e.g., India or China) based on exchange rates, they would likely be declared illegal by the WTO’s dispute settlement body within a relatively short period of time. Probably the only solution for U.S. outsourcing is for the government to maintain a favorable investment climate and a climate for sophisticated basic and applied research, and tax policies that encourage innovation and investment in technologies that increase productivity and competitiveness, so
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that outsourced manufacturing or services jobs can be replaced by other jobs requiring special technical skills and knowledge, as has in fact happened repeatedly in the United States since World War II.
Strategy Adopted by State Governments and Local Governments in the U.S. State governments in the U.S. have used massive subsidies in recent years to attract major foreign manufacturing facilities; examples include the deals made by South Carolina and Alabama to attract BMW and Mercedes respectively. There are also examples of situations where the state government has provided a subsidy to new industries or to existing industries as an incentive to get them not to outsource, and some companies leave the state soon after the contractually mandated period is over. In the area of outsourcing of professional services, the case most cited in literature is that of the conflicting decisions made by successive governors in Indiana. In September 2003, Governor Frank O’Bannon approved a contract of $ 15.2 million in favor of Tata American International Corp., a New York-based subsidiary of Tata Consultancy Services; this was the lowest bid, between $8.1 million to $23.3 million less than other bids. In November 2003, Governor Joe Kernan canceled the bid, not on the basis of any flaw in the execution of the project by the contractor. Additional details of this decision and other noteworthy decisions by state and local governments are presented in (Gupta et al., 2007). State and local governments have to grapple between two constraints: on one side, they need to procure services at the lowest possible price; and on the other, they want to maintain the highest possible levels of employment. In the Indiana case, the additional cost of retaining jobs in Indiana was calculated to be $162,500 per job; this is the incremental cost that the taxpayer must
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Table 2.1. Job Turnover (thousands) (Source: Bureau of Labor Statistics) Year
Job Gains
Job Losses
Net Change
1993
29,665
27,032
2,633
1994
30,783
27,621
3,162
1995
31,459
29,079
2,380
1996
32,504
30,061
2,443
1997
33,725
30,757
2,968
1998
34,637
31,805
2,832
1999
35,614
32,924
2,690
2000
35,104
33,143
1,961
2001
32,491
35,442
-2,951
2002
31,691
32,047
-356
Total
327,673
309,911
17,762
bear in order to keep the job in the state (Gupta et al., 2007). The U.S. constitution specifies that the federal government possesses exclusive authority over all matters pertaining to foreign affairs. Accordingly, it is questionable whether state governments possess the authority to bar procurement of services from abroad. So apart from the international conventions delineated in earlier subsections, the ability to influence outsourcing decisions appears to be further limited by the US constitution.
Outsourcing versus insourcing in the United States There is a perception of IT job losses due to outsourcing. However, much of the job loses experienced have been due to the downturn of the economy in 2001, the IT bubble bursting, the tech-laden NASDAQ losing three-quarters of its value during the ensuing 3 years, and to productivity increases in the IT industry. That mistake is compounded when current output and employment levels are compared with levels at the frenzied peak of the boom in 2000 rather
than with more normal levels from the late 1990s (Griswold, 2004). The job market is like most other markets, a dynamic and fluid environment that operates in a cyclic manner. Jobs are created and lost, similar to other markets where goods and services are bought and sold. U.S. private-sector employment rose by 17.8 million during the decade from 1993 to 2002. To produce that healthy net increase, a breathtaking total of 327.7 million jobs were added, while 309.9 million jobs were lost. In other words, for every one new net private-sector job created during that period, 18.4 gross job additions had to offset 17.4 gross job losses (Lindsey, 2004). Table 2.1 provides a visual representation of the trends of job turnover during 1993-2002 to illustrate this point. Economic analysts and critics might argue that the jobs created are lower paying jobs that replace the more skilled or white-collar jobs that are being lost, and presumably sent abroad. However, management and professional specialty jobs have grown rapidly during the recent era of globalization. Between 1983 and 2002, the total number of such positions climbed from 23.6 million to 42.5 million—an 80% increase. In other words, these challenging, high-paying positions have jumped
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from 23.4% of total employment to 31.1%. Such high-quality jobs are likely to continue growing in the years to come. According to projections for years 2002–2012 prepared by the Bureau of Labor Statistics, management, business, financial, and professional positions will grow from 43.2 million to 52.0 million—a 20% increase that will lift these jobs from 30% of total employment to 31.5% (Lindsey, 2004). As the U.S. economy continues its shift to one that is more focused on performing services than on manufacturing, there is a concern that the U.S. is falling behind in this arena. This feeling is partially due to a shift of some high profile service positions, customer service representatives, and telemarketing sales, being sent offshore. Yet the fact is that the United States runs a trade surplus in the IT services most directly affected by offshoring. In the categories of “computer and data processing services” and “data base and other information services,” U.S. exports rose from $2.4 billion in 1995 to $5.4 billion in 2002, while imports increased from $0.3 billion to $1.2 billion over the same period. Thus, the U.S. trade surplus in these services has expanded from $2.1billion to $4.2 billion (Lindsey, 2004).
Outsourcing of legal tasks across national borders Technology has progressed to the stage that corporations can select providers of legal services in other countries, even other continents, who offer greater value and faster turnaround times. In some cases, they possess superior domain knowledge too. Limits do exist, however, mostly through state bar associations, which regulate the practice of law to members of the bar. To the extent outsourced services are made the responsibility of a member of the bar, for example, an Indian-American who is a member of the New York Bar and is responsible for supervising paralegals working in Mumbai, the state restrictions are likely not controlling.
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Issues of client confidentiality and protecting the lawyer-client privilege also arise. Further expansion of legal outsourcing will depend, inter alia, on maintaining a significant cost differential between the United States and Indian salaries for legal support professionals, and availability of such professionals for expansion.
Case Examples of Outsourcing of Legal Activities The first law firm to expand overseas was Dallas based Bickel & Brewer (Brook, 2005). They opened an office in Hyderabad, India. The founders explained initially this was a solution to “handling the millions of pieces of information that confront us in each case” (Brook, 2005). This office has since spun off to a separate entity (Imaging & Abstract International) that handles work for Bickel and Brewer in addition to several other American clients. While some American companies are reluctant to have their legal work performed by a company that is not located within the United States because of possible negative press (Jain, 2006), other corporations are setting up captive centers, or locating part of their organizations’ legal department to locations such as India (Flahardy, 2005), where labor is often 15-20% of what their U.S. counterparts charge (Rowthorn, 2005). The first U.S. corporation to do this was GE Plastics in 2001. GE had their U.S. staff interview and supervise these new employees who were located in Gurgaon, India. These employees were mainly drafting outsourcing agreements and confidentially contracts. In a 2 year period, GE reported saving “nearly $2 million in legal fees that otherwise would have gone to outside counsel” (Flahardy, 2005). This encouraged other corporations to follow G.E.’s lead, triggering the start of the legal outsourcing industry. DuPont has hired lawyers in the Philippines (Engardio, 2006) to work 24 hours a day (in three shifts), seven days a week, to prepare documents
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and code potential evidence for upcoming court cases, a process known as first level document review. As the amount of data that needs to be managed increases, so does the incentives for sending work, electronically, to a facility that can rapidly review and catalog this growing mass of information. DuPont is looking to shorten this process from 18 months to 3 months. The expected savings for this document work is 40% to 60%, a savings of $6 million from their annual budget. When Paris-based Rhodia, a leading producer of specialty chemicals, felt pressure to remain competitive, it entered into a 6 year contract with Accenture to transfer the bulk of its law and accounting functions to a service center in Prague, Czech Republic (Stein, 2003). Accenture moved Rhodia’s 15 existing systems to Prague, and then began the process of standardizing their processes. This model, a shared service center, resulted in cost reductions over 35% in less than 2 years (Cooper, 2003). While most of the work so far has been low level tasks including transcriptions, document conversions, and legal data entry, there is a shift towards higher value services such as patent law being perform by Indian firms (Sandburg, 2005). Recently, an Indian law firm specializing in patent law, Pangea3, received $4 million from private equity firms (Kannan, 2006). This funding reinforces the belief of industry analysts that legal process outsourcing market will increase to $11.5 billion per annum by 2010 (Jain, 2006).
Legal Tasks and Opinions The law industry, regardless of the type of practice, is composed largely of three components: research, writing, and litigation or negotiation (the vast majority of civil legal actions in the United States—over 90%—never reach the courtroom. They are settled or mediated). Most lawyers are not litigators. Rather, they are engaged in negotiation of complex legal agreements with private parties or government entities, and assisting clients with
regulatory requirements or such documents as wills, trusts, corporate charters, contracts, and so forth. Lawyers often have a heavy work load handling the research and writing as well as the negotiation, litigation, and interaction with clients. The negative effects of this hectic work schedule for the employer are worker burnout and fatigue (Waldmeir, 2003). During the trial phase of a case, lawyers often need to adjust their case in response to the day’s events. After they leave the courtroom, they conduct many hours of research to file a motion, or in response to a motion filed. Similarly, a time-sensitive negotiation or Securities and Exchange Commission filing may require almost round-the-clock work by dozens of legal professionals. The fatigue such professionals experience has negative effects on their performance. In addition to trial attorneys, mergers, and acquisitions, SEC and patent law and contract law among others require extensive research and revisions, and attorneys and paralegals practicing in those areas experience similar workloads. The legal tasks required for litigation support bear significant similarity to financial functions: they both share aspects that predispose them to the benefits of outsourcing. Each consists of vast amounts of information, in printed and electronic form, and requires that the data be tagged and indexed for retrieval upon demand. So, if financial functions can be outsourced at lower costs, one should be able to do the same for allied tasks. Ethics opinions issued in New York and California proclaim lawyers may ethically outsource legal support services overseas to a non-lawyer as long as the lawyer rigorously supervises the non-lawyer, obtains advance client consent to outsourcing, and bills for outsourcing appropriately (New York City Bar, 2006; San Diego County Bar, 2006). Note, however, that patent filing presents a unique set of constraints due to technology export laws. To mitigate this problem, the U.S. Commerce Department grants export waivers for technology, including blanket export waivers. Many multinational companies have blanket
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export licenses covering all of their operations (Harris, 2005).
Trends in Legal Industry Unbundling is a new trend in the legal industry; clients can identify services they want law firms to perform and then select different law firms for different services based on considerations of cost or quality. In essence, legal tasks become a set of commodities. When DuPont needed outside help to manage documentary evidence for product liability cases, it determined that this work, although requiring some judgment, was not difficult or too technical in nature. Instead of opting for a vendor that focused on legal services, DuPont opted for a company with more experience in judgment based work, specializing in back office services. It selected Office Tiger, a large business process outsourcing provider, with the stipulation that the workers assigned by the latter to DuPont cases will work exclusively on DuPont related matters (The Metropolitan Corporate Counsel, 2006). The decision-making process took nearly 2 years with several factors that needed to be examined. A common concern is U.S. export control laws restricting the amount of information on new technologies that can be sent overseas. This was a concern for DuPont, being a technological-driven company. This caused DuPont to use a U.S. law firm for such projects that could not be done overseas. For projects that could be conducted overseas, DuPont conducted onsite interviews of potential vendors before making their selection. Once security and quality concerns were addressed, DuPont utilized its own staff to personally train the foreign workers. In the future, such trips like this will not be necessary, as global standards for the legal outsourcing industry are put into place. A particular project in the Philippines was conducted by trained local persons, under the direct supervision of three persons who possessed law degrees from the U.S. and had been admitted to practice law in the
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U.S. In India, the new Global Legal Professional Certification test has been announced recently, in order to help identify the most talented subset of the nearly 200,000 individuals who graduate with degrees in law each year. Legal outsourcing is not simply a means to lower legal costs. After Andrew Corporation, a manufacturer of communications equipment, acquired a division of Deltec Telesystems, a New Zealand manufacturer, Andrew Corp. opted to use the local IP firm that Deltec had used for filing patents (Fried, 2004). This IP firm had acquired a solid reputation for filing radio frequency patents in the U.S. and other markets. Andrew Corporation decided to send all of their U.S. radio frequency patent work to this firm, located in New Zealand, based on this reputation. Further, because of the time difference between the U.S. and New Zealand, work can be conducted on a cyclic basis, with drafts from the IP firm being reviewed and sent back by the client before the firm begins work the following day. This decreases the overall time involved in the patent filing process and offers major strategic advantages and the possibility of true 24-Hour Knowledge Factory operations (Gupta et al., 2007; Gupta & Seshasai, 2007) as illustrated by the scenario in the following paragraph. There are three legal teams: Group A, B, and C; each located 8 hours (in meridian time difference, not travel time) from each other. When Group A is leaving the courtroom, at the close of the business day, Group B is entering its office. In this example, the opposing legal team is trying to get last minute evidence entered into the trial. Group A sends the case information, along with the results they would like their counter argument (motion) to produce. Group B is now responsible for acquiring all the necessary research to produce the desired result. Group B conducts the research, until the end of its working day. At this point, Group C starts its day. Group C is presented with the information from group A and the research that group B has performed. Group C is now
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charged with compiling this information into a written motion that will be submitted to the court, or an oral argument that Group A will present to the court. After 8 hours have elapsed, group C is now preparing to go home, and group A is now starting its day. Group C now forwards all information to Group A, who is preparing to return to court. Group A receives: (i) Group A’s summary of events and the intended results, (ii) Group B’s research, and (iii) Group C’s written motion and draft oral argument (could be in written form, or as an audio transcript, or both). Presumably, Group A has had sufficient rest, and was able to utilize the time for other aspects of the case. The results for using this model have been translated into a strategic advantage. Such mode of operations will allow three teams of workers to perform professional work on a round-the-clock basis (Gupta et al., 2007; Seshasai & Gupta, 2007).
Intellectual property (IP) issues The performance of tasks in an outsourced or collaborative fashion, by individuals located across state and national boundaries, raises new issues. Who owns the intellectual property such as patents on new medical or drug inventions; who can be sued for malpractice and under which set of laws and regulations; how the charges for services should be apportioned; and what are the mechanisms for seeking redress if and when it becomes necessary? Besides these, there are also other related social and policy-related concerns such as quality control of services and intensity of workflow across boundaries. In the case of patents and intellectual property, there is a common feeling among intellectual property holders around the world that others may find a way to exploit one’s patents or other technology, particularly trade secrets that are not subject to patent protection. In the U.S., there is a
feeling that some companies in foreign countries are exploiting U.S. inventions and patents without authorization and payment of royalties. On the other side, there are people in other counties that feel the same way; there are also instances of patents issued by the U.S. patent office on items of indigenous nature that have existed for thousands of years. This section looks at these issues and proposes an approach that can surmount the current problems and hurdles related to intellectual property.
Foundations of Intellectual Property Intellectual property (IP) rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time (World Trade Organization, 2007b). The key forms of intellectual property are patents, copyrights, trademarks, and trade secrets. In addition, there are variations to the common forms of intellectual property. For the purpose of this chapter, an example in the category of geographical indicators (GI) is focused on. A GI identifies “a good as originating in a locality where a given quality, reputation, or other characteristic of the good is essentially attributable to its geographic origin” (Field, 2006). Since intellectual property shares many of the characteristics of real and personal property, associated rights permit intellectual property to be treated as an asset that can be bought, sold, licensed, or even given away at no cost. IP laws enable owners, inventors, and creators to protect their property from unauthorized uses (Field, 2006). On a macro scale, the importance of IP to social and global development is three fold: •
Convenience: The most obvious reason is that these creations translate into making some of life’s most common and enduring
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•
•
activities more convenient. For example, communication between people became easier when the postal system was created. As time progressed, the telephone was developed, which allowed for direct communication across greater distances. Later, the cellular phone was developed to allow talkers to have direct communication with each other outside of their homes—in fact, anywhere. Economic growth: The World Bank’s Global Economic Prospects Report for 2002 confirmed the growing importance of intellectual property for today’s globalized economies, finding that “across the range of income levels, intellectual property rights (IPR) are associated with greater trade and foreign direct investment flows, which in turn translate into faster rates of economic growth.” Innovation: Effective IP enforcement encourages creation and invention.
The World Intellectual Property Organization estimates that copyright industries alone contributed $791 million, or 7.75%, to the U.S. economy in 2001 (Wayne, 2004). Estimates of U.S. companies’ worldwide losses to counterfeiting and piracy range from $200 to $250 billion per year (Wayne, 2004).
Intellectual Property and Role of International Organizations One of the major governing bodies related to protection of IP on an international basis is the World Trade Organization (WTO). The current policy evolved during the 1986-1994 Uruguay round of multilateral trade negotiations (World Trade Organization, 2007a). The TRIPS (agreement on trade related aspects of intellectual property rights) was an attempt to bring IP rights under the protection of shared international rules governing related trade issues. TRIPS establishes
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minimum levels of protection that each member has to give to the intellectual property of fellow members. Governments are allowed to reduce any short term costs through various exceptions. For example, this maneuver could be executed in order to tackle public health problems. The agreement covers four broad areas (World Trade Organization, 2007a): •
• • •
How basic principles of the trading system and other international intellectual property agreements should be applied How to give adequate protection to intellectual property rights How countries should enforce those rights adequately in their own territories How to settle disputes over intellectual property between members of the WTO now that the provisions of TRIPS apply to all WTO Member states
The second part of the TRIPS agreement looks at different kinds of intellectual property rights and how to protect them. Its main goal is to make certain that member countries have an understanding of its provisions for IP protection. The basis of the TRIPS agreement can be traced back to the late 19th century. More specifically, its basis was founded around the Paris Convention for the Protection of Industrial Property of 1883 (World Intellectual Property Organization, 2007b). Topics that were addressed in this agreement included, but were not limited to, patents, industrial designs, and so forth (World Trade Organization, 2007a). Later, the Berne Convention for the Protection of Literary and Artistic Works in 1886 established international copyright laws (World Intellectual Property Organization, 2007a). Evidently, some areas concerning IP were not discussed—for example, geographical indicators. Or, those protection standards that were discussed were later found to be insufficient. The WTO evaluated the proceedings of the earlier two conventions, and determined that
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higher standards were needed today, especially with respect to the enforcement aspect. Part 3 of the TRIPS agreement was written specifically to address this issue. Yet, before going into the weak points of this section, an understanding of what Part 3 attempts to enforce must be made known. According to the WTO: The agreement says governments have to ensure that intellectual property rights can be enforced under their laws, and that the penalties for infringement are tough enough to deter further violations. The procedures must be fair and equitable, and not unnecessarily complicated or costly. They should not entail unreasonable time-limits or unwarranted delays. People involved should be able to ask a court to review an administrative decision or to appeal a lower court’s ruling. The agreement describes in some detail how enforcement should be handled, including rules for obtaining evidence, provisional measures, injunctions, damages and other penalties. (World Trade Organization, 2007a). More specifically, a major difficulty that member countries face is how to enforce efficiently what the WTO has set out to be a stringent set of rules. It is thought that this problem stems from the fact that the TRIPS agreement does not require all member countries to have uniform rules on protection of intellectual property. According to the WTO, the TRIPS Agreement only: … requires members to comply with certain minimum standards for the protection of intellectual property rights covered in it; however, members may choose to implement laws which give more extensive protection than is required in the agreement, so long as the additional protection does not contravene the provisions of the agreement. (World Trade Organization, 2007a)
When the member countries adhere to the minimum requirements of the agreement, they have: …the freedom to determine the appropriate method of implementing the provisions of the agreement within their own legal system and practice—taking into account the diversity of members’ legal frameworks (for instance between common law and civil law traditions). (World Trade Organization, 2007a) Two issues arise as a result of this line of thought: While some countries believe heavily in the protection of IP and strict laws to enforce that protection, there are other countries that settle for the bare minimum requirements of TRIPS. Although there is a clear disparity, this is acceptable, and both countries are considered to be in compliance with the requirements of the TRIPS agreement. Further, the protection of IP outlined by TRIPS remains unstable due to lack of clarity surrounding the legal rules governing market access and national treatment restrictions as outlined in the GATS—which essentially bolsters IP protection. Generally, the wordings of the GATS guidelines are vague and it has rarely been tested in legal disputes; more specifically, members question its: “…market access rules and subsidies and the unwillingness or incapability of the proponents…to give guarantees that the feared negative consequences can be excluded or ruled out” (Bienefeld, 2003). This could greatly expose any IP being shared and raises the possibility of infringement. In essence, “…is still largely a terra incognita for most trading nations” (Horn & Mavroidis, 2006).
This implies that member countries need only to adhere to the minimum standards of the agreement. 41
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International Property Arguments at International Level According to Friedman (2005), the 2001 Chinese accession into the WTO was largely based on the goal of destroying internal bureaucracy as it negatively affected international trade and encouraged political and economic corruption. Friedman (2005) suggests that a more “codified law” would aid in the control of such problems. It should be noted that lack of local IP enforcement can definitely cause a lack of support for expanding trade between two countries. Such was the case in 2003 when the U.S. was apprehensive in trading with China; since then, China has strengthened the enforcement of its protection policy (Wayne, 2004), but not to the satisfaction of the United States, which has challenged the failure of China to meet its TRIPS obligations (China—Measures Affecting the Protection and Enforcement of Intellectual Property Rights (Complainant: United States), DS 232, April 10, 2007). Consider a specific example from the U.S. according to The New York Times article “U.S. Permits 3 Cancer Drugs from Cuba” (from July 15, 2004 issue) the U.S. federal government allowed biotechnology company CancerVex to license three experimental cancer drugs from Cuba. This was surprising because this allowance was essentially an exception to the highly restrictive trade policy of the U.S. with Cuba. Historically, the U.S. has imposed a series of embargos on Cuba. Most notably, the Cuban Liberty and Democracy Solidarity Act (1996) penalizes foreign companies that have done business in Cuba by preventing them from doing business in the U.S. The European Union vehemently voiced its disdain of this act because it felt the U.S. was dictating how other nations conducted their trade—which was essentially what it was doing—until negotiations were conducted. Such disputes could be better resolved if there was a good mechanism to handle them.
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Consider another example. Basmati rice serves as the traditional staple diet of tens of millions of people in South Asia. Based on research conducted on the total export of basmati rice, it was concluded that exports worth $350 million from India and $250 million from Pakistan were at stake at the time of the award of patent (Chandola, 2006). On September 02, 1997, Texas-based company RiceTec was awarded a patent by the U.S. Patent and Trademarks Office in regards to basmati rice. The patent was vague, allowing RiceTec the rights to exclusive use of the term ‘‘basmati,” a monopoly on farm-bred Indian/Pakistani basmati varieties with any other varieties in the Western Hemisphere, as well proprietary rights on the seeds and grains from any crosses (Uzma, 1998). The allowance of this patent caused uproar among the concerned parties of the South Asian subcontinent, as they feared bio-piracy by the West (Vandana, 2001). There were three main issues that concerned this patent: a theft of collective intellectual and biodiversity heritage of Indian farmers; a theft from Indian traders and exporters, whose markets are being stolen by RiceTec Inc.; and finally, deception of consumers since RiceTec is using a stolen name, basmati, for rice that is derived from a variation of Indian rice but not grown in India, and hence of a different quality. (Ray, 1998) India’s concerns, in fact, were supported by international law and RiceTec was not given new rights or any right given to market their varieties as equivalent to or superior to basmati (Chandola, 2006). According to the TRIPS agreement itself, Article 22 defines a GI as: …indications which identify a good as originating in the territory of a member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.
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Basically, in order to be protected, the GI is not required to have the same name of a geographical place, but must be an indication of that place. In this case, “basmati” is taken to be an indication of rice coming from the Indian subcontinent. Interestingly enough, RiceTec had been selling and marketing basmati rice by the brand Texamati and Kasmati for over 20 years in 30,000 stores in North America (Chandola, 2006). So why did India not challenge the registration of this brand in the USA? Article 24.5 of the TRIPS agreement provides that:
auto manufacturer. Nevertheless, if the dispute had been tried in India, RiceTec would, most likely, have been held accountable for the infringement, and the costs to the plaintiffs would have been significantly lower too. The international IP area provides enormous challenges for companies and other holders of IP rights that wish to enforce those rights in national courts. TRIPS provides a basis for governmentto-government action where, for example, a local patent office may discriminate against foreign patent holders on a systematic basis, but is not useful for dealing effectively with individual company infringements. Under the best of circumstances, IP litigation in national courts is expensive and time-consuming, with the results often difficult to predict..
…where a trademark identical or similar to a GI has been applied for or registered or used in good faith before the application of these provisions of TRIPS in the member state or before the protection of the geographical indication in the country of origin, such a registration is valid and cannot be challenged. (“TRIPS”)
Long-Term Solution for Addressing Issues at Global Level
Based on this proviso, India could have challenged both the trademarks because they violated the provision of “good faith.” The problem, however, is that India, would have had to challenge the dispute in American courts. Historically, American courts have in some instances appeared to favor their national companies and this is a serious disadvantage to an overseas defendant [see Mother’s Restaurants v. Mother’s Other Kitchen, Inc. 218 U.S.P.Q. 1046 (TTAB1983); Person’s Co., Ltd. V. Christman 900 F.2d 1565 (Fed. Cir. 1990), 14 U.S.P.Q 2d, 1477 for correlating evidence] (Chandola, 2006). However, there are other prominent cases that culminated in a result that favors the foreign party over the U.S. firm. For example, in Bremen v. Zapata Offshore Oil, 407 U.S. 1 (1972), the Supreme Court deferred to a contractual choice of law case and forced an American party to bring its court action in England rather than the U.S. In Mitsubishi v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), the Supreme Court enforced an arbitration clause against a U.S. auto dealer in favor of the Japanese
Apart from the problems mentioned, the lack of global consensus on intellectual property issues is increasing the net cost to the customer in unforeseen ways. Consider this example from the healthcare arena. In the U.S., the FDA plays the pivotal role on issues related to drugs. But, each state is responsible for handling all medical professional credentialing and registration issues. The radiologist can render an initial opinion from outside the particular state or country, but the final opinion must usually be signed by another radiologist who resides within the particular state and is licensed to practice there. The use of two radiologists, though providing quicker action, tends to increase overall costs (Gupta et al., 2008). As mentioned earlier in this section, a widespread feeling exists among holders of intellectual property, both in the U.S.and abroad, that others are exploiting their work. Courts in different countries give conflicting judgments, with some evidence of bias in favor of companies domiciled in their respective countries. This is similar to
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situations where judges in different states in the U.S. would render conflicting decisions on the same case, creating confusion need for reconciling these decisions at the inter-state level; now the issue is at a nation-to-nation level. Consider a specific situation. Until fairly recently, child custody cases were handled entirely at the state level in the U.S. In divorce cases involving parents residing in two different states, the first state could grant the custody of the child to the mother (who resided in that state), and the second state could grant custody of the same child to the father (who resided in the latter state). In order to mitigate this problem of conflicting judgments, the Uniform Interstate Family Support Act (UIFSA) was drafted in 1992. According to this act, which has now been adopted in all of the U.S., states have been provided with the power to reach beyond their borders for the establishment and enforcement of support orders. A similar type of action is obviously desirable in the arena of intellectual property, at the international, nation-to-nation level, but agreement has proven elusive. Even the members of the European Union, after more than 40 years of trying, have not been able to agree on a uniform patent statute to be applied in the same manner by all member states. Let us step back from the specific aspect of intellectual property to analyze the broader subject of how laws, regulations, and norms have evolved over history. In 1000 BC, all rules were maintained and enforced at the village level. The village constituted the unit of economy. If a person engaged in inappropriate behavior, he or she could be denied the ability to draw water from the village well. The concerned person then had to plead with his or her peers in order to survive. This was a mechanism to enforce norms and mores of that village-based society. Over time and with the advent of better means of transportation, the legal unit increased in geographic size, first to a collection of a dozen villages, then to principalities, and ultimately to nation states. The lawmaking and enforcement mechanisms evolved
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too, frequently with overlapping jurisdictions. For example, a person residing in Boston today may be governed by up to five sets of regulations, of the City of Boston, Suffolk County, the State of Massachusetts, and the United States of America, respectively. Being governed by laws of the U.S. does not imply having to go to Washington D.C. to seek redress; benches of U.S. federal courts exist in most large and medium-sized cities in the United States. Why was one layer of legal infrastructure adequate 3000 years ago, but multiple layers of infrastructure (see Figure 2.1) needed today? The answer lies in the growing sophistication of society and the widening circle of influence for each individual and organization. If one drives too fast, then the legal system at the local level is adequate to address the situation. If one manufactures goods in one state of the U.S. and sells in another state, then the guidelines of interstate commerce, established at the federal level, apply to safeguard the interests of the sellers and the buyers. As global trade becomes more prevalent, new legal mechanisms have to evolve. Such trends are being witnessed. For example, in some areas, such as intellectual property, there may be a supranational layer as well, that is, the WTO’s trade related intellectual property agreement, which although not applied directly in the United States, affects U.S. intellectual property law. In the case of intellectual property, the ultimate solution may be an international regulatory system that maintains offices in large cities around the world. This organization could deal with issues that transcend national boundaries. The organization that performs this role could be a new one or an existing one such as WIPO or the WTO. Further, it is possible that different organizations would be appropriate for different areas of expertise. For example, the agency that could address issues of medical credentialing, registration, malpractice, accounting, and reimbursement could be operated under the aegis of the World Health Organization (WHO).
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Figure 2.1. Five layers of legal Infrastructure
International Legal Infrastructure
National Infrastructure
State Infrastructure
County/District Infrastructure
Local/City Infrastructure
Issues of intellectual property and trade are currently coordinated at the international level by the World Intellectual Property Organization (WIPO) the World Trade Organization (WTO), respectively. These organizations could serve as the nucleus for establishing streamlined mechanisms that would enable better coordination of emerging types of practices, in various disciplines, perhaps under the aegis of the WTO’s general agreement on trade in services. Professional services of diverse types will increasingly transcend national boundaries as efforts are made to perform them with speed, efficiency, and in the most cost-ef-
Frequently, these two infrastructures are combined into a single infrastructure or only one infrastructure is applicable.
fective manner. The availability of the proposed mechanism for global coordination of intellectual property and allied issues will be of major benefit to large constituencies of individuals and organizations around the world. In order to convert the idea into reality, a critical mass of countries would need to subscribe to the proposed approach, and to the duties and the responsibilities that are inherent in it. Under current political realities, particularly in the United States and other major trading nations (EU, India, China, Brazil, etc.), broad agreement on such a mechanism seems extremely unlikely in 45
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the foreseeable future. Note, however, that it is not necessary for all the countries to agree to the idea; further, it is not necessary that the dominant countries subscribe to the concept at the initial stage. When one of the authors of this chapter was leading the effort to establish the Internet Telephony Consortium at MIT during the nineties, the strongest opposition came from the largest telecommunications company that existed at that time. The representative of this company raised objections at each stage. Finally, this particular author told the concerned representative that his company did not need to join this consortium if it had so many reservations about the concept of the proposed consortium. Immediately, the representative said that if the consortium was formed, his company would definitely be a member of it. Usually, the company or country that is the strongest is the one who resists the consortium approach more than others. Of course, an international/supranational IP system that did not include the United States, the EU, and Japan would not have much practical utility. Historically, matters involving multiple countries have evolved at a slow pace. For example, the law of seas “…developed in the 10th to the beginning of the 11th century where the city-state of Amalfi…had a code of maritime law, which served as the model for laws on the Mediterranean Sea (UN Atlas of the Oceans, 2007)”. As time progressed these laws were expanded and redefined to satisfy the desires of the dominant world power of the time. It was not until the early 1980s, during the finalization of the United Nations Convention on the Law of the Sea (also known as UNCLOS III), that a final set of regulations was developed (The Peace Palace Library Centennial Exhibition, 2004), and the United States, the world’s largest sea power, has not acceded. There are other examples where matters have progressed very fast. Note also that despite the predictions of many experts, the European Union did become a reality, and its member governments opted to surrender
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some of their traditional powers for broader good. Further, even though the United Kingdom, Sweden, and Denmark opted to retain their own currencies, the notion of a common currency was widely accepted. In fact, nations moved from their respective currencies that were centuries old and moved to the euro in an unprecedented short period of time. The notion of countries agreeing to closely cooperate in other parts of the world is exemplified by Mercosur, NAFTA, and other regional trade agreements. So, there are several good precedents where nations have relinquished at least some of their customs, traditions, and procedures rapidly, and have accepted oversight authority that is outside national control. A more likely-to-be obtainable approach, at least in the short to medium term, would be to expand TRIPS to provide not only minimum standards for protection but uniform standards for the registration of patents, trademarks, copyrights, and so forth, which would then be incorporated into domestic law in all of the WTO member states, and enforced by existing national IP entities. This uniform law approach, which has been used successfully in other areas (e.g., Convention on the International Sale of Goods), raises far fewer “sovereignty” concerns than the designation of an international entity with offices in member countries, and would achieve most of the same objectives. However, as noted earlier, there is resistance to such IP uniformity even within major regional trading groups such as the EU. Finally, if some countries opt against joining a common approach to coordinate intellectual property enforcement and allied matters, such countries are likely to suffer over time in terms of their level of trade with other countries.
Conclusion Despite the public rhetoric of politicians and others, governments of developed countries can do little to inhibit the global trend towards
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outsourcing without violating the commitments they have made at the international level. Overall, more jobs come to the U.S. than go out, because of outsourcing. The U.S. is the net beneficiary in terms of net number of jobs and especially in terms of net dollar amounts as the job coming in carries higher remuneration than the job performed abroad. The trend towards outsourcing of legal services, among others, may accelerate over time, assuming adequate supplies of low priced, welltrained professionals in such countries as India. Finally, there is an urgent need to adopt a new mechanism for handling of intellectual property rights and allied issues at the international level, even if the first step is harmonizing national IP laws and procedures through amendments to the TRIPS or WIPO agreements.
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Some descriptive statistics. Retrieved May 18, 2007, from http://siteresources.worldbank.org/INTRES/Resources/469232 1107449512766/HornMavroidisWTODSUDatabaseOverview.pdf Jain, A. (2006). The emerging Indian legal offshoring opportunity. The Financial Times. Kannan, S. (2006). Legal outsourcing firm gets funding. The Hindu. Lindsey, B. (2004). Job losses and trade: A reality check. CATO Institute. Retrieved August 23, 2007, from http://www.freetrade.org/node/65 Romero, R.E. (2006). DuPont legal again sets the pace—Outsourcing judgment based tasks. The Metropolitan Corporate Counsel, 14(11), 59. Retrieved June 18, 2007, from http://www. metrocorpcounsel.com/current.php?artType=vi ew&artMonth=November&artYear=2006&Ent ryNo=5855 New York City Bar. (2006). The Association of the bar of the city of New York committee on professional and judicial ethics, formal opinion. Retrieved May 1, 2006, from http://www.nycbar. org/Ethics/eth2006.htm The Peace Palace Library Centennial Exhibition (2004). Collection as a mirror of the historical development of international law: The law of the sea. Retrieved March1, 2007, from http://www. ppl.nl/100years/topics/sealaw/ Ray, S. G. (1998). The stealing of basmati. Retrieved March 1, 2007, from http://www.rediff. com/business/1998/mar/12rice.htm Rowthorn, R. (2005). The impact on advanced economies of north-south trade in manufacturing and services. The Social Science Research Coun-
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San Diego County Bar Association. (2006). Ethics opinion. Retrieved May 1, 2006, from http://www. sdcba.org/ethics/ethicsopinion07-1.htm Seshasai, S., & Gupta, A. (2007). The role of information resources in enabling the 24-Hour Knowledge Factory. Information Resources Management Journal, 20(4), 105-127. (An updated version of this paper is reproduced as Chapter XIII of this book). Stein, T. (2003). Inside out: Businesses look to outsourcing for more and more business processes. Optimize. Retrieved March 17, 2007, from http:// www.optimizemag.com/issue/020/execreport. htm UN Atlas of the Oceans. (2007). History of Maritime Law. Retrieved March 1, 2007, from http://www.oceansatlas.org/servlet/CDSServlet ?status=ND0xMjg2OC4xNDUwNSY2PWVuJj zPXdlYi1zaXRlcyYzNz1pbmZv Uzma, J. (1998). Biopiracy: The patenting of basmati by RiceTec. Paper presented at the Commission on Environmental, Economic and Social Policy—South Asia & Sustainable Development Policy Institute. Vandana, S. (2001). The Basmati battle and its implication for biopiracy & TRIPS. Retrieved March, 7, 2007, from http://www.globalresearch. ca/articles/SHI109A.html Waldmeir, P. (2003). Lawyers argue the case for a lifestyle revolution. Financial Times, 15. Wayne, E. A. (2004). Address to Senate Judiciary Committee. Retrieved March 1, 2007, from http://usinfo.state.gov/ei/Archive/2004/Mar/24488795.html
Evolving Relationships
World Intellectual Property Organization. (2007). Berne Convention for the protection of literary and artistic works. Retrieved March, 1, 2007, from http://www.wipo.int/treaties/en/ip/berne/ trtdocs_wo001.html World Intellectual Property Organization. (2007). Paris Convention for the protection of industrial property. Retrieved March 1, 2007, from, http://www.wipo.int/treaties/en/ip/paris/ trtdocs_wo020.html
World Trade Organization. (2007a). Frequently asked questions about TRIPS. Retrieved February 20, 2007, from http://www.wto.org/english/tratop_e/trips_e/tripfq_e.htm World Trade Organization. (2007b). What are IPRS? Retrieved February 20, 2007, from http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm
This work was previously published in the Information Resources Management Journal, Vol. 21, Issue 2, edited by M. KhosrowPour, pp. 103-126, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter III
Information Technology/ Systems Offshore Outsourcing: Key Risks and Success Factors Mahesh S. Raisinghani Texas Woman's University, USA Brandi Starr Texas Woman's University, USA Blake Hickerson Texas Woman's University, USA Marshelle Morrison Texas Woman's University, USA Michael Howard Texas Woman's University, USA
Abstract The offshore outsourcing of information technology and information systems (IT/IS) is being increasingly practiced among firms that are focusing on core competencies and cost-effectiveness. With the increase in offshore IT/IS operations, a growing number of companies are encountering negative experiences and unpredicted results. The analysis performed in this chapter reveals the possible risks and perceived success factors of companies outsourcing IT/IS operations offshore. The major points of interest are operational and strategic risks; legal contracts; cultural, security, and financial issues; and noted success factors by companies that participate in offshore outsourcing. The research indicates the importance of risk identification and the formulation of strategic plans that include preventive, detective, and corrective control methods of implementation and evaluation. Effective methods and metrics for measuring the success or failure of IT/IS offshore outsourcing operations is expected to be a continuing development with the increasing growth of this phenomenon.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Information Technology / Systems Offshore Outsourcing
It is not the strongest of the species that survives, or the most intelligent, but the one most responsive to change. —Charles Darwin
Introduction Offshore outsourcing with respect to information technology and information systems (IT/IS) or business processes is a key commercial phenomenon. IT/IS offshore outsourcing is the focus of this chapter and is defined as a process undertaken by an organization to subcontract or to sell the organization’s IT/IS assets, staff, and/or activities to a foreign supplier, rather than develop IT/IS resources internally. The contractual relationship requires the vendor to assume responsibility for the client firm’s IT/IS requirements. IT/IS services
include software development and maintenance; network and computer operations; and research and development (see Table 3.1) (Dolan, 2006). An extensive report by the National Academy of Public Administration prepared for the United States Congress and the Bureau of Economic Analysis defines offshoring as follows: “United States’ firms shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates” (Norwood et al., 2006). In offshore outsourcing work is outsourced to foreign countries that have cost advantages in various tasks such as application development, product manufacturing, and/or call center and back office operations. It involves complexity and risk not found in typical domestic outsourcing due to factors such as cost (i.e., labor, infrastructure, real estate, and corporate taxes); availability of
Table 3.1. IT/IS common outsourced services IT/IS Service
Function
Access Controls
Help organization establish and provision authentication needs
IDS Monitoring
Monitor intrusion detection systems on a 24/7 basis
Contingency Planning
Help facilitate crisis plans and responses, that is, disaster recovery sites
Firewall Management
Assist in configuration of software and monitor logs
Antivirus services
Monitor and act upon malicious attacks
Website Blocking
Filter services
Network Scanning
Identify network vulnerability
Remote Management
Monitor network
Encryption Services
Manage PKI
Software Development
Develop software application/s
Business Process Reengineering/ Outsourcing
Reengineer and/or outsource business process to evaluate and eliminate non-value-added activities
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Information Technology / Systems Offshore Outsourcing
highly skilled workers; market potential; country risk profile (i.e., disruptive events, security, regulatory risk, macroeconomic risk such as cost inflation, currency fluctuation, and capital freedom), and intellectual property risk; environment (i.e., government support, business and living environment, accessibility of location such as travel time, flight frequency, and time difference); quality of infrastructure (i.e., telecom and IT, real estate, transportation, and reliability of power supply); improved customer service by way of 24X7 call centers and/or fewer environmental regulations (Farrell, 2005, 2006; Kraemer & Dedrick, 2004). Table 3.1 lists the common IT/IS outsourced services.
share until one looks at the exponential growth rate of this sector. This sector managed to grow by 26% in 2005 and Michael Corbett of the International Outsourcing Professionals postulates a 40% compounded annual growth rate over the next decade (Barrett, 2006). Pressures from dynamic market conditions and market uncertainty have caused business organizations to focus on core competencies and outsource functions in which they that lack expertise in order to show profitability maintain effective cost structures and improve the bottom line. There are increased pressures on management to remain cost effective by accomplishing more with fewer resources at a faster pace. Outsourcing goals and objectives include competitiveness, time to market, round the clock customer service, agility, and access to world class technology. As illustrated in Figure 1, countries and regions with the most outsourced IT professionals are India, Canada, Ireland, China, Philippines, Israel, Eastern Europe, Russia, Mexico, and South Africa (Kripalani, Foust, Holmes, & Enga, 2006). A recent study measured employee cost; quality; English proficiency; infrastructure; and political and economic risk of countries that have
Industry Analysis IT/IS offshore outsourcing is one of the fastest growing businesses in the world due to technological advances including the Internet and mobile services. The advances have changed markets by decreasing communication costs and increasing specialization of service production. Given that the Indian software services account for about $9.9 billion, this does not seem like a huge market
Figure 3.1. Countries and their outsourced IT professionals (Source: “Countries receiving the Most Outsourcing, 2004.” Wired, February, p 101. Business Rankings Annual 2005) countries with the Most Outsourced iT professionals 0000 0000 0000 00000 0000 0000 0000 0000 0
ia ind
52
da na ca
d lan ire
ina ch
es pin ilip h p
l ae
isr
rn ste ea
pe ro eu
ia ss ru
a o ric xic af Me th u so
Information Technology / Systems Offshore Outsourcing
Figure 3.2. Best countries and regions for U.S. outsourcing (Source: Seewald, S. (2005). “Best Countries for U.S. Outsourcing, 2005.” Wired, February, Business Rankings Annual 2005, p. 101)
na Ch i
o ex ic M
Is ra el
a Ru ss i
Eu ro pe
ca Af ri
Ea st er n
So ut h
Ca na da
Ph ilip pi ne s
In di a
. . . . 0. 0
outsourced IT/IS professionals. As illustrated in Figure 3.2, according to a recent study, the best countries and regions for the United States to outsource in are India, Philippines, Canada, Ireland, South Africa, Eastern Europe, Russia, Israel, Mexico, and China (Seewald, 2005). Despite the short-term successes, IT/IS offshore outsourcing has several risks and challenges that increase the possibility of long-term adverse effects on the client company. Studies show that negative effects and consequences of offshore outsourcing such as hidden costs, vendor complacency, lack of vendor flexibility, high employee turnover, and lack of expertise are increasing among major corporations subcontracting IT/IS services (see Figure 3.3) (Dolan, 2006). A recent survey of 25 Fortune 500 corporations indicated that 70% of outsourced operations resulted in numerous negative experiences. Fifty-two percent of the companies surveyed experienced negative experiences and problems three times in two months (Accenture, 2004). The long-term effects of these negative experiences are difficult to measure because the value of IT/IS is intangible, hidden, and long term
(Arbore & Ordanini, 2006; Greaver & Kipers, 2005; Hatch 2005). This obstacle raises the following questions: What hazards contribute to encountering negative results and how are thriving companies achieving success? What topics and areas are researched the most often in the IS outsourcing field? Risks and success factors seem to be the common threads for the most frequent topics in IS outsourcing. It is also worth mentioning the increase in the number of articles focusing on offshore/global outsourcing. The use of cheaper communications technology, the Internet, economic globalization, and easy access to IT professionals with lower salaries are some of the reasons for this phenomenon. Among the many articles dealing with the economics of outsourcing, involve agency theory, transaction cost theory, game theory, resource-based theory, and resource-dependence theory (Dibbern et al., 2004; Gonzalez, Gasco, & Llopis, 2006; Iyengar & Rolf, 2007; Nyrhinen & Dahlberg, 2007). In order to evaluate possible causes for adverse long-term affects, a risk identification and success factor analysis have been developed to gain further understanding.
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Figure 3.3. Negative effects and consequences of offshore outsourcing (Source: Deloitte Consulting Outsourcing Study, October—December 2004)
negative experiences by client firms employee Turnover rate vendor complacency lack of flexibility hidden costs lack of Knowledge limited Transparency Quality/delivery issues Management change complex government 0%
Risk Identification Several risks such as cultural, political, financial, technological, commercial, and legal have been linked to the failure of IT/IS offshore collaborations. Adverse risk is heightened because of the geographical distance between the client firm and the vendor firm (Beiling, 2006). Geographical distance, costs, time, and resources prevent the client firm from exercising appropriate control over the vendor. Common risks include operational, strategic, cultural, and financial risks.
Operational Risk Operational risk is identified as the increased chance of poor quality and output due to limitations of the communications and transmission systems, complexity of operations, and geographic separation between the two firms (Patterson, 2006). Loss of control is a significant threat to the ongoing operations because it decreases the
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10%
20%
30%
40%
50%
60%
manageability and power of value chains and inhibits client firms to give accurate performance evaluation. Performance evaluation and monitoring is often overlooked due to increased pressures of keeping costs down. An agent’s lack of experience for a specific activity also increases the risk of poor quality of services, and the client’s inability to measure the performance causes the client firm to become vulnerable to the agent’s results and services.
Strategic Risk Strategic risks result from opportunistic behavior of the vendor client. Shirking is an example of strategic risk. Shirking is defined as deliberate underperformance while claiming full payment (Patterson, 2006). As globalization changes the basis of competition, strategic sourcing is moving from the periphery of corporate functions to the core, and research indicates that service providers are tempted to fail to perform their best work
Information Technology / Systems Offshore Outsourcing
when they know the performance is difficult for their client to measure (Gottfredson, Puryear, & Phillips, 2005; Willcocks & Feeny, 2006). Performance pressures cause a number of offshore companies to cut corners to make certain the product is delivered despite product reliability or product completion (Beiling, 2006). Software development integrity is often violated as a result of the competitive position of providing ISs at the lowest possible cost for the highest achievable quality at the quickest time (Gottschalk, 2006). Opportunistic recognition is another form of strategic risk. It derives from one party changing the terms of a contract after its inception. Opportunistic recognition occurs when the client discovers that it has no alternative source of support, goods, or services and, as result, must pay the supplier whatever price the supplier demands in the future (Arbore & Ordanini, 2006; Willcocks & Feeny, 2006).
Security Risks Offshore outsourcing increases the risks on intellectual property violation and loss of confidentiality because it allows vendors access to private business information (Patterson, 2006). In many countries there is a lack of adherence to security and quality standards. Integrity is often violated because of the pressures of performance standards. Many vendor companies have multiple clients and there is no guarantee that a contracting organization’s data, programs, and applications will not be duplicated for other clients (Arbore & Ordanini, 2006). Intellectual property theft is steadily increasing, and protecting rights in foreign countries can be difficult. Countries like China have copyright laws but they tend to favor Chinese companies. Privacy campaigners argue that the processing of sensitive financial and data records in foreign countries do not meet the high privacy standards of the United States (Chan, 2005; Lyons, 2006). Their argument is supported by a particular in-
stance when a woman from Pakistan threatened to post sensitive United States medical records on the Internet (McLean, 2006). As a result, other medical organizations have returned their data processing back to the United States. Other financial companies that offshore ISs are worried they will be open to lawsuits if they can not guarantee acceptable standards of privacy. In a recent study by Booz Allen Hamilton, information security has become a top concern among companies evaluating offshore outsourcing (Dunlop & Smith, 2005). The respondents also felt there was a significantly higher security risk in working with offshore providers over those in the United States, due to a lack of trust in legal and regulatory environments in developing countries. Protection of corporate and personal data in any offshore outsourcing venture is critical in order to protect the business from cyber crime and theft of customer data. Information security ranked as one of the top three factors when selecting an outsourcing partner. It was rated ahead of financial strength, business stability, and reputation. At the February 20, 2006 Outsourcing World Summit, the International Association of Outsourcing Professionals announced an increasing concern over data security while considering offshore outsourcing (Hunt, 2006). More than 90% of the respondents stated that data security breaches would be “catastrophic “to their business. A key factor is not being able to verify vendor’s claims of security capabilities. More companies are concerned with theft or misuse of outsourced data than they are about the threat of terrorism.
Cultural Challenges Culture is the “totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought” (dictionary.com, n.d.). Cultural differences and communication difficulties have numerous effects on business operations including no information sharing, poor communications of decisions, and no
55
Information Technology / Systems Offshore Outsourcing
interaction between team members. Breakdown in communication often results in inadequate task priority and lack of overall business comprehension. Differences in culture often lead to miscommunication, which can result in considerable chaff. Memories of war and religious animosities make it difficult to build and maintain trust. Another concern is the simulation of a non-foreign facade to the clients who call these centers. Studies show that employees feel alienated from their own culture because of the shrinkage of local traditions to meet client expectations (Beiling, 2006). Workers become exhausted from working in a foreign language and tend to have growing resentments for the American people because of the decreased identity and cultural differences (Willcocks &Feeny, 2006). Although these overseas positions train the employees on the specifics of job expectations, there is little transferable job experience and no preparation for future career growth (Seabrook, 2004).
Financial Risks As illustrated in Figure 3.4, despite increased cash flow and cost effectiveness, there are many hidden costs associated with IT/IS offshore outsourcing. Tailored contracts, lack of transparency, and bundling of services result in costly unexpected spending. There can be extensive, unpredictable
costs due to a lack of due diligence. Vendor firms’ unclear pricing and cost structure make it very difficult to understand cost savings. Bundling or grouping of services is a frequent dilemma and causes confusion in unit costs (Dolan, 2006). Hidden costs are most likely the result of broad and ambiguous contracts that fail to define present and future IT requirements (McLean, 2006). Hidden costs can derive from dismissing or transferring staff, transfer of licenses by software vendors, travel costs, investigation costs, and the cost of developing infrastructure to support off-site operations.
Offshore Outsourcing’s Success Factor Analysis Global giant, Dupont, has developed a framework for its ISs offshore outsourcing operations. The company’s IS frame consist of nine core capabilities including: (1) leadership, (2) business systems thinking, (3) relationship building, (4) architecture planning, (5) making technology work, (6) informed buying, (7) contrast facilitation, (8) contract monitoring, and (9) vendor development (Willcocks & Feeny, 2006; Willcocks, Feeny, & Olson, 2006). IBM has been noted for its exceptional global offshore outsourcing and credits its success to their IBM Relationship Alignment Process (Petershack, 2005). Their model is cen-
Figure 3.4. Financial risks (Sources: Forrester Research, McKinsey & Co, http://pollingreport.com)
cost-related risks
Hidden Costs/Transparency
24%
42%
Vendor Management Vendor Selection
17% 17%
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Quality trade off and Vendor Profit Margins
Information Technology / Systems Offshore Outsourcing
tered on relationship determinants including: commitment, predisposition, mutual benefits, linkage, unique resources, and shared knowledge. Success factors of IT/IS offshore outsourcing consists of precise risk analysis; detailed cost benefit analysis; relationship management and cultural understanding; understanding legal issues and contracts; and implementing risk controls.
in Table 3.2, when determining IT/IS offshore outsourcing, a cost benefit analysis should include a review of potential gains, costs, and possible risk(s) of each alternative; appropriate contract period; intangibles and hidden costs; contracting and legal costs; vendor’s fee; conversion costs; IS salaries and severance payments; cash; contract cancellations; staff morale; and share price.
Risk Analysis
Relationship Management and Cultural Understanding
Risk analysis enables client firms to determine the financial consequences of risk. As illustrated in Figure 3.5, a risk breakdown structure in risk analysis involves discovering and prioritizing of important risks that need protection and analyzing threats to assets to estimate potential losses. Successful companies determine the relative importance of each risk and then verify the level of impact it will have on their company in terms of costs, schedule, and quality. Successful firms identify the priority of each risk and determine the goals of the project accordingly (Bardhan, Whitaker, & Mithas, 2006; Patterson, 2006).
Cost Benefit Analysis Potential customers need to do a cost-benefit analysis to determine whether database or application server outsourcing is right for them. Cost benefit analysis indicates whether offshore outsourcing is financially sound for companies. As illustrated
Research indicates that the level of partnership between a client firm and a vendor firm will increase when high levels of cultural similarity exist between them as evidenced by the insurance company USAA (Arbore & Ordanini, 2006; Chakrabarty, Gandhi, & Kaka, 2006). Identification-based trust is associated with successful offshore outsourcing because a mutual understanding allows for both parties to recognize and appreciate the other’s wants. Identification-based trust has been linked to information sharing behavior and the overall quality of communication between the two firms (Bardhan et al., 2006). The parties involved in an offshore outsourcing relationship belong to distinct cultures and it is vital that these differences are accepted. A recent study by Gartner (Heib, 2006) pointed to culture as a key differentiator to IT success and discussed the need for the IT organization to establish trust, commitment, two-way communication, clarity of
Figure 3.5. Risk breakdown structure Risk Analysis
Operational Risks
Loss of Control
Lack of. Monitoring
Financial Risks
Hidden Costs
Service Bundling
Strategic Risks
Shirking
Opportunistic Recognition
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Information Technology / Systems Offshore Outsourcing
Table 3.2. Cost analysis Costs
Factors
Intangibles and Hidden Costs
Administering the outsourcing contract and coordination efforts between internal users and outsourcing company upgrades
Contracting Costs
Legal costs including monetary and opportunity costs involved in contracting, renegotiating, and vendor disputes
Vendor Fees and Prices
Potential increase in costs if initial vendor low-balling of fees/ rough-order-of-magnitude price estimates lead to higher vendor fees and prices after the initial contract
Conversion Costs
Costs associated with transfer of software licenses
IS Salaries and Severance Pay
Staff retained, terminated, and possible legal costs from disgruntled employees
Contract Cancellation Costs
Cost of new negotiation, training of staff, hardware or software replacement
Share Price
Will announcement of outsourcing hurt or help stock prices?
purpose, and agility as vital components of the IT organization. Healthy communication is a crucial element to a working relationship. The effectiveness of the relationship between management personnel of both teams is dependent on the understanding and strong working relationships among the firms. Studies of offshore outsourcing success stories have demonstrated that working chemistry in management and peer friendships among employees have proved to be important determinants in forming long-term relationships that yield real value (Patterson, 2006). Industrial relatedness has also been a significant indication of successful offshore outsourcing. IT/IS offshore outsourcing between firms in related industries outperformed firms in unrelated industries (Kripalani et al., 2006). Firms from different industries have more difficulties understanding and collaborating with each other. Firms in related industries communicate their needs more effectively because they share a common language, socialization, institutional history, and organizational practices.
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Flexibility, modularity, and process knowledge are important business culture elements to study when determining a vendor firm. The client firm needs to determine the adaptability of the vendor to adjust to the changing demands of business and IT environment. The client firm must also know the vendor’s ability or willingness to add, delete, or modify services. Lastly, the vendor firm must know enough about the client firm’s industry to successfully deliver needed services.
Understanding Legal Issues and Contracts Legal issues regarding offshore outsourcing of IT/IS functions into emerging economies can be broken down into two parts: (1) the need for laws to govern international business operations, and (2) the ability to enforce international laws. Hall and Liedtka (2007) discussed the implications of the Sarbanes Oxley Act for large-scale IT outsourcing. First, companies and nations realize that international laws and agreements are needed in order to ensure that physical and intellectual
Information Technology / Systems Offshore Outsourcing
properties are protected. Second, countries have different laws and policies regarding ownership and control of physical and intellectual properties, and the ability to enforce the international laws and agreements that have been established is critical. In 1883, the Paris Convention for the Protection of Industrial Property was established (WIPO Treaties, 2006). This became the first international treaty to help people of one country obtain protection in other countries for intellectual properties in the form of industrial property rights (inventions, patents, trademarks, and industrial designs). As the volume and different types of intellectual property grew, there grew new requirements to protect intellectual property. In 1970, the World Intellectual Property Organization (WIPO) came into existence (WIPO Treaties, 2006). The WIPO was established to promote the protection of intellectual property throughout the world through cooperation between nations and, where appropriate, in collaboration with any other international organization. In 1974, the WIPO became a specialized agency of the United Nations system of organizations. At present the organization has 181 member nations and the need to expand the scope of laws to protect intellectual property continues to grow as global business grows. The World Trade Organization (WTO) plays in important part in the establishment of intellectual property rules. The WTO’s Agreement on trade-related aspects of intellectual property rights (TRIPS), negotiated in the 1986-1994 Uruguay Round, (Understanding the WTO, n.d.) introduced intellectual property rules into the global trading market for the first time. The agreement is supposed to narrow the gaps in how these rights are protected and bring common international rules into play. Although there has been extensive cooperation between many of the nations of the world, there still exist many nations that do not adhere to the international laws that have been established to provide protection to companies. As we look at emerging nations the risk of doing
business with these nations increases depending on their acceptance and enforcement of established international laws. The majority of subjects who participated in the Booz Allen survey felt that the regulatory and legal infrastructure in Asia and South America is not adequate (Dunlop & Smith, 2005). The survey revealed that only 5% of companies surveyed believed that China has a strong and legal infrastructure, South America was 5%, and Southeast Asia was 11%. The 27% of the respondents indicated that India, which is a major country for offshore outsourcing, had a good legal infrastructure. There is a feeling that there is a high potential risk for loss of customer or corporate data in these countries. Companies have to weigh the savings of lower costs that could be realized by offshore outsourcing in these countries to the potential impact to their companies from data loss. International laws continue to change as outsourcing companies and potential countries to outsource realize the importance of having legally binding contracts. Many countries have worked to improve their legal systems to work with the companies that want to outsource to their country. Russia, for example, has established laws to offer some protection to offshore outsourcing , 2005). Companies companies ( must still do due diligence in advance of any potential outsourcing contract. What can companies do to protect themselves in emerging countries? First, it is critical to understand the laws and legal infrastructure of the country that the potential vendor is located. Does the company belong to trade groups or industry associations that have established standards for security of company and customer data? A company should have legal counsel that is experienced in the laws of the offshore country and may want to hire local counsel in the country to assist in legal matters. Companies must invest the time to research trade laws of the countries they are looking to outsource in. In addition, a company should research the legal performance
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history of potential vendors. The company may want to have a third party security audit or an independent security evaluation be completed before any agreements are formalized. The terms of the contract is an important part of any potential offshore outsourcing agreement. Time should be taken to agree in detail exactly what each party is responsible for. This will lessen the potential of trying to identify which party is to blame when things are not done correctly or on time. The initial development of detailed requirements will make the working relationship operate smoother. If your requirements are not clearly documented in the contract, a company will find it very difficult for any international legal system to rule in their favor. Another area that needs to be agreed upon is the metrics that will be used to measure progress and success or failure. Service level agreements are necessary and can be an outstanding tool to have if legal issues should arise regarding performance at a future date. The service level agreements should be agreed to and fully understood by both organizations prior to implementing any offshore outsourcing relationship.
Risk Controls Best practices indicate performing risk controls decrease chances of offshore outsourcing risks (Willcocks & Feeny, 2006). Preventive, detective, and corrective controls are common tools that are implemented for risk reduction. Preventive controls lessen the impact of risk or prevent it before having an impact. Preventive controls include clarifying assumptions, involvement planning, establishment of standards, and hiring translators. Detective controls reveal the existence of a risk and expose future impact under similar conditions. Detective controls include collecting metrics on project performance and conducting frequent audits of offshore vendor sites. Corrective controls involve determining the impact of risk and require establishing measures to prohibit future impacts. Examples of corrective controls are rescheduling of tasks on a critical path, alternate offshore vendor sites, and hiring more translators (Ramanujan & Jane, 2006; Sakthivel, 2007).
Figure 3.6. Cost effectiveness of IS/IT outsourcing
percenTages
hOw well is iT wOrKing % 0%
Increase in Cost No Savings
% 0% % 0%
0 - 0% Savings - 0% Savings - 0% Savings
% 0%
+ % Sa vings reasOns
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Information Technology / Systems Offshore Outsourcing
Discussion and Final Analysis Due to the complexity of IT/IS projects and metrics, evaluating the long-term value and effectiveness of offshore outsourcing has been very difficult. Figure 3.6 illustrates that 30% of all these ventures fail to provide the desired outcome and 25% of these partnerships create no cost savings to the firm investing in them. Due diligence and strategic planning are key elements to achieve excellence in an effort to improve productivity. Dun and Bradstreet’s Barometer of Global Outsourcing study indicates that as many as 25% of all outsourcing relationships fail because the client does not clearly communicate its needs, costs exceed expectations, and quality of service is poor (Nair, 2002). As illustrated in Figure 3.7, poor client preparation and joint clientvendor planning accounted for 49% of root failure causes (Telecoms & Technology, 2005). Despite increased risks and negative statistics, IT/IS offshore outsourcing can still be cost effective and successful if the right combination of due diligence and strategic planning is in place. The most cited problem that leads to failure results from ambiguous contracts. Elements of
the contract are often overlooked and left out. Many companies have paid a significant amount of money in hidden costs due to vague contract agreements and ambiguous requirements (Kripalani et al., 2006). In order to decrease risks, companies must first identify those risks and verify the costs of each possibility. A cost analysis is also essential in the planning process. Cost analysis foresees possible cost associated with the production of the desired product. Building and maintaining relationships with the vendor company is an essential success factor that many companies overlook. Statistics show that companies that have healthy working relationships are less likely to have intellectual property laws violated and duplication of applications (Tucci, 2005). IT/IS offshore outsourcing can lead to a long relationship that should be nourished and monitored (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Next we discuss the eservices capability model (eSCM) and the capability maturity model integration (CMMI) framework that help enhance the success factors and minimize negative risk in a offshore outsourcing project. The eSCM best practices framework provides direction on
Figure 3.7. Root case analysis of failures in offshore outsourcing projects (Source: Telecoms & Technology Forecast Americas; June 2005, pp. 10-16) rOOT failure causes
Client Preparation & Execution Joint Client-Vendor Planning
%
%
%
%
Wrong Answer Client Team Morale & Support Miscommunication & Culture
0% %
%
Vendor Team Performance Other
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measuring and improving the value of outsourcing relationships by way of enhanced productivity, reduced cycle time, decreased transaction costs and improved time to market. It was developed at Carnegie Mellon University (CMU) to guide organizations doing process outsourcing, especially IT enabled process out sourcing, to form, manage and expand outsourcing relationships. Adopting the eSCM framework (illustrated in Figure 3.8) enables a service provider to implement organization-wide practices required for succeeding in a process-outsourcing situation. Organizations can consider the eSCM as a holistic reference framework for implementing processes within their organization around critical elements of offshore out sourcing (organizational management, people, business operations, technology and knowledge management) and the different phases in an outsourcing relationship (precontract, contract execution, and post contract). The eSCM offers client organizations a means to select capable providers who are committed to delivering consistently high quality services and developing continually improving relationships. Also, we expect this model to provide guidance to service providers so they can more effectively manage IT-enabled outsourcing relationships (CMU, 2001; Nair, 2002;). The capability maturity model integration (CMMI) developed by the Software Engineering Institute (SEI) at Carnegie Mellon University is used to improve processes for organizations to guide projects, divisions, or entire organizations. Improving processes increases product and service quality when organizations apply them to their business objectives (CMMI, 2005). The success factors have been incorporated into the CMMI model to demonstrate how companies can integrate these factors into their goals and plans (see Figure 3.9). For example, India has far more SEI CMM Level 5 (representing the best software development practices) than any other country in the world. It had 42 companies at SEI CMM Level 5 assessment and the quality maturity of the
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Indian software industry can be measured from the fact that already 316 Indian software companies have acquired quality certifications (e.g., ISO 9000) and more companies in India, China, and the Philippines are in the pipeline to do so (www.nasscom.com; Barrett, 2006; Palvia, 2006). Companies can use the CMMI model and become successful in combining their management and engineering processes as well as ensuring that their products or services meet their customers’ expectations. Companies can incorporate lessons that they have learned and address additional organizational functions that are essential to their services and products (CMMI, 2005). Companies have also aligned their internal practices with the People CMM framework and by use of Six Sigma methodology for reducing variation and assuring “end-to-end” quality in all company operations (Palvia, 2006). It is important for the organization to apply the appropriate options such as in-house, outsourced, or hybrid options (e.g., build-operate-transfer or equity investments) to the CMMI model carefully, extend an IT service and measurement culture into business processes; map the offshore location to the organization’s global presence; identify appropriate projects for global sourcing; define and measure business process performance and progress from a focus on cost to a focus on value; and focus on measuring business value after IT projects end. Firms expect to benefit from globally recognized quality processes and will outsource offshore to get quality service which would otherwise take the in-house operation several years to achieve. To conquer the culture dilemma, IT organizations cannot simply try harder or place more pressure on their offshore vendor to deliver. Rather, they must address the issue at the source, within their own organization. Process and project management are the solutions many companies are turning toward. A sign of this trend is found with the 182% increase in companies completing the CMMI assessment from 2005 and 2006 (sei. cmu.edu, 2007).
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Figure 3.8. Overview of eSCM elements, phases and capability levels (Source: Adapted from Hyder, Kumar, Mahendra, Siegel, Heston, Gupta, Mahaboob, & Subramanian, 2002 and Nair, 2002)
Table 3.3 illustrates the comparison of the benefits and challenges of CMMI when determining if this model would best fit within the target organization.
Implications for Management The market is changing as user requirements shift from supporting customized, internally focused IT environments to shared infrastructure, applications, and processes that are based on open standards. Incremental efficiencies are not enough in the age of outsourcing and offshoring; managers need to shift their emphasis to breakthrough
innovation in processes that increase revenue (Koch, 2007). Managing successful IT/IS offshore outsourcing requires the intense strategic planning and full comprehension of the vendor firm culture. Important success factors include tactical entry strategies and planned control strategies. Due diligence and appropriate forecasting of costs and risks are essential for all projects. Appendix A lists the risk assessment factors and their implications for global/offshore outsourcing. In order for offshore projects to reach full potential, there must be a full identification and respect of cultural differences and similarities. Identification of the culture provides a foundation for a stronger
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Figure 3.9. IT/IS offshore outsourcing success factors applied to the CMMI model Process Area 1
Process Area 2: Goals and Practices
Specific Goals Due Diligence
Culture Expertise
Develop Transparent Contract
Generic Goals Risk Analysis
Achieve Specific Goals
Understand laws and legal infrastructure
Third party security audit or an independent security evaluation Research trade laws
Obtain Legal Council Identify Service level Agreement
Education of Company Hire a Translator
Perform Base Practices
Contracting Preventive Controls Vendor’s Fee Conversion Costs
Plan Process Corrective Controls Provide Resources
IS Salaries and Severance Pay Train People
Identify Culture Similarities Identify Differences Organize Social Events
Determine financial consequences of risk
Prioritize of important risks
Verify the level of impact on costs, schedule, and quality
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Develop Optimizing Process
Generic Practices Intangibles and Hidden Costs
Research the legal performance history of potential vendors
Document Detailed Requirements
Develop Managed Process
Cost Benefit Analysis
Specific Practices
Clarify Terms
Process Area n
Assign Responsibility
Detective Controls
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Table 3.3. Benefits and challenges of CMMI level 2 process adoption Benefits
Challenges
Level 2 processes increase project oversight by establishing project management processes
Requires up to 100% more formal project manager roles than previously existed
Level 2 processes enforce establishing proper project risk monitoring through status and risk reports
Requires organizations understand how to apply resource management and project management simultaneously
Change control is formalized and documented once the project scope is agreed upon
Can be viewed by the internal and external customers as bureaucracy
Establishes processes required to measure work performed for time, quality, and commitments
Requires tools to manage scheduling and project plans
Minimizes the number of different processes used by different groups to accomplish the same thing
May be taken too far, meaning processes become rigid and restricting rather than facilitating
Can create more efficiency by reducing duplicated processes and steps
Similar gains in efficiency, quality, and commitments can be achieved without CMMI; commonly consultant companies are used to recommend process lightening and improvements.
relationship and increased job focus. As a result of deficient metrics in the evaluation of IT/IS offshore outsourcing operations, ongoing tests and vendor monitoring can increase the possibility of discovering potential dilemmas as root causes of the problem. Organizations must understand the strategic business value of offshore outsourcing that is instrumental in enhancing growth, cost, speed, and agility. Success will be undermined if the organization focuses solely on cost reduction or tactical problems. To prepare for the future, organizations must assess their sourcing competencies and evaluate their sourcing execution and strategy capabilities.
Implications for Research Due to the lack of metrics in association with the evaluation of IT/IS offshore outsourcing projects, there is very little research available on the effects of offshore outsourcing on host companies and how these companies are adapting to these changes and challenges. Directions for future research include a survey methodology for crosssectional or longitudinal data collection using the CMMI framework illustrated in Figure 3.9 and inquiries concerning the client company size and
financial stability, countries of vendor firms with increasing negative results, and employee overall satisfaction of offshore outsourcing change. Future researchers may find it interesting to determine if there is a causal relationship between the degree of hierarchy within the organization, formality of relationships, and the success of the offshore outsourcing contracts. Future research could address what developing countries are doing to increase the availability and caliber of project management professionals; the real cost associated with implementing a CMMI process framework and the process level that has the greatest return on investment; and efficiency improvements in offshore outsourcing projects. IT and corporate executives would benefit from understanding the percentage of onshore versus offshore project success after factoring in the various dimensions of risk.
Conclusion This chapter has explored the risks of offshore outsourcing and integrated the success factors into the CMMI model to demonstrate how companies can integrate these success factors into their goals
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and plans. It is perceived that offshore outsourcing of IT/IS services allows companies to become more cost effective and focus on core competencies and competitive edge. Despite a growing movement of this offshore development, an alarming number of companies are experiencing negative results while outsourcing. The lack of metrics in this domain has made it very difficult to evaluate appropriate levels of satisfaction. As a result, companies should identify technical and business risks and formulate a strategic plan that includes preventive, detective, and corrective methods of implementation and evaluation. Cultural relationships should also be emphasized in order to develop a dedicated operations focus. To ensure success, firms involved in offshore outsourcing need to make use of more advanced and complex means of communication and coordination in order to overcome issues such as geographical distance and cultural differences; demand economic transparency and a strong business case; adopt flexible contracts; tightly manage service level agreements; keep and build the right skills; and build accountability at all levels. Methods of measuring IT/IS operations is expected to be a key development in years to come with the increased growth of computer technology, and more quantitative measurements and evaluations will provide companies with more precise performance evaluations in the future. Most critically, the significance of achieving win-win relationships by balancing customer savings objectives with vendor margin and overhead goals will help organizations transform competitive advantage into measurable success.
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Arbore, A., & Ordanini, A. (2006). Broadband divide among SMEs: The role of size, location and outsourcing strategies. International Small Business Journal, 24(1), 83-90. Bardhan, I., Whitaker, J., & Mithas, S. (2006). Information technology, production process outsourcing, and manufacturing plant performance. Journal of Management Information Systems, 23(2), 13-25. Barrett, D. R. (2006). Offshore outsourcing: Key commercial and legal issues. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48). Beiling, Y. (2006). Demand for skills in Canada: The role of foreign outsourcing and information-communication technology. The Canadian Journal of Economics, 39(1), 53-60. Capability Maturity Model Integration (CMMI) Overview. (2005). Retrieved May 7, 2006, from http://www.sei.cmu.edu/cmmi/general/general. html accessed 5/8/06 Carnegie Mellon University. (2001, October 4). Determining capabilities of IT-enabled outsourcing service providers: A capability model and methods. Retrieved May 25, 2007, from http://www.globaletp.com/images/clientExecSum_1.0_100401 Chakrabarty, S. K., Gandhi, P., & Kaka, N. (2006). The untapped market for offshore services. The McKinsey Quarterly, 16-22. Chan, S. S. (2005). IT outsourcing in China: How China’s five emerging drivers are changing the technology landscape and its industry. Retrieved April 9, 2006, from http://www.outsourcing, com/china_trends/index.html Dhar, S. (2008). Global IS outsourcing: Current trends, risks, and cultural issues. In M. S. Raisinghani (Ed.), Global information technology management in the digital economy. Hershey, PA: IGI Global.
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Dolan, K. A. (2006). Offshoring the offshorers. Forbes, 177(8), 1-12. Dunlop, A., & Smith, C. (2005). Outsourcing: Know your legal position. Retrieved April 2, 2006, from http://www.computing.co.uk//computing/features/2072392/outsourcing-know-legal-position Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies, 42(3), 675-683. Farrell, D., Dibbern, J., Goles, T., Hirschheim, Rudy & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102. Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834. Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing: From periphery to the core. Harvard Business Review, 132-139. Gottschalk, P. (2006). Research propositions for knowledge management systems supporting IT outsourcing relationships. The Journal of Computer Information Systems, 46(3), 110-116. Greaver, M., & Kipers, K. (2005). Outsourcing. Retrieved on March 26, 2006, from http://www. valuecreationgroup.com/outsourcing_advantages.html Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. (An updated version of this paper is reproduced as Chapter 1 of this book). Hall, J. A., & Liedtka, S. L. (2007). The Sarbanes-Oxley Act: Implications for large-scale IT outsourcing. Communications of the ACM, 50(3), 12-20.
Hatch, P. J. (2005). Offshore 2005 research preliminary findings and conclusions. Retrieved on March 26, 2006, from http://www.ventoro. com/Offshore2005ResearchFindings.pdf Heib, B. R. (2006, May). Characteristics of successful care delivery: Organization IT cultures (pp. 2-3). Gartner Industry Research. Hunt, T. (2006, March 7). Concern over data security on the rise in outsourcing industry. Retrieved April 30, 2006, from http://www.marketwire. com/mw/release-html Hyder, E. B., Kumar, B., Mahendra, V., Siegel, J., Heston, K. M., Gupta, R., et al. (2002, October 21). eSourcing capability model for IT-enabled service providers v. 1.1. Retrieved May 25, 2007, from http://reports-archive.adm.cs.cmu. edu/anon/2002/CMU-CS-02-155.pdf IT outsourcing destination: Russia. (2005). Retrieved April 16, 2006, from http://www. sourcingmag.com/outsource_by_region/russia_central_eastern_europe.html Iyengar, P., & Rolf, J. (2007). Factors to weigh before going offshore. Retrieved April 30, 2007, from http://outsourcing.weblog.gartner.com/weblog/index.php?blogid=9 Koch, C. (2007, February 1). IT builds a better. CIO, 34-40. Kraemer, K., & Dedrick, D. (2004). Offshoring in Orange County: Leader, follower, or mirror of international trends? University of California Irvine, Personal Computing Industry Center, Graduate School of Management. Kripalani, M., Foust, D., Holmes, S., & Enga, P. (2006). Five offshore practices that pay off. Business Week, 30(3969), 60. McLean, J. (2006). Slaves to technology? The British Journal of Administrative Management, 16. Nair, N. T. (2002). eServices capability model (eSCM)—A new quality standard for outsourcing
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activities. Retrieved May 23, 2007, from http:// ewh.ieee.org/r10/kerala/April_June_2002.htm Norwood, J., Carson, C., Deese, Ms., Johnson, N. J., Reeder F. S., Rolph J. E., et al. (2006, January). Offshoring: An elusive phenomenon. A Report of the Panel of the National Academy of Public Administration for the U.S. Congress and the Bureau of Economic Analysis. Nyrhinen, M., & Dahlberg, T. (2007, January). Is transaction cost economics theory able to explain contracts used for and success of firm-wide IT-infrastructure outsourcing? In 40th Annual Hawaii International Conference on System Sciences (HICSS). Palvia, S. (2006). A model for choosing a destination country for outsourcing of IT and IT enabled services. In C. Evans (Ed.), The Euromoney outsourcing handbook (pp. 39-48). Patterson, D. A. (2006). Offshoring; Finally facts vs. folklore. Communications of the ACM, 49(2), 41-49. Petershack, R. (2005, July 18). Consider the legal issues before outsourcing offshore. Retrieved April 9, 2006, from http://www.wistechnology. com/article.php? Id=2007 Ramanujan, S., & Jane, S. (2006). A legal perspective on outsourcing and offshoring. Journal of American Academy of Business, 8(2), 51-58. Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50(4), 69-75.
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Seabrook, J. (2004, October 30). Offshore outsourcing. Retrieved March 30, 2006, from http:// www.countercurrents.org/glo-seabrook301003. html Seewald. (2005, February 2004). Best countries for U.S. outsourcing, 2004. Wired,101. Smarter offshoring. (2006). Harvard Business Review, 85-92. Telecoms & Technology Forecast Americas. (2005, June). Forecast on the telecommunications and technology sector (pp. 10-16). Tucci, L. (2005, April 5). Outsourcing needs strong RX. Retrieved April 9, 2006, from http://searchcio. techtarget.com/originalContent/0,289142,sid19_ gcil075783, 00.html Understanding the WTO—Intellectual property: Protection and enforcement. (n.d.). Retrieved April 9, 2006, from http://www.wto.org/english/ theWTO_e/whatis_e/tif_e/agrm7_e.htm Willcocks, L., Feeny, D., & Olson, N. (2006). Implementing core IS capabilities: Feeny-Willcocks IT governance and management framework revisited. European Management Journal, 24(1), 28-37. Willcocks, L. P., & Feeny, D. (2006). IT outsourcing and core IS Capabilities: Challenges and lessons at Dupont. Information Systems Management, 23(1), 49-57. WIPO-administered treaties, WIPO treaties, treaties and contracting parties: General information. (n.d.). Retrieved April 9, 2006, from http://www. wipo.int/treaties/en/
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Appendix Table A.1. Risk assessment factors and their implications for global/offshore outsourcing Risk assessment factor
Description
Implications for Global /Offshore Outsourcing
People
The people risk emerges from the experience level, training, and human resource deployment policies of the vendor. In addition, redeployment of existing IT staff of the customer is also a risk assessment factor.
Globally distributed teams with different skills and experience contribute to risk
Knowledge (Functional, Technological, Managerial)
Functional knowledge is the expertise, understanding, and experiences in the given functional area of the activity. Technological knowledge is associated with the expertise in the areas technology selection, analysis, architecture, design, development, integration, and maintenance support. Managerial knowledge is associated with the project management, risk management, resource management, developing and administrating management processes to carry out the activities.
The level of functional, technological, and managerial knowledge contributes to risk in offshore outsourcing. Managerial knowledge is extremely important in a global context.
Cultural
Cultural risks arise from the dominant culture prevalent with the vendor. The attitudes, communication skills, language, selection policies, performance motivation, team spirit, level of cohesiveness, autonomy, participatory decision making, work ethics, management style, customer-orientation, and related organizational behavioral factors that shape the culture.
Country specific cultures can add risk in global outsourcing. Language and work ethics vary from country to country and that may contribute to risk.
Political
Political risks arise out of trading restrictions imposed by the sovereign, permissible ownership rights, nationalistic aspirations, type of government, and political and economical stability.
Political instability is a major concern for global outsourcing as the government rules and regulations may have adverse effect on outsourcing.
Financial
Financial risks arise out of project accounting standards, cash flow, asset base, and currency stability.
Accounting standards and variation in currency exchange rate contribute to risk.
Quality Standards
Software Capability Maturity Model (CMM) and ISO 9000 compliance are hallmarks of the quality standards. The ability to prepare test plans, and performance standards is seen favorably while assessing the risks due to quality standards.
Quality standards vary from one country to another and contribute to risk.
Measurement
Performance measurement standards, benchmarking, and assurance of the performance are key elements in evaluating measurement risks.
Performance measurement standards vary from country to country which contributes to risk.
Scope, Cost, and Time Estimates
Ability to formulate the scope of the project, accurate cost and time estimation poses the risk.
It is quite difficult to accurately determine scope, cost, and time estimates in global outsourcing. This contributes to risk.
Company Specific Risks
Company specific risks are largely due to outsourcer’s financial strength, area of core competence, management, relationships and alliances with other major organizations, and (potential) acquisitions and mergers activities.
Different companies in foreign countries have different management and core competencies. Those contribute to risk.
Legal Contracts and Intellectual Property
Intellectual property rights and their legal status in the country, brand protection, contractual bindings, and arbitration policies of the outsourcer constitute the risk.
IP standards and law vary from one country to another and contribute to risk.
continued on following page
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Table A.1. continued
Security
Access control, authentication, usage of secure protocols, encryption, and security policies adopted by the outsourcer constitute the risk.
Security is a major concern in global outsourcing as protection and control of data pose a problem.
Disaster Recovery
Ability to protect software code, and related data, level of replication, redundancy, and back-up and recovery policies are the main factors in deciding the risks due to disasters.
Loss of control over disaster recovery contribute to risk.
Contract Management
Contract management involves formulating contracts, schedule planning, activity planning, sending and accepting deliveries, dispute resolution, and signing off. Inability to properly formulate or execute the contracts constitutes the risk.
Contract management in global outsourcing is a risky business as monitoring the project activities become a challenge.
Relationships & Alliances
Ability to formulate customer-vendor interface at executive and working levels, customer relationship management, and developing long-term alliances offers synergy at organizational level.
Inability to manage relationships and alliances constitutes the risk in global outsourcing.
Geographic Location
The country, province, and city may be in different time zones, which require working at odd hours for the customer or outsourcer. The communication infrastructure, distance, industrial peace and stability in the region, availability of supporting infrastructure, social-economical-political stability constitutes the risk.
Vendor’s geographic location poses some risks. Communication infrastructure failure in offshore projects incurs significant loss.
Multi-vendor Arrangements
Synchronization of development efforts, data format exchange standardizations, complexities due to multi-layer architecture dependencies or non-contagious independent parts constitute the risk with ability to work with multi-vendor arrangements.
In global outsourcing with multi-vendor arrangements, coordination has to be efficient. Otherwise execution becomes a problem and contributes to risk.
Source: Dhar S. (2008). Global IS Outsourcing: Current Trends, Risks, and Cultural Issues, in Global Information Technology Management in the Digital Economy, Mahesh S.Raisinghani (Ed.), Idea Group Inc.
This work was previously published in the Journal of Information Technology Research, Vol. 1, Issue 1, edited by M. KhosrowPour, pp. 72-92, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter IV
A Paradigmatic and Methodological Review of Research in Outsourcing Vanita Yadav Management Development Institute, India Rajen K. Gupta Management Development Institute, India
Abstract Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment and synthesis of research activities to date. This chapter addresses this need and examines the academic literature on information systems outsourcing and business process outsourcing using a paradigmatic and methodological lens. The objective of this chapter is fourfold. Firstly, it examines the status of outsourcing research from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework. Thirdly, it compares and contrasts the outsourcing research work published in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and the directions for future research.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
A Paradigmatic and Methodological Review of Research in Outsourcing
INTRODUCTION Eastman Kodak’s decision to outsource its information systems (IS) function in 1989 to IBM, DEC, and Businessland formally launched the phenomenon of outsourcing in the corporate world which aroused interest worldwide. Outsourcing is defined as the procurement of products and services from sources that are external to the organization (Lankford & Parsa, 1999). The e-commerce revolution has forced the transformation of traditional IS outsourcing structures into new outsourcing service configurations, like Internet service outsourcing, application service outsourcing, and business process (BP) outsourcing (Watjatrakul, 2005). Businesses today are growing in complexity and the world is moving towards globalization. As a result the forces of outsourcing have become a present-day reality and are poised for phenomenal growth in the future. The importance of outsourcing in industry has led to extensive research in this area. Most of the research done in outsourcing is in the field of IS outsourcing. In the last few years, there has been a rise in another more process-centric approach to outsourcingbusiness process outsourcing, in which the outsourcing vendor offers to take responsibility for an entire client process (Harmon, 2003). Due to the growing academic and practitioner interest in the field of outsourcing, there is a need to do a comprehensive assessment of research activities to date. This chapter aims to address this need of exploring and synthesizing the academic literature on outsourcing. Although Dibbern, Goles, Hirschheim, Rudy, and Jayatilaka (2004) and Gonzalez, Gasco, and Llopis (2006) have carried out a survey and analysis of literature in the field of IS outsourcing, the goal of this research is to extend existing insights. The focus of Gonzalez et al.’s (2006) IS outsourcing review was to identify the main topics of IS outsourcing, the methodologies most often applied, and the authors and countries that have contributed most to the area of IS outsourcing. 72
The focus of Dibbern et al.’s (2004) IS outsourcing review was on research objectives, methods used, and theoretical foundations to view outsourcing as an organizational decision process using Simon’s model of decision making. In contrast, our study covers IS as well as BP outsourcing research, and carries out a methodological and paradigmatic examination of literature. Hence this study makes a contribution to the philosophical and methodological foundations of research in outsourcing. Additionally, it also presents a comparative analysis of the outsourcing research trends in leading American and European journals. The objective of this chapter is fourfold. Firstly, it examines the status of outsourcing research in from 1995 to 2005 in eight leading academic journals, to compare the current research trends with past research directions in terms of methodologies applied. Secondly, it analyzes the research paradigms adopted in these research papers using the Operations Research Paradigm framework of Meredith, Raturi, Amoako-Gyampah, and Kaplan (1989). Thirdly, it compares and contrasts the outsourcing research work published in three leading European journals with the work published in three leading American journals. Finally, it uncovers the implications of this study and directions for future research. The chapter is organized as follows. In the next section, the review of existing research literature on IS and BP outsourcing is presented. Subsequently, the choice of methodology for collecting and analyzing data is explained, followed by discussion of the results. The chapter ends with implications of the study, directions of future research, and contributions.
LITERATURE REVIEW Outsourcing Outsourcing involves contracting with an external provider for the provision of a service which may have been provided using in-house
A Paradigmatic and Methodological Review of Research in Outsourcing
staff (Domberger, Fernandez, & Fiebig, 2000). Outsourcing has been around for more than a decade, but it got formal recognition only after the famous Kodak deal in 1989. Since then it has generated a stir in the practitioner community. Academics, by and large, have been relatively slow to research this phenomenon (Dibbern et al., 2004). While academic research has been slow to follow the practitioner community, it is now being recognized as an important area of research. This chapter focuses on the following two kinds of outsourcing: •
•
Information systems outsourcing: Willcocks and Kern (1998) define IS outsourcing as the handing over to a third party management of IT/IS assets, resources, and/or activities for required results. Cheon, Grover, and Teng (1995) define information technology outsourcing as the organizational decision to turnover part or all of an organization’s IS functions to external service provider(s) in order for an organization to be able to achieve its goals. Business process outsourcing: The Accenture Institute for Strategic Change suggests that BP outsourcing goes further than technology infrastructure or even applications. The outsourcing service provider takes primary responsibility for ensuring that the process works, interfaces effectively with other company functions, and delivers the outcome intended. BP outsourcing refers to an outsourcing relationship where a third-party provider is responsible for performing the entire business function for the client organization (Dibbern et al., 2004). A number of industries are considering BP outsourcingin particular, government, financial services, healthcare, transportation, and logistics (Millar, 1994).
Research Paradigms in IS Research Orlikowski and Baroudu (1991) and Chen and Hirschheim (2004) indicate that positivism dominates IS research while other paradigms are relatively small in number. The following three references outline the paradigmatic analysis of IS research between 1985 and 2001: •
•
•
Orlikowski and Baroudu (1991) examined 155 articles on IS research published between 1985 and 1989 in MIS Quarterly (MISQ), Communications of the ACM (CACM), Management Science (MS), and Proceedings of the International Conference on Information Systems (ICIS). Their findings indicated that positivist paradigm overwhelmingly dominated the IS research community and little attention was paid to interpretive paradigm. Chen and Hirschheim (2004) analyzed 1,893 articles on IS research published between 1991 and 2001 in MISQ, Information Systems Research (ISR), Journal of Management Information Systems (JMIS), ICIS, Information and Organization (I&O), Information Systems Journal (ISJ), Journal of Information Technology (JIT), and European Journal of Information Systems (EJIS). Their analysis indicates that while there has been some paradigmatic change in the IS research community since 1990, this change has not significantly manifested itself in journal publications. In most research journals, positivism maintains its prevailing dominant position. Dibbern et al. (2004) examined 84 articles on IS outsourcing published between 1988 and 2000 in I&O, CACM, EJIS, JIT, JMIS, Information and Management (I&M), ISJ, ISR, MISQ, Academy of Management
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A Paradigmatic and Methodological Review of Research in Outsourcing
Journal (AMJ), Academy of Management Review (AMR), Decision Sciences (DS), MS, Organization Science (OS), Strategic Management Journal (SMJ), Harvard Business Review (HBR), California Management Review (CMR), Sloan Management Review (SMR), ICIS, and Hawaii International Conference on System Sciences (HICSS). Their results indicate that there is a balanced aggregation of research approaches in IS outsourcing on the positivism-interpretivism continuum. However, the American outlets were dominated by the positivist paradigm and the European outlets were dominated by the interpretive paradigm.
nale behind the choice of leading journals in IS and management fields has been investigated by Walsham (1995), Orlikowski and Baroudu (1991), and Chen and Hirschheim (2004). The following academic journals were examined: •
•
•
Three mainstream American IS journals: Information Systems Research, MIS Quarterly, and Journal of Management Information Systems. Three mainstream European IS journals: Journal of Information Technology, European Journal of Information Systems, and European Management Journal. Two mainstream management journals: Management Science and Decision Sciences.
METHODOLOGY Paradigmatic Representations Journal Representations For the purpose of this research, the focus was on mainstream journals that would reflect progress in the field of IS and BP outsourcing in the last 10 years, ranging from 1995 to 2005. The ratio-
For paradigmatic analysis, this chapter uses the Operations Research Paradigm framework by Meredith et al. (1989) as shown in Figure 4.1. This framework has been used by researchers in the operations management area (Meredith et
Figure 4.1. Research paradigms framework (Adapted from Meredith et al. (see Appendix 1)
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A Paradigmatic and Methodological Review of Research in Outsourcing
al., 1989; Sachan & Datta, 2005). It serves as a comprehensive analysis tool in a two-dimensional format and is in the same way applicable to the field of IS research also. Hence this research extends the body of knowledge in the IS arena by using this Operations Research Paradigm framework to analyze the research paradigms in IS and BP outsourcing literature. Here it may be useful to mention that a paradigmatic perspective goes beyond the dichotomous classifications of research methods and techniques. Such a perspective helps the research community to undertake a reflective examination of its ontological and epistemological assumptions including the underlying values held by the community. The analysis of this chapter focuses on the following paradigms: axiomatic, positivist, interpretive, direct observation of object reality, people’s perception of object reality, and artificial construction of object reality.
Quantitative vs. Qualitative The criterion for categorizing research methods as quantitative or qualitative in this chapter is based on whether studies use a statistical or numerical approach to collect and analyze data (Chen & Hirschheim, 2004). There is a possibility that research could use both quantitative and qualitative methods in different stages of the study. On such occasions, they are categorized as a mixed research method.
Cross-Sectional vs. Longitudinal Chen and Hirschheim (2004) described longitudinal study as a research that evolves over an uninterrupted period of time and focuses on process. Cross-sectional study, on the other hand, is research that collects data through one snapshot at a particular point of time (Orlikowski & Baroudi, 1991).
Methodological Representations Research Designs The analysis of research methodology used in the identified journal papers focuses on the following areas: empirical vs. non-empirical; quantitative vs. qualitative; cross-sectional vs. longitudinal; research designs (survey, focus group, case study, experiment, and action research); sources of data; hypothesis testing; and the data analysis techniques (descriptive analysis, regression, factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, structural equation modeling).
Adapting the research design categorizations from Orlikowski and Baroudi (1991) and Chen and Hirschheim (2004), the following research designs were identified: • • •
Empirical vs. Non-Empirical The empirical studies rely on observations and data, and the non-empirical studies rely on ideas and concepts. The categorization in this research is established as empirical if the articles obtain real data or observations, which could be gathered through quantitative, qualitative, or a mixed approach, including archival data (Chen & Hirschheim, 2004).
•
Survey: Research articles involving data collection via questionnaires. Focus group: Group discussions exploring a specific set of issues to generate data. Case study: Research articles that are involved with a single site or a few sites over a certain period of time that involved in-depth study of a phenomenon. The case study inquiry usually relies on multiple sources of evidences (Yin, 2003). Experiment: Studies that take place within a designed, controlled environment and usually involve special treatment of different groups to contrast the precise relationships among variables (Galliers, 1991).
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•
•
Action research: The researchers are an integral part of the phenomenon under study. The researchers’ input often influences the outcomes of the phenomenon, and his/her role could change from researcher to subject (Galliers, 1991). Others: Articles that are practitioner oriented (systems or tools development), non-empirical pieces, or descriptive/argumentative as noted in Galliers’s (1991) classification. Research with secondary data such as public records or existing datasets is also included in this category.
in the research paper whether the study involves explicit formulation and testing of research hypotheses.
Data Analysis Techniques Data analysis techniques help researchers in: • • • •
Summarizing data Understanding the effect of variable (s) on the variable under study Minimizing confounding effects inherent in data, such as questionnaire data Assessing alternative future scenarios.
Sources of Data The sources of data involve collecting data from primary data sources or secondary data sources. The articles involving scenarios and examples have been categorized under the others category.
Major techniques used for data analysis are descriptive analysis, regression factor analysis, correlation, cluster analysis, conjoint analysis, path analysis, Logit model, and structural equation modeling.
Hypothesis Testing
RESULTS
A hypothesis is a specific statement of prediction (Sachan & Datta, 2005). The development of science can be seen as a sequence of revisions of hypotheses. Our knowledge of reality involves sequence of trials and errors (Sachan & Datta, 2005). Under hypothesis testing, it is checked
This chapter assessed the state of research in IS and BP outsourcing by examining the research paradigms and research methodologies adopted in 70 articles in eight leading academic journals between 1995 and 2005. The findings of the study reveal that on IS and BP outsourcing, between
Figure 4.2. Research: ITO & BPO (1995-2005) Management journals 13%
american is journals 29% american is journals european is journals Management journals
european is journals 58%
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Figure 4.3. Comparison of Total Number of Papers in American and European Journals (1995-2005) EMJ
20 MisQ 15
JIT
isr
JMIS EJIS
10 5
jMis jiT
MISQ ISR
ejis eMj
0 american journals
1995 and 2005, there were 20 articles in the three American IS journals, 41 articles in the three European IS journals, and nine articles in two management science journals (see Figure 4.2). The European journals indicated more research in the outsourcing field (see Figure 4.3).
Methodological Representations
european journals
quantitative approach, and two indicating mixedmethod approach. The European IS journals had 30 qualitative articles, six quantitative articles, and one mixed-method article. The management journals had two qualitative articles and six quantitative articles. The American journals mainly were quantitative research focused, whereas the European journals were qualitative research focused (see Figure 4.7).
Empirical vs. Non-Empirical Cross-Sectional vs. Longitudinal Forty-three articles fell under the empirical category and 22 under the non-empirical category (see Figure 4.4). In American IS journals there were 10 indicating empirical approach and 10 indicating non-empirical approach. The European IS journals had 29 empirical articles and eight non-empirical articles. The management journals had four empirical articles and four non-empirical articles. American journals had an equal balance of empirical and non-empirical articles, whereas the European journals indicated applying mostly empirical approaches (see Figure 4.5).
Thirty-four articles fell under the cross-sectional category and 6 under the longitudinal category (see Figure 4.8). In American IS journals there were 12 indicating cross-sectional approach and one indicating longitudinal approach. The European IS journals had 21 cross-sectional articles and four longitudinal articles. The management journals had one cross-sectional article and one longitudinal article. Both the American and European journals involved mostly cross-sectional approaches (see Figure 4.9). The longitudinal approach was insignificant in number.
Quantitative vs. Qualitative Research Designs Thirty-eight articles fell under the qualitative category and 24 under the quantitative category (see Figure 4.6). In American IS journals there were six indicating qualitative approach, 12 indicating
Fifteen articles fell under the survey research, one under focus group, 18 under case study, and 38 under the ‘others’ category. There were no articles
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A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.4.
Empirical vs. Non-empirical
nOneMpirical 34%
eMpirical nOn-eMpirical
eMpirical 66%
Figure 4.5.
Empirical vs. Non-empirical Journalwise 29
30 25 20
empirical
15 10
10
10
non-empirical
8 4
5
4
0 american is
european is
Management
Figure 4.6.
Quantitative vs. Qualitative
Quantitative 37%
Mixed method 5% Qualitative Quantitative Mixed method
Qualitative 58%
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A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.7.
Quantitative vs. Qualitative Journalwise 30
30 25 20
Qualitative
15 10 5
Quantitative
12 6
6 2
1
0 american is
Mixed Method
6
european is
2
0
Management
Figure 4.8.
Cross-sectional vs. Longitudinal longitudinal 15% cross-sectional cross-sectional 85%
longitudinal
Figure 4.9.
Cross-sectional vs. Longitudinal Journalwise 25 21 20 15
cross-sectional
12
10
longitudinal 4
5 1
1
1
0 american is
european is
Management
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A Paradigmatic and Methodological Review of Research in Outsourcing
under action research and experimental research. Research in the ‘others’ category included: one literature review paper, nine conceptual modelbuilding papers, 10 mathematical model-building papers, one research commentary paper, and 17 papers based upon secondary data analysis. Case study research was the most predominant research design, followed by secondary data analysis and survey research (see Figures 4.10 and 4.11).
Sources of Data There were 30 articles using primary data sources, 31 articles using secondary data sources, and 13 articles in the others category, which included examples and scenarios (see Figure 4.12). In American IS journals there were eight indicating primary data sources, 13 indicating secondary data sources, and seven indicating other sources. The European IS journals had 20 primary data sources articles, 14 secondary data sources articles, and five other sources articles. The management journals had two primary data sources articles, four secondary data sources articles, and one ‘other’ sources article. European journals mainly relied on primary data sources, whereas the American and management science journals relied on secondary data sources (see Figure 4.13).
Hypothesis Testing Eight articles indicated hypotheses testing out of the 70 articles reviewed (see Figure 4.14). The American IS journals had five articles indicating hypotheses testing, the European IS journals had two articles involving hypotheses testing, and the management journals had one article indicating hypotheses testing. Thus the American journals indicated a greater trend towards hypothesis testing than the European journals (see Figure 4.15).
Data Analysis Techniques There were 28 articles which indicated descriptive analysis, nine involving applied regression, four involving factor analysis, three involving correlation, two indicating Logit model, two involving structural equation modeling, and 23 under the ‘others’ category (see Figure 4.16). There were no articles applying cluster analysis, conjoint analysis, and path analysis. The ‘others’ category involved qualitative analysis of interview transcripts. American journals applied higher quantitative statistical analysis techniques whereas the European journals were restricted to mainly descriptive and qualitative techniques (see Figure 4.17).
Figure 4.10.
Research Design Commentary % Math Modeling %
Lit Rev %
Survey %
survey case study focus group sec data
Conceptual %
conceptual Math Modeling
Sec Data %
80
Case study % Focus Group %
commentary lit rev
A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.11.
Research Design Journalwise 20
20 15
14
survey
12 10
case study 8
6
5
6
Others
3 1
0
focus group
0 european is
american is
1
1
0 Management
Figure 4.12.
Sources of Data Others 18% primary 41%
primary secondary Others
secondary 41%
Figure 4.13.
Sources of Data Journalwise 20
20 15 10
14
13 8
primary secondary
7 5
5
Others
4 2
1
0 american is
european is
Management
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A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.14.
Hypothesis Testing yes 11% yes no no 89%
Figure 4.15.
Hypothesis Testing Journalwise 5
5 4 3
2
2
hypothesis testing 1
1 0 american is
european is
Management
Figure 4.16.
Data Analysis Techniques descriptive regression Others %
factor Descriptive %
SEM %
correlation logit seM Others
Logit %
82
Correlation %
Factor %
Regression %
A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.17. Data Analysis Techniques Journalwise 20
descriptive 16
15 10
0
factor
10
correlation 7
5
regression 13
logit
6 33
4 2
1
american is
1
2
0000 european is
11
1 00 Management
seM Others
Figure 4.18. Direct Observation of Object Reality
People’s Perceptions of Object Reality
Artificial Reconstruction of Object Reality American Journals: • JMIS (3) Management Journals • MS (4) • DS (1)
AXIOMATIC
European Journals: • JIT (1) American Journals: • ISR (3) • MISQ (2) • JMIS (3) LOGICAL POSITIVIST/ EMPIRICIST
European Journals: • EMJ (2)
Management Journals • MS (1) • DS (1) European Journals: • JIT (4) American Journals: • MISQ (2)
INTERPRETIVE
European Journals: • JIT (2) • EJIS (6) • EMJ (6)
American Journals: • ISR (2) • JMIS (4)
American Journals: • MISQ (1)
Management Journals • MS (1) European Journals: • JIT (5) • EJIS (2) • EMJ (9)
CRITICAL THEORY
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A Paradigmatic and Methodological Review of Research in Outsourcing
Figure 4.19.
Paradigmatic Representations The paradigmatic analysis for IS and BP outsourcing research in 70 papers using the operations research paradigm framework is tabulated in Figure 4.18. The literature review highlighted that the American journals are predominantly positivist in approach, but the results show that in the area of IS and BP outsourcing, they are also adopting interpretive paradigms. Although American journals are still more inclined towards positivism (positivist and axiomatic11 articles), the trend towards interpretive research (nine articles) is evident. The European journals belong predominantly to the interpretive paradigm (interpretive30 articles; positivist and axiomaticseven articles).
IMPLICATIONS Analysis of previous review papers in IS research highlights that positivist paradigm holds a dominant position. A paper by Galliers and Meadow (2003) offers a possible explanation in this regard. They discovered that editorial board members of North American journals like ISR and MISQ were primarily North American researchers (between 75% and 87.5% for ISR, and 51.2% and 86.8% for MISQ), and these journals tended to publish articles written by North American researchers (74% for ISR and 83% for MISQ). A similar situation was reported for European journals where the editorial board members were largely European, as were the papers published (Galliers & Meadow, 2003; Chen & Hirschheim, 2004). Galliers and Meadow (2003) concluded that the IS field maintained a “homegrown” perspective. Further, traditional wisdom has long recognized that positivist research is more easily accepted because its research tradition has been more successfully established (Hirschheim & Klein, 2002). The mainstream North American journal, MISQ, had
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publicly announced its acceptance of alternate research approaches in 1993. Chen and Hirschheim (2004) reported from their empirical analysis of 1,893 articles that even after years of advocacy of paradigmatic pluralism, not much has changed. On the contrary our findings indicate that a change is noticeable as the American journalsthough still more inclined towards positivism (positivist and axiomatic11 articles)are also publishing interpretive research (nine articles). However, this can also be attributed to the recency of the phenomenon of outsourcing. Another interesting observation is that highlighted by the comparison between empirical and non-empirical studies. Our analysis revealed that 66% of the papers were empirical in nature. Chen and Hirschheim (2004) have also reported that researchers have increased their use of empirical data collection. Interestingly, our study revealed that the American journals had an equal balance of empirical and non-empirical articles whereas the European journals indicated applying mostly the empirical approach. Chen and Hirschheim (2004) state that as a field matures, theoretical and conceptual developments become less appealing, and empirical studies become more popular because of the need for theory testing and practical relevance. The European journals indicated more research in the outsourcing field (58%) as compared to the American journals (29%). For this reason the European journals could possibly regard outsourcing research as a mature field and show greater adoption of empirical studies. Both the American and European journals mainly involved cross-sectional studies. Longitudinal approach was insignificant in quantum. It can be due to the contention that cross-sectional studies enjoyed more popular positions (Chen & Hirschheim, 2004) and prevalence of a ‘publish or perish’ research publication notion (Walsham, 1995). Also, research using literature reviews, conceptual model building, mathematical model building, and research commentaries were the most predominant research designs followed by
case study and survey research. The European journals mainly relied on primary data sources whereas the American journals relied more on secondary data sources. Finally, the American journals applied higher quantitative statistical analysis techniques and indicated a greater trend towards hypothesis testing, whereas the European journals applied mainly descriptive and qualitative techniques. To summarize, this study reveals that in the area of outsourcing, interpretive paradigm is beginning to dominate if two sides of the Atlantic are put together. This can probably be attributed to the reality that European journals are publishing more in this area and they are more interpretively inclined. Newness of outsourcing could also be one possible explanation as the more positivist inclined American journals were also reporting interpretive research in this area.
DIRECTIONS FOR FUTURE RESEARCH The IS and BP outsourcing industry is poised for phenomenal growth, and this area has high potential for future research. Outsourcing has emerged as a multifaceted subject. There is a great deal of diversity in terms of research objectives, theoretical foundations, and methods (Dibbern et al., 2004). Additional exploratory content analysis of the papers revealed various emerging research areas. These are summarized as follows: •
•
Longitudinal studies: An evident need for longitudinal studies is a key finding of this study. There is an opportunity for researchers to move beyond the snapshot studies and broaden the perspective of outsourcing by incorporating temporal effects to answer questions like, How does the outsourcing process change over time? Client-vendor relationships: An in-depth understanding of the key issues underly-
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•
•
•
•
86
ing client-vendor relationships is required. Most of the studies were from the client perspective, and there was a need for further examining the vendor perspective. Additionally, dyadic studies incorporating both the client and vendor perspective would offer better understanding of the dynamics of such engagements. Client-vendor governance arrangements: An increasing number of varied outsourcing contracts have increased the complexities of governance mechanisms. There is a need to explore such engagements and understand the dynamics of control. Additionally, the impact of informal relationship between the client and vendor organizations can lead to interesting studies. There is an emerging nature of such relationships. This promising trend to move beyond the contractual engagements can be explored. What is the impact of trust on the governance of such arrangements? How does an outsourcing contract-relationship evolve over time? Risk management: Turning over the entire business process to a vendor brings with itself various risks. Studies conceptualizing and examining comprehensive risk assessment frameworks can aid in better understanding the dynamics of outsourcing risks. Operationalization and measurement of outsourcing success: Success is defined differently in various papers by various stakeholders and researchers. The complicated nature of the perception of success makes it a difficult variable to operationalize. Hence an all-inclusive view of success can be explored. Emerging role of countries: The emerging role of countries—like India, China, the Philippines, and othersfrom cost-saving outsourcing destinations to strategic valueadding outsourcing destinations is also a fertile area for future research.
Furthermore, the dataset of this research was limited to eight journals only. Hence this study can be taken forward by researchers for larger assessment by including other management science journals in the area of information systems, operations, human resources, organizational behavior, finance, and strategy.
CONCLUSION The purpose of this chapter was to study the literature on IS and BP outsourcing using a methodological and paradigmatic lens. The analysis of publication trends brings out a growing awareness of non-positivist approaches to doing research in outsourcing. However, the analysis also brings out a continuing divide across the Atlantic Ocean. The authors hope that awareness of such a divide would trigger a meaningful dialogue over the underlying perspectives so that it stimulates more wholesome research across the globe. A better balance between the positivist and interpretive is also likely to save us from making unnecessary blunders due to cultural blindness of the positivist paradigm in the outsourcing phenomenon, which by its very nature straddles far-flung continents and cultural worlds. The analysis also shows the paucity of longitudinal and action research studies, which actually have great potential to generate deeper insights about the challenges to the management of outsourcing. In sum, the chapter attempts to stimulate a reflective introspection in the research community interested in the emerging phenomenon of outsourcing.
REFERENCES Ang, S., & Beath, C.M. (1993). Hierarchical elements in software contracts. Journal of Organizational Computing, 3(3), 329-361.
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Chen, W., & Hirschheim, R. (2004). A paradigmatic and methodological examination of information systems research from 1991 to 2001. Information Systems Journal, 14, 197-235. Cheon, M.J., Grover, V., & Teng, J.T.C. (1995). Theoretical perspectives on outsourcing of information systems. Journal of Information Technology, 10, 209-210. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. The DATABASE for Advances in Information Systems, 35(4), 6-102. Domberger, S., Fernandez, P., & Fiebig, D.G. (2000). Modeling the price, performance and contract characteristics of IT outsourcing. Journal of Information Technology, 15, 107-118. Galliers, R.D. (1991). Choosing appropriate information systems research approaches: A revised taxonomy. In H.E. Nissen, H.K. Klein, & R. Hirschheim (Eds.), Informations systems research: Contemporary approaches and emergent traditions (pp. 327-345). North Holland: Elsevier Science.
Lankford, W.M., & Parsa, F. (1999). Outsourcing: A primer. Management Decision, 37(4), 310-316. MacCrimmon, K., & Wehrung, D. (1986). Taking risks: The management of uncertainty. New York: The Free Press. Meredith, J.R., Raturi, A., Amoako-Gyampah, K., & Kaplan, B. (1989). Alternative research paradigms in operations. Journal of Operations Management, 8(4), 297-326. Millar, V. (1994). Outsourcing trends. Proceedings of the Outsourcing, Cosourcing and Insourcing Conference, Berkeley, CA. Nash, J.F. (1953). Two-person cooperative games. Econometrica, 21, 128-140. Orlikowski, W., & Baroudi, J.J. (1991). Studying information technology in organizations: Research approaches and assumptions. Information Systems Research, 2, 1-28. Sachan, A., & Datta, S. (2005). Review of supply chain management and logistics research. International Journal of Physical Distribution & Logistics Management, 35(9), 664-705.
Galliers, R.D., & Meadow, M. (2003). A discipline divided: Globalization and parochialism in information systems research. Working Paper.
Walsham, G. (1995). Interpretive case studies in IS research: Nature and method. European Journal of Information Systems, 4, 74-81.
Gonzalez, R., Gasco, J., & Llopis, J. (2006). Information systems outsourcing: A literature analysis. Information & Management, 43(7), 821-834.
Watjatrakul, B. (2005). Determinants of IS sourcing decisions: A comparative study of transaction cost theory versus the resource-based view. Journal of Strategic Information Systems, 14, 389-415.
Harmon, P. (2003). An overview of business process outsourcing. Business Process Trends, 1(9), 1-12. Hirschheim, R., & Klein, H.K. (2002). Information systems research in the making: A critical reflection on the current state of the IS discipline. Working Paper. Klepper, R. (1995). The management of partnering development in IS outsourcing. Journal of Information Technology, 10(4), 249-258.
Willcocks, L.P., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of UK inland revenue. European Journal of Information Systems, 7(1), 29-45. Yin, R.K. (2003). Case study research: Design and methods. London: Sage.
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Appendix 1
This work was previously published in the Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 27-43, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter V
An Outsourcing Acceptance Model:
An Application of TAM to Application Development Outsourcing Decisions
John “Skip” Benamati Miami University, USA T.M. Rajkumar Miami University, USA
Abstract The use of outsourcing is expanding rapidly. This chapter empirically tests a model of application development outsourcing acceptance based on the technology acceptance model (TAM). TAM-suggested perceived usefulness and ease of use mediate the effects of other variables on users’ attitudes towards a technology. The model tested in this chapter suggests that perceived usefulness and ease of use of outsourcing mediate the effects of the external environment, prior outsourcing relationships, and risks on decision-makers’attitude toward application development outsourcing. One hundred and sixty respondents to a survey sent to 3000 IT decision makers provided data to confirm the applicability of TAM and the influences of these external variables. Support for applying TAM in this alternative context was found. Three sub-dimensions of risk, project management, relationship, and employee risk emerged. Project management and employee risks along with prior relationships were found to significantly influence decision maker perceptions about application development outsourcing. Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
An Outsourcing Acceptance Model
INTRODUCTION An increased reliance on information technology (IT) for success combined with the rapid, accelerating rate of IT change, has intensified both the importance and complexity of managing this now vital corporate resource. IT outsourcing, the transferring of all or part of a company’s IT functions to an outside party, offers additional alternatives to organizational decision makers. Hence, there is an increasing focus on determining the correct sourcing strategy for IT and IT services (King, 2001). However, choosing the appropriate IT functions to outsource and the best outsourcing vendor is very complex (Kern, Willcocks, & van Heck, 2002). This is especially true now because the motivation for IT outsourcing has moved beyond traditional cost cutting or efficiency gains to become more transformational. IT outsourcing now plays a much more strategic role, enabling companies to be more adaptive and respond quickly to new opportunities (Mazzawi, 2002). Kodak brought IT outsourcing to the forefront with their landmark decision to outsource their IT functions in 1989. Recent surveys indicate that around the globe, firms of all sizes across many industries view outsourcing as a realistic alternative for some or all of their IT functions (Barthelemy & Geyer, 2001; Kakabadse & Kakabadse, 2002). The use of IT outsourcing continues to grow at a phenomenal rate (Kernet al., 2002; Ross & Westerman, 2004). A wide variety of IT functions are outsourced. This study focuses on one particular function, applications development (AD), defined as any efforts in the organization involved with the analysis, design, or implementation of information systems. AD was identified in multiple prior studies as an IT function commonly outsourced (McFarlan & Nolan, 1995; Hurley & Schaumann, 1997; Elmuti & Kathawala, 2000; Ross & Westerman, 2004). Furthermore, recent surveys indicate that AD outsourcing is on the rise (Hurley & Schaumann,
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1997; Ketler & Willems, 1999; King & Cole-Gomolski, 1999). More and more AD outsourcing is also done offshore which adds complexity to the decision making process (Elmuti & Kathawala, 2000; Robb, 2000; Prencipe, 2001). Thus, a better understanding of the AD outsourcing decision is important. More importantly, this knowledge may help to improve the understanding of other outsourcing decisions. A prior outsourcing study (Benamati & Rajkumar, 2002) proposed an application of the technology acceptance model (Davis, 1989; Davis, Bagozzi, & Warshaw, 1989) as a basis for investigating AD outsourcing decision making. The model also proposed risk, prior outsourcing relationships, and an organization’s external environment to be important antecedents to decision-maker perceptions and hence important factors in AD outsourcing decisions (Benamati & Rajkumar, 2002). The goal of this research is to empirically test and validate that model as a basis for further study and shed new light on factors that influence AD outsourcing decisions. The following section reviews the proposed model of outsourcing acceptance and develops hypotheses from it. The methodology used and findings from an empirical validation of that model are then explained. Finally, implications of both the results and the model for future research are discussed. No other research has empirically applied TAM in this way. Nor has there been empirical testing of the influence of these three antecedent factors on the decision to outsource AD.
THEORETICAL BASIS FOR THE RESEARCH MODEL AND HYPOTHESIS TAM states that users’ perception of the usefulness of a technology, defined as the degree to which a person believes that using the technology will enhance his or her job performance, and ease
An Outsourcing Acceptance Model
of use, defined as the degree to which a person believes that using the technology will be free of effort (Davis, 1989), directly affect the users’ attitude about and hence their intention to use the technology. These two perceptions also moderate the effects of antecedent constructs on the decision to use the technology. The AD outsourcing acceptance model (Benamati & Rajkumar, 2002) that is the focus of this study, shown in Figure 5.1, illustrates TAM constructs, outsourcing decision antecedent constructs, and posited relationships among the constructs. It proposes that TAM constructs are applicable to the acceptance of AD outsourcing. The TAM constructs and interrelationships are applied consistently with previous TAM research (Davis et al., 1989; Mathieson, 1991; Karahanna, Straub, & Chervany, 1999). Decision-maker perceptions of the usefulness, defined as the degree to which the decision maker believes that AD outsourcing will enhance the performance of the IT group, and ease of use, the degree to which the decision maker believes that AD outsourcing will be free of effort, are posited to influence their attitude about AD outsourcing which in turn affects their intention to do it. Consistent with TAM, the model proposes that a decision-maker positively inclined towards outsourcing is more likely to have intentions to outsource.
Many organization level decisions are ultimately made by an individual within the organization. IT managers most often prepare sourcing evaluations (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004) and IT sourcing decisions elevate to the CIO, CFO, and CEO levels in organizations (Kakbadse & Kakabadse, 2002). A study of 160 French and German companies found the decision to outsource IT was made by an individual executive in 90% of the French and 75% of the German organizations studied (Barthelemy & Geyer, 2001). The studies indicate most IT outsourcing decisions are organizational decisions primarily made by individuals. The unit of analysis in prior TAM research has predominantly been individual adoption of a specific technology. Recent studies apply TAM to organizational level adoptions decisions by owners or executives in small and medium sized enterprises (SME) and more general technology categories such as ecommerce (Granden & Pearson, 2004) or having a Web presence (Riemenschneider, Harrison, & Mykytyn, 2003). Since AD outsourcing is a solution to a general technology problem, TAM constructs and relationships may be applicable to high level decision-makers’ acceptance of AD outsourcing.
Figure 5.1. Outsourcing acceptance model Antecedents External Environment
TAM
H5 H6
Prior Outsourcing Relationships
H7
H10 (-) H8 (-)
Perceived Risks of Outsourcing
H9 (-)
Perceived Usefulness of Outsourcing
H2
Attitudes towards Outsourcing
H4
Perceived Ease of Use of Outsourcing
H1
Intention to Use Outsourcing
H3
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An Outsourcing Acceptance Model
Furthermore, TAM is rooted in the theory of reasoned action (Azjen & Fishbein, 1980) and other research has drawn on attitude based choice theory rooted in the theory of reasoned action to study organizational level decisions. Mykytyn and Harrison (1993) studied the acceptance of strategic information systems by senior management and Candel and Pennings (1999), the choice of financial services by entrepreneurs. This provides further support for organizational level decision makers as a unit of analysis. Figure 5.1 also illustrates the hypotheses tested in this study. Hypotheses one through four stem directly from the established TAM relationships. It is hypothesized that these relationships will hold in the AD outsourcing decision context as well. Hence, it is hypothesized that: H1: Decision maker attitude toward outsourcing AD positively affects their intention to use it. H2: Decision maker perception of the usefulness of AD outsourcing positively affects their attitude towards it. H3: Decision maker perception of the ease of use of AD outsourcing positively affects their attitude towards it. H4: Decision maker perception of the ease of use of AD outsourcing positively affects their perception of its usefulness. The model also proposes the external environment, prior outsourcing relationships, and the perceived risk of outsourcing AD as antecedents to decision maker perceptions of AD outsourcing. Each is proposed to affect one or both of the TAM perception variables. Support for the influence of these antecedents on outsourcing decisions exists in prior literature. A firm’s external environment plays a role in decision-making (Goll & Rasheed, 1997). A dynamic, competitive, or uncertain environment
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can lead firms to focus on core competencies and outsource others (Slaughter & Ang, 1996). As hypercompetition becomes an unavoidable way of life in many industries (D’Aveni, 1994), IT plays a bigger and bigger role in achieving and sustaining competitive advantages. Furthermore, environmental change prompts organizations to maintain flexible organizational structures (Burns & Stalker, 1961; Perrow, 1970; Thompson, 1967; Woodward, 1965). Outsourcing provides flexibility and offers a way to adjust organizational boundaries in response to pressures from the environment (Lonsdale & Cox, 2000). For example, the critical contingencies that arise due to stiff competition were found to influence IT outsourcing decisions in the banking industry (Ang & Cummings, 1997). This provides support for the fifth hypothesis in the model. H5: A more competitive external environment positively affects decision maker perception of the usefulness of AD outsourcing. The importance of the client supplier relationships has received increasing attention in the outsourcing literature. Organizations and their outsourcing vendors have become more tightly coupled (Lee, Huynh, Chi-wai, & Pi, 2000) and long term partnerships are more appropriate (Nam, Rajagopalan, Rao, & Chaudjury, 1996; Saunders, Gabelt, & Hu, 1997; Mazzawi, 2002). Some outsourcing arrangements form as strategic alliances with deep levels of interdependence (Lacity & Willcocks, 1998; King, 2001) and the ability to build a trusted partnership and avoid relational trauma is imperative for success (Kern et al., 2002). It becomes critical to consider outsourcing as the management of relationships with service providers as opposed to simply managing contracts for IS commodities (Kishore, Rao, Nam, Rajagopalan, & Chaudhury, 2003). A recent survey of 700 IT professionals indicates that reliability and trust in the outsourcing vendor were the two most important factors in selecting an
An Outsourcing Acceptance Model
outsourcing vendor (Gareiss, 2002). Surprisingly, these two relationship qualities ranked above more traditional selection criteria such as cost and technical skills. Whitten and Leidner (2006) found that for varying perceptions of product and service quality (high, low or poor), poor relationship quality has caused the decision to backsource or bring application development back in-house. The quality of the outsourcing relationship is clearly important (Lee & Kim, 1999) as these relationships are becoming mission critical (Kern & Willcocks, 2002). From a decision making perspective, early outsourcing research predominantly overlooked the fact that many outsourcing decisions are not independent decisions but instead are based on prior outsourcing experiences (Nam et al., 1996; Lee et al., 2000). Past marketing research into customer-service provider relationships found that customer satisfaction with prior experiences with a provider affected their loyalty to that provider and the strength of the relationship increased with the length of prior experience (Bolton, 1998). Likewise, prior outsourcing experiences certainly influence follow-on outsourcing decisions. The outsourcing acceptance model posits that prior outsourcing relationships will influence decision maker perceptions about outsourcing’s usefulness and ease of use as stated in hypotheses six and seven. H6: Positive prior AD outsourcing relationships positively affect decision maker perception of the usefulness of AD outsourcing. H7: Positive prior AD outsourcing relationships positively affect decision maker perception of the ease of use of AD outsourcing. Risk is also an important factor in the AD outsourcing decision (Earl 1996; Aubert, Patry, & Rivard, 1998; Ketler & Willems, 1999). Risk, if ignored, leads to undesirable consequences, such as increased likelihood of project failure
(Lyytinen, Mathiassen, & Popponen, 1998; Bahli & Rivard, 2005). IS managers may perceive outsourcing to reduce risk because it can provide skills the organization lacks to develop a particular application. However, outsourcing introduces many new risks such as hidden costs, lack of proper skills or infrastructure to manage the engagement, staff morale problems, and loss of control to or key dependence on a third party (Ketler & Walstrom, 1993; Hurley & Schaumann, 1997; Smith, Mitra, & Narasimhan, 1998; Barthelemy, 2001). Offshore outsourcing adds many additional challenges and risks to the outsourcing engagement (Ramarapu, Parzinger, & Lado, 1997). For example, the project team is, by definition, virtual and must be managed across time, distance, and perhaps even borders or oceans. Although some virtual organizations succeed, the value of virtual organizations has been oversold and more fail than succeed (Chesbrough & Teece, 2002). Perceived risk has been shown to inhibit system or product evaluation and adoption in e-service settings (Featherman & Pavlou, 2003). That study also provided strong empirical evidence that perceived risk adversely influences perceived usefulness. In an AD outsourcing context, perceived risk can be expected to negatively influence the perceived usefulness of outsourcing. Hypotheses eight states this expectation. H8: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the usefulness of AD outsourcing. The risks associated with outsourcing highlight the need to outsource in the right way (Ross & Westerman, 2004). When risk is perceived, users introduce standard risk management mechanisms such as risk assessment, and developing risk mitigation plans to handle the perceived risk. Contracts for example, are one mechanism used to effectively manage the outsourcing relationship and provide for early termination, in case of underperformance (Osei-Bryson & Ngwenyama, 2006). The out-
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An Outsourcing Acceptance Model
sourcer also typically sets up an organizational unit to coordinate interactions between its information technology staff and the vendor as well as monitor the vendor’s performance. Users must pay close attention to coordination in the early stages of the AD outsourcing projects so that costly adjustments to the coordination mechanisms do not occur later (Sabherwal, 2003). This additional effort to manage risks introduces a burden on the user to invest more time and effort in governance, oversight, and coordinating mechanisms, reducing the ease-of-use of outsourcing. Hence, this leads to the hypotheses: H9: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the ease of use of AD outsourcing. Today’s outsourcing relationships involve strategic alliances with shared risk between the provider and the purchaser of the outsourcing services (Lacity & Willcocks, 1998; Kishore et al., 2003). Just as good prior relationships should increase perceptions of ease of use and usefulness, it would be expected that positive past experiences would reduce the perception of risk associated with outsourcing. This expected inverse relationship forms the basis for a final hypothesis. H10: Positive prior AD outsourcing relationships negatively affect decision maker perception of the risk of AD outsourcing.
METHODOLOGY A survey instrument was implemented to empirically test the model and hence, the applicability of TAM and the influence of the antecedent variables. Most prior outsourcing studies applied more qualitative or case study research. Very few studies employed quantitative methods. This research is the first to employ a quantitative instrument to study the applicability of TAM and one of only
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a few to quantitatively examine antecedents to outsourcing decision making.
Instrument Development The instrument items used to operationalize the constructs in Figure 5.1 were all derived from past research. All questions used a 1 to 7 scale where 1 meant “strongly disagree” and 7 meant “strongly agree.” The items for the four TAM constructs are revisions of items from previously validated TAM instruments (Agrawal & Prasad, 1999; Hu, Chau, Liu Sheng, & Yan Tam, 1999; Venkatesh & Davis, 2000). The items were reworded to change the focus from systems to application development outsourcing. For example, the TAM intention to use item “Given that I have access to the system, I predict that I would use it” became “Given that I have access to an outsourcer for applications development I predict that I would use them.” These items were applied to test the TAM hypotheses (H1-H4). Consistent with previous instruments applying TAM to organizational level adoption decisions (Grandon & Pearson, 2004), the items for ease of use focused on the decision maker’s perception of their own ability to use outsourcing. Grandon and Pearson (2004) operationalized perceived usefulness as a mix of the decision maker’s perception of the usefulness to themselves and to the organization. For example, “Using e-commerce would improve my job performance” and “Using e-commerce would enable my company to accomplish specific tasks more quickly” were used. For consistency, all usefulness items in the developed instrument addressed the usefulness of outsourcing to the organization. The items for external environment and prior relationships originated from instruments used in marketing research. To measure the competitive nature of the environment, items from Industruct (Pecotich, Hattie, & Peng Low, 1999), an instrument developed to measure Porter’s (1980) five
An Outsourcing Acceptance Model
competitive forces model were adapted. Only items from intensity of rivalry defined as “the extent to which firms in this industry frequently and vigorously engage in outwardly manifested competitive actions and reactions in their search for competitive advantage in the marketplace” (Pecotich et al., 1999) were applied. That study found that rivalry was the strongest force of the five. Competitive rivalry is also probably the one most directly applicable to help test hypothesis five. Many marketing studies have measured dimensions of relationship quality. The items for measuring relationship quality used here were drawn from two separate marketing instruments. This was done to tap into a representative set of relationship quality dimensions that may be applicable to outsourcing relationships. The first dimension adapted was relational norms (Heide & John, 1992). Relational norms allow both buyer and supplier to judge whether each party’s actions conform to established standards (Ivens, 2006). The measures tap into three aspects of the relationship norms; flexibility—the expectation of a willingness of the parties to be adaptable to changing circumstances, information exchange—the expectation that a proactive exchange of useful information will occur, and solidarity—the expectation that both parties place a high value on the relationship. Trust is also commonly identified as an important aspect of relationship quality (Crosby, Evans, & Cowles, 1990; Moorman, Zaltman, & Deshpande, 1992; Morgan & Hunt, 1994; Rindfleisch, 2000; Ulaga & Eggert, 2004; Huntley, 2006). Rindefleish’s (2000) five item scale for organizational trust, which he defined as “…confidence in an exchange partner’s reliability and integrity” was adapted. This combination of 15 measures adequately represented the dimensions of relationship quality from an outsourcing perspective. These measures were applied to test hypotheses six, seven, and ten.
Established measures for outsourcing risk were not found in prior research and hence were developed from outsourcing risks identified by Elmuti and Kathawala (2000). This was the most complete list that was found and is applied to explore risk factors and test the last three hypotheses. Table 1 details the number and the source of survey items for each construct in the proposed framework.
Instrument Pretest A pretest of the instrument was conducted with two IT academicians experienced in survey development, three IT executives who have outsourced applications development, and two executives from application development outsourcing providers. The pretest was done to ensure that the survey was clear and concise, and that items portrayed their intended meaning. Feedback was also sought on the length of the survey, its overall appearance, and how each participant would react to receiving it in the mail. Comments and suggestions were used iteratively to revise the survey. During each pretest, one of the authors met with each of the participants individually and discussed the purpose of the survey. The subjects were asked to complete the survey. They were also asked to suggest improvements and to identify anything not clear to them. After completion of the survey, the attending author clarified and recorded subject feedback and suggestions. The comments of each participant were incorporated before meeting with the next participant and the pretest iterated until all clarity issues in the survey were flushed out. The pretest resulted in substantial improvement in the clarity of the survey definitions and items. It also resulted in the addition of one ease of use item—using application development outsourcing makes it easier to share risk with the vendor. The Appendix lists all the survey items along with the instructions to subjects.
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Table 5.1. Source of survey items Construct
Prior Study Factor
Number of Items
Source
Intention to Use
Intention to Use
5
Agrawal & Prasad, 1999; Hu et al., 1999; Venkatesh & Davis, 2000
Attitude
Attitude
4
Agrawal & Prasad, 1999; Hu et al., 1999
Perceived Usefulness
Perceived Usefulness
9
Davis, 1989; Venkatesh & Davis, 2000
Perceived Ease of Use
Perceived Ease of Use
5
Venkatesh & Davis, 2000
External Environment
Competitive Rivalry
9
Pecotich et al., 1999
Prior Relationships
Relational Norms
10
Heide & John, 1992
Trust
5
Rindefleisch, 2000
18
Elmuti & Kathawala, 2000
Outsourcing Risks
Data Collection To implement the survey, a random sample of 3000 IT executives was drawn from subscribers to an IS journal focusing on enterprise application issues. The journal qualified subscribers based on their level in the organization and provided a randomized sample from the over 25,000 subscribers with the level of director or higher in their organizations. Two mailings were done. The first contained a solicitation letter, the survey, and a postpaid return envelope. The letter also included the URL of an online version of the survey. The second mailing was a reminder card that also pointed to the online version. The IT executives provided a total of 160 usable responses. Subjects’ organizations represented a variety of industries. Table 5.2 summarizes them. The “other” category includes all industries represented by only one organization. Subjects’ demographics indicate they were indeed high level IT executives. They averaged
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19.4 years of IS experience, 9.6 with their current employer. In addition, they managed on average 78 subordinates. All subjects also indicated they played significant roles in outsourcing decisions for their organizations. Table 5.3 summarizes the size of the subjects’ organizations in terms of number of IT professionals and IT budget. Subjects estimated that on average 13.2% of their IT budget was spent on application development outsourcing and 19.7% on all types of IT outsourcing. AD outsourcing decisions were being made in these organizations. Response rates in surveys of executive level individuals are often low (Pincus, Rayfuekdm, & Cozzens, 1991; Baruch, 1999) due to the numerous demands on their time. Many executives have buffer systems in place to control the receipt of requests for information such as surveys (Cycyota & Harrison, 2002). Subject organizations that are small exacerbate the low response rate problem (Dennis, 2003). Not unexpectedly, the response rate of 5.33% was low. Low response rates can introduce response bias. However, the absence
An Outsourcing Acceptance Model
Table 5.2. Subject organization industries Industry
Number
Percentage
Finance
20
12.50%
Other
19
11.88%
Education
18
11.25%
Manufacturing
18
11.25%
Consulting
15
9.38%
Government
14
8.75%
Communication
9
5.63%
Health Care
8
5.00%
Transportation
7
4.38%
Insurance
6
3.75%
Systems Integrator
5
3.13%
Utilities
4
2.50%
marketing
4
2.50%
software development
4
2.50%
Banking
3
1.88%
Publishing
2
1.25%
Construction
2
1.25%
Legal
2
1.25%
Table 5.3. Subject organization size
Number of IT Professionals 1-49
Number of Subject Organizations 77
Reported IT Budget (Thousands)
Number of Subject Organizations
Under $99
5
50-99
13
$100-$499
22
100-249
30
$500-$1,999
29
250-499
16
$2000-4,999
18
500-999
5
$5,000-9,999
22
More than 1000
18
More than $10,000
56
Not reported
1
Not reported
8
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An Outsourcing Acceptance Model
of differences in the responses received at different times would be consistent with the claim that response bias was not present (Anderson & Gerbing, 1988). The responses for all of the factors and numeric demographic variables collected were tested for responses received before and after the second mailing. None of the t-tests (continuous variables) or chi-squared tests (categorical variables) showed responses to be significantly different. Hence, response bias was not found.
DATA ANALYSIS The data analysis proceeded through two phases. The first phase examined the applicability of TAM to outsourcing decision making and the second the influence of the three antecedents on decision maker beliefs about outsourcing. The following two sections discuss these phases.
The Applicability of TAM The TAM analysis proceeded through two steps. The first employed exploratory factor analysis (EFA) techniques to establish the validity of the instrument and identify the coping mechanism categories (Hatcher, 1994; Stevens, 1996). The second used simple linear regression to test the TAM hypotheses in the context of AD outsourcing. The EFA used the principle factor method with promax oblique rotation. Oblique rotation is suggested when factors are thought to be correlated factors (Harman, 1976; Hatcher, 1994). The factors are hypothesized to interrelate (in fact, the data later showed that each resulting factor correlated with at least one other factor at .24 or higher). Based on the prior expectation of four TAM factors and the percent of variance criterion (Hatcher, 1994) with a five percent cutoff, four factors variables were retained. In the factor analysis items PU2, PU8, and IN5 (see the Appendix) cross loaded onto the attitude
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construct, indicating multidimensionality in these measures. All three were dropped. Additionally, PU1, PU5, and EOU1 did not load above the recommended .40 cutoff on their factors and were also dropped. All remaining items loaded on their expected constructs. The constructs all had Cronbach alphas of .77 or higher, well within recommended thresholds (Nunnally, 1967). This indicated the reliability of the instrument. Table 5.4 presents the descriptive statistics for the analysis including the mean factor scores. The second step in this analysis employed simple linear regression to test the TAM research hypotheses (H1 through H4). The regression results illustrated in Table 5.5 indicate that all four hypotheses were strongly supported.
The Effects of the Antecedents The same two steps were followed to analyze the effects of the three antecedents, the external environment, prior outsourcing relationships, and the perceived risk of outsourcing. An EFA was done including all 42 antecedent items. The expectation was that three factors would emerge. However, five factors accounted for more than 5% of the variance in the data and thus were retained. The risk items loaded onto three separate factors accounting for the two additional factors. Five items were dropped in subsequent runs. Items EN9, RSK7, RSK15, and RSK17 did not load above .40 on their respective factors and REL9 cross loaded onto one of the risk factors. All remaining items loaded on their expected constructs. The constructs all had Cronbach alphas above .73 indicating the reliability of the instrument. Table 5.6 presents the descriptive statistics for the analysis. The authors named the three risk factors: project management risk, relationship risk, and employee risk based on an interpretation of the concepts embodied by the items in each. These names are reflected in Table 5.6. Table 5.7 explicitly defines these three sub-dimensions of Risk in terms of those items.
An Outsourcing Acceptance Model
Table 5.4. Final results of TAM exploratory factor analysis
Item
Attitude Towards Outsourcing
Perceived Usefulness of Outsourcing
Intention to Use Outsourcing
Perceived Ease of Use of Outsourcing
AT2
.90
.03
-.07
-.02
AT3
.79
.08
.09
-.13
AT1
.77
-.09
.09
.11
AT4
.62
-.08
.05
.17
PU4
-.13
.80
.05
.01
PU7
.07
.66
-.13
.06
PU3
.12
.63
.14
-.14
PU9
.28
.55
.09
.02
PU6
-.11
.49
.09
.06
IN2
-.02
-.01
.95
.01
IN1
.02
-.01
.91
.01
IN3
.19
.15
.48
.05
IN4
.17
.25
.41
-.04
EOU2
.04
.07
-.04
.75
EOU1
-.10
-.11
.03
.67
EOU3
.16
.21
.00
.60
EOU4
.26
-.01
.07
.46
Alpha
.87
.82
.87
.77
Eigenvalue
6.833
1.564
0.832
0.688
Percent of Variance Explained
71.0
16.3
8.7
7.2
Mean
4.25
5.12
4.72
3.23
Std. Dev.
1.16
0.96
1.19
1.09
Table 5.5. TAM hypotheses linear regression results Dependent Variable
R2
F-Value (p-value)
Independent Variable (Hypothis)
T value (P-value)
Estimate
Intention to Use Outsourcing
.37
93.44 (<.0001)
AT (H1)
9.67 (<.0001)
.6317
Attitude Towards Outsourcing
.45
61.95 (<.0001)
PU (H2) PEOU (H3)
7.11 (<.0001) 5.59 (<.0001)
.4414 .3794
Perceived Usefulness of Outsourcing
.12
20.86 (<.0001)
PEOU (H4)
4.57 (<.0001)
.3769
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An Outsourcing Acceptance Model
Table 5.6. Final results of antecedent exploratory factor analysis Project Mgt. Risk
Relationship Risk
Employee Risk
-0.07
0.17
-0.07
-0.05
0.00
0.06
-0.03
-0.10
Item
Relationship
Environment
REL11
0.76
REL4
0.74
REL7
0.68
-0.19
-0.11
0.05
-0.03
REL10
0.67
0.10
-0.07
0.12
-0.12
REL13
0.65
-0.04
0.11
-0.12
0.14
REL1
0.65
-0.23
-0.09
0.05
0.04
REL8
0.65
0.06
0.26
-0.17
0.02
REL3
0.64
0.18
-0.04
-0.01
-0.11
REL2
0.63
0.16
-0.08
-0.03
-0.15
REL14
0.58
0.09
-0.08
-0.02
0.10
REL6
0.56
0.14
0.03
-0.05
-0.08
REL15
0.54
-0.02
-0.21
0.24
0.23
REL5
0.51
-0.06
-0.01
0.00
0.08
REL12
0.51
-0.03
0.01
0.02
0.08
EN6
0.03
0.81
0.10
0.03
0.00
EN3
0.00
0.79
0.05
0.05
-0.01
EN8
-0.06
0.74
0.02
-0.03
0.09
EN1
-0.06
0.73
0.06
0.00
-0.01
EN5
0.02
0.73
-0.17
0.18
-0.04
EN2
0.01
0.71
0.00
0.02
-0.04
EN7
0.02
0.67
-0.03
-0.09
0.08
EN4
0.08
0.41
0.04
-0.02
0.11
RSK4
-0.09
0.09
0.70
0.06
-0.07
RSK3
-0.05
0.09
0.59
-0.12
0.10
RSK5
0.13
0.04
0.54
0.13
0.03
RSK11
-0.06
-0.07
0.50
0.12
0.11
RSK16
-0.04
-0.27
0.46
0.12
-0.07
RSK1
0.07
0.23
0.45
-0.01
-0.02
RSK14
0.06
0.07
-0.13
0.74
0.04
RSK9
0.01
0.04
0.09
0.72
0.00
RSK8
-0.15
0.03
0.11
0.55
-0.18
RSK18
-0.10
0.07
0.07
0.53
0.00
RSK13
0.07
-0.24
0.31
0.45
0.03
RSK12
0.07
0.00
0.27
0.43
0.14
RSK2
0.07
0.02
-0.01
-0.10
0.82
RSK6
0.05
0.05
0.06
0.05
0.78
continued on following page
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Table 5.6. continued RSK10
-0.13
0.07
0.04
0.04
0.77
Alpha
.89
.87
.73
.76
.86
Eigenvalue
6.402
5.252
3.487
1.935
1.435
Percent of Variance Explained
26.1
21.4
14.2
7.9
5.8
Mean
4.86
4.04
4.70
4.64
4.42
Std. Dev.
0.87
1.30
0.96
1.07
1.50
Table 5.7. Definitions of the risk subdimensions Definition
Risk Subdimension Project Management Risk
Environmental uncertainties or the lack of management skills, control mechanisms, infrastructure, or high-level support for the outsourcing effort.
Relationship Risk
Risks associated with vendor relations including vendor’s lack of knowledge of the business, contract length, flexibility in the relationship, meeting schedules, and maintaining security and confidentiality of information shared.
Employee Risk
Fear of layoffs and the accompanying risk of lower employee morale and performance due to outsourcing.
To test hypotheses H5 through H10, again simple linear regression was employed. Due to the multiple sub factors of perceived risk of outsourcing, hypotheses H8, H9, and H10 were replicated as H8a, H8b, H8c, and so forth, to represent project management risk, relationship risk, and employee risk respectively. Table 5.8 summarizes the results. Support was found for 6 of the 12 hypotheses. The effect of prior relationships on perceived ease of use (H6, p<.001) and perceived usefulness (H7, p<01) suggest it to be an important antecedent to outsourcing decisions. The risk factors’ inverse relationships with the other factors in the model were partially substantiated. Results indicated that project management risk inversely affected perceived ease of use (H9a, p<.01), employee risk inversely influenced perceived usefulness (H8a, p<.05), and prior relationships negatively affected
relationship risk (H10b, p<.01). Surprisingly, employee risk had a positive affect on perceived ease of use (H9c, p<.01). Table 5.9 summarizes the results of all the hypotheses tests. Six of the first seven hypotheses were supported. Mixed support was found for the three risk hypotheses. The variance inflation factors of the independent variables in the tested models were all less than two indicating multicollinearity was not a problem in the data collected (Stevens, 1996). Additionally, Harman’s single method test failed to demonstrate common method variance was a problem (Podsakoff & Organ, 1986). The two factor analyses produced neither a single factor nor one general factor that accounted for the majority of the variance and each factor accounted for more than the viable cut-off of 5% (Hatcher 1994).
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Table 5.8. Antecedent hypotheses linear regression results Dependent Variable Perceived Usefulness of Outsourcing
.26
F-Value (p-value) 7.57 (<.0001)
Perceived Ease of Use of Outsourcing
.19
8.10 (<.0001)
Project Management Risk Relationship Risk Employee Risk
.02 .05 .01
2.19 (.1409) 6.91 (.0095) 1.07 (.3029)
R2
Independent Variable PEOU (H4) EN (H5) REL (H6) PrjMgtRISK (H8a) RelRISK (H8b) EmpRISK (H8c) REL (H7) PrjMgtRISK (H9a) RelRISK (H9b) EmpRISK (H9c) REL (H10a) REL (H10b) REL (H10c)
T value (P-value) 3.61 (.0004) 1.16 (.2486) 2.95 (.0037) 1.21 (.2267) -1.37 (.1736) -2.53 (.0127) 4.25 (<.0001) -2.63 (.0094) 0.05 (.9624) 3.22 (.0016) -1.48 (.1409) -2.63 (.0095) -1.03 (.3029)
Estimate .3441 .0418 .0983 .0921 .0863 .2363 .1211 -.1770 .0027 .2632 -.0574 -.1127 -.0316
Table 5.9. Hypotheses testing summary Hypothesis
Supported
Significance
H1: Decision maker attitude toward outsourcing AD positively affects their intention to use it.
Yes
***
H2: Decision maker perception of the usefulness of AD outsourcing positively affects their attitude towards it.
Yes
***
H3: Decision maker perception of the ease of use of AD outsourcing positively affects their attitude towards it.
Yes
***
H4: Decision maker perception of the ease of use of AD outsourcing positively affects their perception of its usefulness.
Yes
***
H5: A more competitive external environment positively affects decision maker perception of the usefulness of AD outsourcing.
No
H6: Positive prior AD outsourcing relationships positively affect decision maker perception of the usefulness of AD outsourcing.
Yes
**
H7: Positive prior AD outsourcing relationships positively affect decision maker perception of the ease of use of AD outsourcing.
Yes
***
H8: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the usefulness of AD outsourcing.
PrjMgtRisk - No RelRisk - No EmpRisk - Yes
*
H9: Decision maker perception of the risk of AD outsourcing negatively affects their perception of the ease of use of AD outsourcing.
PrjMgtRisk - Yes RelRisk - No EmpRisk - Yes
H10: Positive prior AD outsourcing relationships negatively affect decision maker perception of the risk of AD outsourcing.
PrjMgtRisk - No RelRisk - Yes EmpRisk - No
*** (p<.001) ** (p<.01) * (p<.05)
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** (**) Reversed **
An Outsourcing Acceptance Model
DISCUSSION The use of outsourcing is rapidly expanding. It is even growing outside the realm of IT outsourcing. Outsourcing decisions are strategically important to organizations. While much research has focused on IT outsourcing decisions, little has done so empirically. By empirically focusing on application development outsourcing decisions, this research has made several significant contributions to this body of knowledge. First, it contributed by empirically validating that the technology acceptance model has application to organizational level decision makers. Many organizational level decisions are ultimately made or strongly influenced, by a single individual. This study found that for outsourcing decisions, TAM may apply. Perceptions of the usefulness and ease of use of outsourcing strongly influence decision makers’ attitudes about and hence their intention to use AD outsourcing. This finding perhaps indicates that TAM is applicable in the study of other organizational level decisions. It is interesting the note the striking difference in the means factor scores for usefulness (5.12) and ease of use (3.23). There is general agreement in the sample that AD outsourcing is useful, but not so easy to do. Useful information can be garnered from the items that were dropped in the factor analysis of the TAM items. Most of them were from the perceived usefulness construct. It appears that the usefulness of AD outsourcing to improve the IS function’s effectiveness, improve the quality of IS applications, and reduce costs is not recognized in the subject organizations surveyed. Perhaps this finding indicates this is not what is happening. Recent research has asserted that outside support may not be the panacea that it is touted to be (Benamati & Lederer, 2001). Empirical support was also found for two of the three hypothesized antecedents to decision maker perceptions, prior outsourcing relationships and perceived risk of outsourcing. Prior
outsourcing relationships strongly influence both perceptions. While this seems intuitive, perhaps this study provides the motivation needed for both providers and receivers of outsourcing to attend to existing relationships more carefully. Positive prior relationships increase decision maker perception of outsourcing AD as well as attenuate relationship risk, one of the dimensions of risk identified in the study. AD outsourcing decisions are made in the face of risk. Categorizing the risks allows managers to select appropriate management tools and actions for each type of risk (McFarlan, 1981; Jurison, 1995). Thus, the three dimensions of risk empirically identified in this study employee, project management, and relationship risk provide necessary knowledge for the purpose of outsourcing decision making. The individual items in each category provide additional knowledge. Prior academic research and popular practitioner press have identified these potential hazards faced when outsourcing. The current empirical research more firmly establishes their relevance to the context of AD outsourcing decisions. Employee risks such as decreased morale (Antonucci, Lordi, & Tucker III, 1998; Kliem, 1999; Lonsdale & Cox, 2000) or performance (Garaventa & Tellefsen, 2001) are often cited as issues faced in the outsourcing process. Managers and their employees are interdependent on each other for success. This goes beyond any written contract stating responsibilities and remuneration for a job well done. Employees develop individual perceptions or psychological contracts of what they owe to their employers and what their employers owe to them (Robinson, 1996). A breach of this contract in the eyes of the employee negatively affects employee performance (Robinson, 1996; Garaventa & Tellefsen, 2001). Outsourcing can be viewed as such a breach and has actually been described as a betrayal of workers (Gordon, 1996). This study found that employee risk negatively impacts the perceived usefulness of outsourcing and hence the outsourcing decision.
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Proper management of the outsourcing engagement is also imperative for success. “Outsourcing does not eliminate the need to manage the function. Rather, it creates a situation requiring managers to utilize a different set of skills” (Garaventa & Tellefsen, 2001). A recent survey of 116 companies found that the struggle to manage the outsourcing process was a key reason for dissatisfaction with outsourcing arrangements (PA Consulting Group, 2003). Lacity and Willcocks (1999) identified the lack of active management of the supplier and lack of maturity and experience of contracting for and managing the outsourcing arrangement as two of the main reasons for negative outcomes in IT outsourcing deals (Lacity & Willcocks, 1999). Furthermore, one often cited reason for outsourcing IT functions is inadequacies in the current IT organization’s performance (Ketler & Walstrom, 1993; Lacity & Willcocks, 1998; Smith et al., 1998). “If the IT activity has been badly managed in the first place, will the IT managers be any better at managing an external provider?” (Earl, 1996). Clearly, project management risk is an issue and this study found it negatively affects decision maker perceptions of ease of use. The third category of risk identified, relationship risk, stems from the risks involved when depending on a third party to deliver important products or services. Excessive contract length could lock the organization into a negative relationship (Kliem, 1999) in which they are held hostage by the vendor (Antonucci et al., 1998). Rigid outsourcing contracts, while intended to protect the buying organizations, might actually lead to less flexibility to take advantage of new technologies or react to changing business needs (Antonucci et al., 1998). Multiple studies have examined outsourcing contract parameters (Ketler & Walstrom, 1993; McFarlan & Nolan, 1995; Lacity & Willcocks, 1998; Kelter & Willems, 1999). Confidentiality and the proper care of sensitive data and business knowledge are now in the hand of a third party and must be protected (Jurison, 1995; Antonucci et al., 1998; Lonsdale & Cox,
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2000). Another source of relationship risk is the vendor’s ability to deliver (Jurison, 1995), especially without prior relationships with that vendor. It was found that positive prior relationships reduce the perception of relationship risks. This research also found no support for the influence of the external environment on outsourcing decisions. The structured interviews in the model building study (Benamati & Rajkumar, 2002) found mixed responses about the importance of the external environment. Other studies report similar mixed responses. For example, Loh and Venkatraman (1992) found that outsourcing behavior of other organizations is a good indicator of outsourcing events, but Hu, Saunder, and Gabelt (1997) did not find corresponding effects. In spite of assertions that competition may influence decision maker perceptions about outsourcing, this was not the case in the subject organizations in this study.
IMPLICATIONS FOR FUTURE RESEARCH This research was the first empirically study of the application of TAM to the decision to outsource. The applicability of TAM as a basis for explaining the mediating effects of decision-maker attitude on organizational decision making is a major contribution of this study. The instrument developed here based on prior TAM research could provide a basis for other decisions made at this level. The decision-making processes for outsourcing other IT functions or entirely different technology decisions could be examined. Influential external variables for these alternative decisions could also be studied. Additionally, the antecedents established in this research provide a basis for further study. This study identified prior relationships, employee risks, and project management risks as important to the AD outsourcing decision. Future research should look more closely at these to both vali-
An Outsourcing Acceptance Model
date and extend these findings. It might also be interesting to explore why increased perceptions of employee risk increased perceived ease of use for decision makers. Perhaps IT executives do feel that keeping employees on edge is good and helps ease the use of AD outsourcing. It is also possible that this result was due an anomaly of the sample or flaw in the measures. This finding is not unique to this study. A study of TAM and mobile commerce found, perceived risk positively influenced intention to use (Wu & Wang, 2005). They speculate that users are perhaps well aware of the risks, and weigh the benefits more than the risks. In either case, more research is required. The antecedents’ influences could also be examined for the outsourcing of other business processes. They could also be studied across organizations of different size, of different organizational structures, or in different industries. The R2 values in Table 5.8 indicate that these are probably not the only antecedents to outsourcing decisions. The methodology applied here could be used to identify and study other important influential elements in outsourcing decisions. Finally, this study focused only on the decision to outsource. The antecedents identified here as influential to the decision most likely play significant roles in the outsourcing process itself. Future research could explore these relationships.
tions about relationship quality and relationship risks when trying to sell further business. For example, the study indicates that organizations seeking an AD outsourcing vendor are sensitive to the length of the outsourcing contract and the amount of industry knowledge the outsourcing vendor has. Both should play a role in the marketing strategy to win outsourcing contracts. Outsourcing decision makers can learn from the experiences of others presented here. They should pay particular attention to the individual items from the risk antecedents identified as influential. Decision makers should also understand that the results indicate negative prior outsourcing experiences may predispose them to choose not to outsource in a future decision. While, this may indeed be the correct path, it may not.
LIMITATION A limitation of this study is the low response rate, 5.33% of the executive decision makers surveyed. Response rates in surveys of executive level individuals are often low (Pincus, Rayfuekdm, & Cozzens, 1991; Baruch, 1999) due to the numerous demands on their time. Regardless, this limitation should be carefully addressed in similar future studies. Doing so will help to ensure the generalizability of the findings of future research.
IMPLICATIONS FOR PRACTICE CONCLUSION Useful knowledge for practitioners also results from this study. Decision maker perceptions about outsourcing obviously influence their decisions. The identification of prior relationships and two of the three dimensions of risk: project management, employee, and relationship risk as strong influencers of these perceptions is useful knowledge to decision makers in both outsourcing customer and provider organizations. Application development outsourcing providers should work to manage decision maker percep-
The use of outsourcing application development is increasing. This study is the first to empirically validate the applicability of technology acceptance model to enhance the understanding of the decision to outsource application development. Outsourcing decision makers in organizations and outsourcing providers can glean useful insights from the results. Additionally, researchers can use this work as a platform for future research.
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Appendix 1 For the purpose of this survey, outsourcing vendors are defined as any organization external to your own to which you have in some way transferred responsibility for any type of application development efforts. This definition excludes contract workers.
Industry Environment Please indicate your level of agreement with the following statements about the industry in which your organization operates.
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EN1
In our industry, pricecutting is a common competitive action.
EN2
In our industry, firms compete intensely to hold and/or increase their market share.
EN3
In our industry, competitive moves from one firm have noticeable effects on other competing firms and thus incite retaliation and counter moves.
EN4
In our industry, foreign firms play an important role in industry competition.
EN5
In our industry, firms have the resources for vigorous and sustained competitive action and for retaliation against competitors.
EN6
In our industry, price competition is highly intense (i.e., price cuts are quickly and easily matched).
EN7
In our industry, advertising battles occur frequently and are highly intense
EN8
In our industry, appropriate terms used to describe competition are ``warlike,’’ bitter,’’ or ``cut- throat’’.
EN9
In our industry, there is a diversity of competitors (i.e., competitors may be diverse in strategies, origins, personality, and relationships to their parent companies).
Potential Outsourcing Risk Outsourcing applications development involves a level of risk to the organization requiring the application. To what level do you agree that each of the following is a concern when outsourcing application development in your organization? RSK1
Inadequate training/skills needed to manage application development outsourcing
RSK2
Fear of job loss by employees due to projects being outsourced
RSK3
Unclear expectations/unclear objectives of outsourcing
RSK4
Inadequate control mechanisms on the outsourced project
RSK5
Uncertainties in the environment
RSK6
Decline in performance of in-house employees due to the project being outsourced
RSK7
Over emphasis on short term benefits of outsourcing
RSK8
Meeting and enforcing time schedules are problematic with outsourcing
RSK9
Security is harder to maintain on outsourced projects
RSK10
Decline in morale of employees due to outsourcing
RSK11
Lack of infrastructure to support outsourcing efforts
RSK12
Excessive length of outsourcing contract
RSK13
Lack of flexibility by you and/or vendor
RSK14
Confidentiality is harder to maintain on outsourced projects
RSK15
Fear of becoming dependent on the outsourcing vendor
RSK16
Inadequate high level management support for outsourcing
RSK17
Inadequate knowledge transfer back from the outsourcing vender
RSK18
Vendor’s lack of knowledge of our business
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Perceptions of Outsourcing Please assess your level of agreement with the following statements relative to outsourcing applications development work in your organization. PU1
Using applications development outsourcing improves the IS function’s effectiveness
PU2
Using applications development outsourcing improves the quality of IS applications
PU3
Using applications development outsourcing allows the IS function to accomplish tasks critical to the organization
PU4
Using applications development outsourcing allows the IS function to develop more systems than would otherwise be possible
PU5
Using applications development outsourcing allows the IS function to reduce costs.
PU6
Using applications development outsourcing helps the IS function meet staffing goals.
PU7
Using applications development outsourcing allows the IS function to develop systems more quickly than would otherwise be possible
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PU8
Using applications development outsourcing makes it easier to perform IS functions
PU9
In general using applications development outsourcing is useful.
EOU1
I understand how to use outsourcing
EOU2
Using outsourcing does not require a lot of mental effort
EOU3
I find outsourcing to be easy to use
EOU4
I find it easy to accomplish what I set out to do through outsourcing
EOU5
Using application development outsourcing makes it easier to share risk with the vendor
AT1
I like using application development outsourcing.
AT2
Outsourcing provides an attractive alternative to in house application development.
AT3
Using application development outsourcing is in general a good idea
AT4
Using application development outsourcing creates a pleasant project environment
IN1
Assuming I have an outsourcer for applications development, I intend to use them.
IN2
Given that I have access to an outsourcer for applications development I predict that I would use them.
IN3
I intend to increase my usage of application development outsourcing in the future
IN4
I intend to use application development outsourcing as often as needed
IN5
To the extent possible, I would use application development outsourcing frequently.
An Outsourcing Acceptance Model
Outsourcing Relationships If your organization has never outsourced application development work, please skip to the Demographic Information section. Otherwise, please think about your organization’s relationships with past outsourcing vendors and indicate your level of agreement with the following statements. REL1
We generally trusted our vendors.
REL2
Flexibility in response to requests for changes was a characteristic of past relationships.
REL3
We kept each other informed about events or changes that might have affected the other party.
REL4
Both our vendors and us did not mind helping each other out.
REL5
If we were unable to monitor our vendors’ activities, we trusted them to fulfill their obligations
REL6
Both us and our vendors expected to be able to make adjustments in the ongoing relationships to cope with changing circumstances
REL7 REL8
We trusted our vendors to carry out important project-related activities Problems that arose in the course of these relationships were treated by both us and our vendors as joint rather than individual responsibilities.
REL9
We were willing to let our vendors make important decisions without our involvement
REL10
In these relationships, it was expected that any information that might have helped the other party would be provided to them.
REL11
Both our vendors and us were committed to improvements that benefited the relationship as a whole, and not only the individual parties.
REL12
When some unexpected situation arose, together with our vendors, we worked out a new deal rather than hold each other to the original terms
REL13
We trusted our vendors/vendors to do things we could not do ourselves
REL14
Exchange of information in these relationships took place frequently and informally, and not only according to a prespecified agreement
REL15
It was expected that we and our vendors would share our proprietary information if it could help the other party.
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 2, edited by M. KhosrowPour, pp. 80-102, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Section III
Sectoral Applications and Case Studies
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Chapter VI
Outsourcing in the Healthcare Industry:
Information Technology, Intellectual Property and Allied Aspects Amar Gupta University of Arizona, USA Raj K. Goyal VA Boston Health Care System, USA Keith A. Joiner University of Arizona, USA Sanjay Saini Harvard Medical School, USA
Abstract The healthcare industry is being impacted by advances in information technology in four major ways: first, a broad spectrum of tasks that were previously done manually can now be performed by computers; second, some tasks can be outsourced to other countries using inexpensive communications technology; third, longitudinal and societal healthcare data can now be analyzed in acceptable periods of time; and fourth, the best medical expertise can sometimes be made available without the need to transport the patient to the doctor or vice versa. The healthcare industry will increasingly use a portfolio approach comprised of three closely-coordinated components seamlessly interwoven together: healthcare tasks performed by humans on-site; healthcare tasks performed by humans off-site, including tasks performed in other countries; and healthcare tasks performed by computers without direct human involvement. Finally, this chapter deals with intellectual property and legal aspects related to the three-pronged healthcare services paradigm.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Outsourcing in the Healthcare Industry
INTRODUCTION Advances in computing and communications technologies are dramatically altering the healthcare landscape around the world in a number of ways such as: •
• •
• •
Enabling detailed analysis of healthcare data to elicit underlying trends and interrelationships. Facilitating storage, transmission, integration, and retrieval of healthcare records. Enabling healthcare professionals to render assistance to patients separated by significant geographic distance from each other. Monitoring the safety of medical procedures and pharmaceutical drugs Bringing the latest healthcare information to the attention of healthcare professionals and others.
In this chapter, we take five operational scenarios, one from each of the five illustrative categories delineated above. In each operational scenario, at least one of the co-authors of this chapter played a significant role and therefore possesses first-hand knowledge of that healthcare application. The operational scenario is analyzed, post-facto, from the viewpoint of diagnosing what subset of tasks can be handled by evolving information technologies without significant human intervention, what subset needs to be performed on-site by humans, both now and in the foreseeable future, and what subset can be potentially performed by humans located at a significant distance from the patient. Based on the above analysis, we postulate that the future healthcare industry is unlikely to adopt a mono-operational scenario in which all the tasks occur on-site (as happened in the past), off-site, or by machines alone. Instead, the healthcare industry will gradually adopt an operational model in which there is a seamless and symbiotic combination of all three modes of operation.
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After examining the future healthcare industry model from multiple perspectives, we conclude that we need a new approach to intellectual property in order to adequately safeguard the interests of the relevant constituencies. Based on the forces that will motivate the change, we further assert that healthcare organizations that are unwilling to adapt and embrace the evolving three-faceted work paradigm will be at a competitive disadvantage to their peers. National, state, and local medical regulatory agencies will need to respond to market pressures in order to support the longterm interests of both medical professionals and patients in their respective jurisdictions.
COMPREHENSIVE ANALYSIS OF HEALTHCARE DATA One out of eight women in the United States will develop breast cancer during her lifetime. Early detection is a woman’s best defense against breast cancer, which is 97% curable when detected and treated at an early stage. Mammography is the gold standard for screening for breast cancer. With the trend towards people living longer lives and taking proactive measures on their health, the demand for mammography is increasing at a significant pace. Unfortunately, 10-20% of the cancers currently detectable by a screening mammogram are missed by the human radiologist, allowing the disease another year to progress. In addition, there is a high degree of liability on radiologists due to missed diagnoses. To mitigate this problem, some radiology screening centers employ two radiologists to read each case. This approach involves significant cost to support an additional radiologist, reduces the number of total mammograms that can be performed within a center, and is problematic due to the shrinking numbers of radiologists in the field of mammography, especially in the United States. Based on the latest information available on the FDA Web site (October 2006), there were
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8,832 FDA-certified mammography centers and 13,511 accredited units in the United States. In the year 2006, there were 34.6 million mammograms performed in the United States alone, which translates into a total market of $5 billion (at $150 per mammogram). Globally, there are over 200 million mammograms per year, which translates to a market running into several billions of dollars per annum. As the population of women over 40 increases and the awareness of proactive health measures, such as mammograms, gets enhanced, the number of mammograms increases every year. However, a decrease in mammogram centers and the number of radiologists in this field are negatively correlated with the demand. The area of mammography and the aspect of errors in diagnosis (both false positives and false negatives) have been studied in detail by many researchers (Berlin, 2005; Ghate et al., 2005; Gilbert et al.; 2006; Khoo, Taylor, & Given-Wilson, 2005; Sickles, Wolverton, & Dee, 2002; Skaane, Kshirsagar, Stapleton, Young, & Castellin, 2006). The use of computer-aided detection (CAD) techniques in mammography can mitigate the growing shortage of radiologists, as well as reduce or eliminate many of the instances of missed diagnosis. One of the authors of this chapter and several of his colleagues have developed new computer-based algorithms that allow a rapid analysis leading to the marking of cancerous and pre-cancerous regions, thereby providing a decision-support diagnostic facility to the radiologist. Using a CAD-based approach in conjunction with a human radiologist allows for the second reading of a mammogram, with the human radiologist actively involved in the process and making the final determination in each case. The advantages of the proposed approach are:
• •
•
• • •
•
The proposed approach was developed in 2001 and 2002 (Gupta, Norman, Mehta, & Benghiat, 2002), and its technology component is described in Norman and Gupta (2002), which advocated that instead of taking the mammogram image and its interpretation by the radiologist at the same location, it would be more advantageous to use a geographically decentralized strategy that utilized the following principles: •
•
• •
The capital investment of using a CAD service is significantly less, when compared to that of employing a second radiologist.
No additional hardware or space requirements are required. Current and previous cases can be made available to the radiologist online for necessary comparison. There is a minimal footprint in the workspace, allowing multiple radiologists to objectively view and analyze mammograms. Results and information can be made available anywhere via the Internet. Improvements to the algorithm and core technology can be readily disseminated. The approach is consistent with the trend towards teleradiology, allowing radiologists to perform analysis from anywhere, anytime. The proposed approach reduces the incidence of second visits and the level of patient anxiety by providing expert (specialty) second opinions when needed in a timely manner through a teleradiology model.
Taking of the mammogram image by a technician at the location where the patient was available Transmitting the image to a central location where the image was analyzed by advanced data mining techniques and compared with other images Interpretation by a qualified radiologist at the same location where the centralized computing facility is located or at a different place altogether
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•
Making the image available, with appropriate privacy and security safeguards, to the patient when she visits other clinics and to appropriate medical personnel with the patient’s consent.
Based on unique and patentable distributed computing technology, a peer-to-peer model was implemented; it could act as a pure application service provider (ASP), a pure client application, or any combination in between. The proposed solution could: • • • • •
Minimize or eliminate the costs of a “second reader” Provide scalability for large, medium, and small centers (national and international); Support the development of distributed teleradiology systems Decrease the liability factor for false readings Improve equity of access to radiology services by employing only technicians on-site and performing both human and CAD readings off-site.
The proposed technology envisaged a longterm vision of “Image Anywhere.” where there is a network of mammography screening centers in shopping malls across the country. A woman could step into a mammography center as easily as walking into a drug store. While the screening was performed at that site, the radiologist could be located hundreds of miles away looking at images from several mammography centers (via teleradiology) and could provide an opinion back to the concerned location within a few minutes of the screening time. Finally, the proposed architecture and the technology could be readily adopted for use with all other types of medical images, as depicted in Figure 6.1. After establishing a track record with mammography CAD, the plan envisaged expansion into auxiliary applications (first medical,
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then non-medical). These include dentistry, CT colonography, and bone cancer detection. The above concept was unanimously voted to be the first-place winner at the Big Red Venture Fund Innovation Contest, organized on an annual basis by Cornell University (2002). To the best of the authors’ knowledge, this is the pioneer instance where the three-pronged strategy of using resident medical resources, off-site medical resources, and advanced computational techniques was explicitly delineated; this was done in the context of optimizing the productivity of radiologists, enhancing access to mammography centers by women, improving the quality of interpretation of mammograms, reducing the incidence of errors (both false positives and false negatives), and reducing the costs incurred in performing mammograms.
MANAGEMENT OF HEALTHCARE RECORDS As healthcare costs continue to rise, researchers are exploring new options for enhancing the process of sharing medical data across disparate information systems, both within and across hospitals and other healthcare facilities. This has the potential to reduce costs by billions of dollars each year, estimated at $77.8 billion for the United States alone (Walker et al., 2005), and concurrently improve the quality of healthcare rendered to patients. Each of the entities in the current generation of hospital systems was built to function on an individual basis, with each island of information governed by its own idiosyncratic data model (Shortliffe, 1998). In the U.S., only regional interoperability has been implemented, so far, on an experimental basis (Halamka et al., 2005). The absence of a larger-scale interoperable system presents other problems too. For example, in the case of a plane crash or other catastrophic situation, the manual approach to accessing large numbers of patient records is very weak (Teich,
Outsourcing in the Healthcare Industry
Figure 6.1. The integrated architecture for the use of on-site medical personnel, off-site medical personnel, and computer-based techniques for mammography and other medical applications Collect Cases
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Wagner, Mackenzie, & Schafer, 2002). There are several other facts that further strengthen the requirement for interoperable healthcare systems, such as: 1.
2.
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There is a large number of cases where institutions have split or merged, and existing data are physically distributed. There are several ‘mobile’ individuals who frequently use medical facilities in different states or even countries. The aged population contribute significantly to overall healthcare costs and very often have limited mobility.
This increases the requirement of access to healthcare records from a previous residence or transmittal of medical data to remote facilities for diagnosis rather than to move the patients themselves. The challenges inherent in transforming disparate islands of data into an archipelago of integrated information have been highlighted by Gupta (1988) and others (Reddy, Prasad, Reddy, & Gupta, 1994; Arellano & Weber, 1998; Arts,
Central Location
Keizer, & Scheffer, 2002). The constituent systems differ in terms of data types, data definitions, data structures, data hierarchies, data categorizations, and underlying assumptions that are not expressly denoted in the concerned information systems. Imagine that you receive an electronic medical record of a new patient. The weight of the person as shown in the corresponding database field is 75. If you are a medical professional in the United States, your immediate reaction is that the person is extremely underweight, based on the assumption that weight is specified in pounds, whereas it is actually in kilograms. The U.S. is among the handful of countries that still use the traditional British system for most measurements; another county in this category are in Africa. Britain moved to the metric system a few decades ago. Ironically, the healthcare arena is the only one where the metric system has been adopted in the U.S. for measurement of mass and volume. However, many other types of differences continue to remain in terms of underlying assumptions of data types and other parameters; such assumptions are not revealed by looking at the data alone.
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The above example highlights that healthcare data must often be converted from one form into another to facilitate communication, either at the source or at the destination. The process of conversion of data, manually or by computer, involves significant costs and is prone to the loss of information (Barthell, Coonan, Pollock, & Cochrane, 2004; Shapiro et al., 2006). Since many healthcare applications require access to each other’s data, and neither the source nor the destination is willing to do the required conversions, the only possible solution is to transform the data en route from the source to the destination. The format and other details related to the data at the source are maintained in the source schema. The target schema contains the same types of underlying information for the destination. As the number of potential sources and potential targets increase, the number of likely transformations increases in a non-linear fashion. Haas, Miller, Niswonger, Roth, and Wimmers (1997), Milo and Zohar (1998), Abiteboul, Cluet, and Milo (2002), and Shaker, Mork, Barclay, and Tarczy-Hornoch (2002) advocated the use of middleware and the use of one common schema that incorporates data elements from multiple client schemas. The complexity of this common schema increases with the number of sources and targets, thereby restricting the use of this approach in large, diverse healthcare applications. Wiederhold and Genesereth (1997) highlighted the fact that a single mediating schema in a large domain such as healthcare is not feasible; they advocated that the implementation of domainspecific data standards and mediators across heterogeneous medical information systems results in a cost decrease for mediating the transfer of data. Despite these findings, there is minimal standardization in the creation of healthcare information systems in the United States and in many other countries. This means, for example, that if there are “m” ambulance systems and “n” emergency department systems that could potentially need the medical data from any of the “m”
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ambulance systems, one could be dealing with as many as “m multiplied by n” transformations of data. Given the complexity of dealing with such a large number of possibilities, the process of data transformation is clumsy, time consuming, and costly (Gupta, 1998). One approach to address the above problem of non-linearity is to create a mediating schema as the framework for reconciling heterogeneous information systems within and across hospitals and other healthcare facilities. Using the approach described in several papers, including Reddy and Gupta (1995), the number of necessary transformations can be reduced from “m x n” to “m + n”. This requires that the mediating schema contain a core set of context-specific patient care-related information and a comprehensive methodology for specifying the ontology (vocabulary) of the relevant healthcare domain. The lattice-based context interchange approach, described by Reddy and Gupta (1995), allows evolutions of the semantics of data in the source or target schemas to be managed in a more effective manner as compared to traditional approaches. Differences in ontology always exist in large information systems (Wiederhold & Genesereth, 1997). Within a single hospital, each healthcare unit may collect, store, and process its own set of data, based on its own specialty and needs. The application of the mediating schema approach requires the careful study of the different ontologies, and the formulation of rules to transform data from one particular ontology to another. Sarnikar and Gupta (2007) describe the problems and challenges involved in creating a mediating schema that would transfer data between the heterogeneous databases of a particular pre-hospital and ED system in the Boston area, and in extending the prototype system to cater to the idiosyncrasies of additional medical systems (see Figure 6.2). Based on the assessment of the size and complexity of the source and destination databases, as well as the associated data dictionaries, it was concluded that the mappings
Outsourcing in the Healthcare Industry
Figure 6.2. The use of the mediation approach to reduce the effort involved in integrating data from heterogeneous information systems (Adapted from Sarnikar et al., 2007).
HL7 SNOMED NEMSIS PROPRIETARY
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CONTEXT SPECIFIC MEDIATING SCHEMA
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between single data elements needed to be done manually. This was based on the realization that the available software approaches to automate the mapping process between databases were frequently unreliable and required human intervention to analyze and to make corrections to the mappings generated. The manual creation of mappings could, however, lead to a set of development rules that could facilitate the creation of additional schemas in the future. These tasks involved extensive consultation between members of the development team and experts from several concerned medical specialties, especially for “analysis of what information most succinctly and completely composed the patient care record across the source and target hospital information systems.” The analysis of the data elements involved acquiring deep understanding of the meaning of each element in the source schema and its corresponding element in the target schema, as well as the associated differences in cardinality. Sarnikar and Gupta (2007) presented a performance analysis of the above system in terms of information loss during the automated data translation process, relative to the coverage (amount of fields populated in the target schema using information from the source schema). Due to the presence of certain type conflicts and missing-data conflicts, a small amount of information was lost (<15%) in the presence of
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significant coverage values (>80%). Further, this was eliminated through the use of appropriate converters and filters (Gaynor, Gupta, Rawn, & Moulton, 2008; Gupta Martin, Avanavadi, & Sarnikar, 2007). Industries and applications that are still at an evolutionary stage are frequently characterized by the existence of no standards or by the existence of too many standards, none of which carry broad acceptance. In the case of the healthcare arena, multiple standards currently exist, including HL7, EDIFACT, X12, ASTM, NCPDP, DICOM, and XDT (Dudeck, 1998). Further, as a reviewer of this chapter pointed out, the need for the transmission of medical data may be acute, sub-acute, or delayed. The electronic transmission of acute data (pre-hospital to emergency department) usually occurs in the case of healthcare providers who can use a common data set for their medical records. Sub-acute transmission could apply in situations involving hospitals and providers who use similar data elements, but not necessarily a similar platform. Delayed transmission, such as transmission of data across a national boundary, will need a standardized healthcare language, but not common data elements or platforms. Based on the above discussion, we find that the use of cutting-edge computer and communications technology alone cannot accomplish the goal. Instead, large amounts of computational power and human expertise are needed to create
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the bridges across legacy healthcare information systems at this stage. Hospitals and other healthcare facilities in the U.S. have traditionally used medical and information technology personnel in the U.S. to undertake initial efforts in this area. Unfortunately, a vast majority of work remains to be done, and this cannot be accomplished, in terms of both time and costs, by the personnel available in the U.S. As such, one needs to explore non-conventional solutions that involve the use of resources from abroad. Until the eighties and the nineties, large U.S. companies belonging to other sectors of the economy focused on doing all of their information technology work in the U.S. (Gupta, Seshasai, Mukherji, & Ganguly, 2007). This was the traditional model, and the concerned management and technical personnel were satisfied with the pace of progress. Options for doing such work abroad, or by persons recruited from abroad for temporary work in the U.S., were frequently discarded on the basis that: 1.
2.
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Only the persons currently associated with the work were familiar with the intricacies involved, thereby implying that such peculiarities were too complex or too confidential to be shared with others. Organizational procedures or governmental regulations did not permit data and process information to be transmitted abroad or shown to foreign nationals. The concerned work was too important for the success of the company, and the option of saving costs on this particular application was miniscule in comparison. The work could not be performed by persons working in Asia because the difference in time zones made it impossible for them to interact with domain experts in the U.S.
more months to complete a project. The date, December 31, 1999, was a very hard deadline, and the conversion of information systems had to be completed by then: no exceptions, indeed. This inflexible scenario forced the companies to become flexible. They permitted parts of the conversion work to be done abroad, as well as to employ persons with foreign qualifications and experience. The conversion from national currencies to the common currency, euro, had a similar impact in Europe. The unqualified success in both cases forced companies to depart from their arrogance in maintaining status quo. A similar compelling need currently exists in the case of management of healthcare records. Conventional database systems are clumsy, costly, and time consuming. The integration of information in such systems, as well as the gradual incorporation of newer concepts, requires the healthcare industry to seriously consider the use of the hybrid model, involving the use of human resources in the U.S., human resources abroad, and state-of-the-art information technology. The success of the banking industry, the insurance industry, and several other industries too relies heavily on ensuring the privacy and the security of data belonging to their customers. Yes, glitches do happen from time to time. In 2004, information on 20 million credit card holders was compromised at a credit card processing facility in Tucson, Arizona. This particular facility was subsequently acquired by another company. But this unauthorized disclosure was not used as the basis to cease this type of application altogether. Instead, it should serve as the motivator for human experts, both in the U.S. and abroad, to develop more robust applications that can be used by more industries.
REMOTE DIAGNOSIS The above situation was dramatically altered by the Y2K dilemma. Management and technical personnel could no longer plead for six
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Remote diagnosis is both an outsourcing and an insourcing phenomenon. For many years, medical
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records and medical images from patients and healthcare practitioners in Latin American countries, as well as from other countries in the world, have been reviewed by doctors at Massachusetts General Hospital in Boston and by a number of other leading hospitals in the U.S. The Arizona Telemedicine Program (ATP) is a pioneer in terms of medical professionals located in Tucson, Arizona, providing expert advice to patients located elsewhere in the state, in neighboring states, and in other countries. ATP provides teleradiology, telepathology, and teleoncology services to patients in hospitals, in prisons, and in other settings (Weinstein et al., 2007). A significant number of the patients, who seek remote diagnostic advice, are from Navajo Nation and from other Native American nations in Arizona and neighboring states of the U.S. On the outsourcing side, medical personnel in other countries are looking at medical records of patients in the U.S. The specialty that has witnessed the most attention is teleradiology (Pollack, 2003). Teleradiology involves the electronic transmission of radiological images, such as X-rays, computed tomograms, and magnetic resonance images, across geographical locations via telephone lines, satellite connections, and wide area networks. It enables a single radiologist to serve multiple hospitals concurrently, even ones in other continents. Further, it enables the image to be interpreted by an alert physician working a day shift rather than a radiologist who has been up all night (Weinger & Ancoli-Israel, 2002; Firth-Cozens & Cording, 2004). Telemedicine is the delivery of healthcare services in situations where the physician and the patient are not at the same geographic location; it is a broad term and includes teleradiology, telepathology, and teleoncology. Telepathology involves the use of video microscopy at the patient’s location and a pathologist’s workstation at the physician’s location. Teleoncology refers to the use of remote technology to address different aspects of cancer care.
For the purposes of studying “remote diagnosis,” we will focus primarily on teleradiology for four reasons. First, the area of teleradiology has attracted wide attention in the media (e.g., Pollack, 2003). Second, this chapter focuses on outsourcing rather than insourcing, and the other specialties are characterized more by insourcing than by outsourcing. Third, within outsourcing, we are focusing on offshoring issues and are looking at applications that transcend national boundaries, not just local or state boundaries. Fourth, the teleradiology scenario allows an objective assessment of the potential risks and opportunities for individual radiologists in the U.S., as well as for the broader medical community in the U.S. The growth in teleradiology is being driven by four major forces. First, there is a significant shortage of radiologists, because of a significant number of radiologists retiring from practice and training programs not keeping pace with growing demand (Sunshine, Maynard, Paros, & Forman, 2004; Bhargavan & Sunshine, 2002). Second, the aging population and the advent of newer imaging technologies are leading to annual increases in imaging volumes; for example, a 13% increase in the utilization of radiological imaging was observed among Medicare beneficiaries (Maitino, Levin, Parker, Rao, & Sunshine, 2003). Third, the increased use of imaging technologies in trauma situations has led to a corresponding need for round-the-clock radiological services in hospital emergency rooms (Spigos, Freedy, & Mueller, 1996). Fourth, changing regulations and guidelines have contributed to the need; as an example, the Health Care Financing Administration (HCFA) requires that overnight coverage be provided by certified radiologists, rather than by residents or trainees, in order to be billable (HCFA Medicare Program, 1995). Typically, the radiology group outsources its night calls to a teleradiology provider and pays the latter for preparing the preliminary report. The insurer is billed for the final report that is prepared by the radiology group the following
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morning. The service delivery model depicted in Figure 6.3 includes mechanisms for communications, workflow, and payments. Teleradiology offers several advantages:
6.
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A single professional can support multiple hospitals concurrently via teleradiology links to a central reading facility (often the radiologist’s home). Remote locations with radiological scanning, but no on-site radiologist, can be supported leading to improved patient care (Franken et al., 1995; Lee et al., 1998). The productivity of the radiologist can be enhanced by bringing the images to the radiologist, rather than vice versa, thereby eliminating commuting time and delays. The work can be optimally assigned among multiple radiologists in large hospitals. Greater availability of subspecialty consultations results in better patient care (Kangarloo et al., 2000; Franken et al., 1997; Sickles et al., 2002).
Residents (junior doctors) covering night shifts in academic hospitals can use teleradiological services to ensure correct diagnosis and to seek confirmation. The increasing disparity in the patient-toradiologist ratio, especially during off-peak hours, can be effectively addressed by offshoring teleradiology services.
The increasing availability of technologies that replace invasive screening procedures (virtual colonoscopy replacing actual colonoscopy) means enormous increases in patient volume. Further, defensive medicine increasingly employs tests to guard against missing even the most unlikely diagnosis. The use of head CT in the ED under circumstances when the chance of an abnormal reading is extremely small is one example. It remains commonplace to get a head CT done if the patient has expected meningitis before doing a lumbar puncture, even though the literature indicates this is typically unnecessary. While this example of defensive medicine is not gratifying to mention, it represents the current reality. It
Figure 6.3. A service delivery model for teleradiology (Adapted from Kalyanpur, Latif, Saini, & Sarnikar, 2007)
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also provides another reason why the workload in the radiology department has increased and will continue to increase further. Teleradiology providers must conform to the guidelines of the Health Insurance Portability & Accountability Act (HIPAA), and are required to implement adequate privacy and security practices, as Protected Health Information (PHI) and Electronic Protected Health Information (EPHI) are transmitted over public networks on a regular basis. HIPAA requires that “covered entities execute contracts that consist of specific provisions for protection, use and disclosure of health information” (Hilger, 2004). The Privacy Rule deals with all forms of patients’ protected health information, whether electronic, written, or oral, while the security rule covers only protected health information that is in electronic form, including EPHI that is created, received, maintained, or transmitted. The security rule does not prescribe any specific technologies; being technology neutral, it allows the HIPAA-covered entities to choose solutions based on their specific requirements. Technical safeguard standards include stringent guidelines for Access Control, Audit Controls, Data Integrity, Person or Entity Authentication, and Transmission Security. The biggest hurdle to the rapid deployment of teleradiology services is the credentialing process. The U.S. requires statewide licensing requirements and board certifications; as such, a teleradiologist based in Australia must be registered to practice in all the relevant states in the U.S., so to look at radiological images from hospitals in these states, as well as pay appropriate fees to these states on an annual basis. Canada does certification at the national level for radiologists. And in Europe, some of the members of the European Union allow still greater flexibility. The current U.S. regulatory and credentialing structure was designed for a physical presence of medical professionals and needs to be adapted for the evolving technologies and procedures. Recently, some states have modified credentialing laws to allow out-of-state
radiologists to perform remote diagnosis. Further, several federal and military healthcare organizations in the U.S. have licensure laws that enable them to render services independent of state and national boundaries. However, such privileges have not been extended to the private sector. Other obstacles to the growth of teleradiology are: Limited availability of reliable Internet connections, especially in remote locations 2. Limited availability of trained technicians 3. Traditional billing and reimbursement procedures that vary by country and state, such as Medicare not paying for services rendered from abroad 4. Variations by nations and states, as well as underlying ambiguity, in medical malpractice liability laws (Gantt, 1999) 5. The need for incorporating new encryption methods while transmitting image data (Cao, Huang, & Zhou, 2003). 1.
Other related aspects of radiology have been discussed by several researchers (Bradley, 2004; Graschew, Roelofs, Rakowsky, & Schlag, 2006; Hayward & Mitchell, 2000; Jacobson & Selvin, 2000; Kalyanpur, Weinberg, Neklesa, Brink, & Forman, 2003; Kalyanpur, Neklesa, Pham, Forman, & Brink, 2004; Levy & Yu, 2006; Maitino et al., 2003; Mun, Tohme, Platenbery, & Choi, 2005; Takahashi, 2006; Weinger & Ancoli-Israel, 2002). Over time, the concept of using both onshore and offshore radiologists will grow in terms of overall numbers of radiological images analyzed, as well as in terms of the breadth of the cases studied. Further, we expect the trends in both insourcing and outsourcing to continue. Parts of some medical diagnostic and allied applications will be performed abroad because of lower costs, quicker response, and load balancing. Conversely, more patients from abroad will seek professional advice from medical experts in the U.S. Overall,
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it appears appropriate to gradually lift barriers that currently impede outsourcing and insourcing activities; most of these barriers are in the former category.
MONITORING AND ENHANCEMENT OF SAFETY Timely information on adverse drug effects can save lives and reduce healthcare costs. Previous studies show that more than two million adverse drug reactions occur yearly and are responsible for an estimated 100,000 deaths (Lazarou, Pomeranz, & Corey, 1998; Gurwitz, Field, Avorn et al., 2000; Fontanarosa, Rennie, & DeAngelis, 2004). Some systems exist for identifying drugs with serious adverse effects, but they have had limited success (Kopec, Kabir, Reinharth, Rothschild, & Castiglione, 2003; Ray & Stein, 2006). Between 1997 and 2005, the MedWatch system in the U.S. identified 15 drugs with toxic side effects, taking an average of 5.9 years for the identification phase and the subsequent drug withdrawal phase. In general, after the introduction of a drug into the market, the process of eliciting and analyzing information from patients is weak, especially when problems arise during extended use of the drug (U.S. Department of Health and Human Services, 1999; Brewer & Colditz, 1999; Okie, 2005). The problem with Vioxx, for example, was only uncovered during controlled clinical trials (Bombardier, Laine, Reicin et al., 2000). And there is still no system, either in existence or under discussion, for addressing this need at a global level. In order to address these issues, the Institute of Medicine (2006) presented a report on “The Future of Drug Safety” and made the following recommendations: 1.
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Increase the FDA’s authority to ensure sponsor compliance with standards and regulatory requirements, especially those related to packaging and distribution
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Establish separate performance goals for safety, in addition to existing goals for speed of approval Ensure proper communication of the drug approval/testing status to consumers and medical practitioners through effective package indicators and advertisements Improve the facilities, available resources, and organization structure of the FDA.
Towards these goals, a prototype Community Pharmacy Safety Network (CPSN) was developed. Pertinent raw data are spread over the computer systems of multiple organizations including: (1) the one who performed the original drug development work, (2) the one that produced the drug, (3) the one that conducted the clinical trials, (4) the FDA in the U.S. and equivalent government agencies in other countries, and (5) the one that prescribed the medication. In addition, pharmacies contain information on the buyer of the drug, on what date, and in how much quantity. The problems involved in integrating these types of information from diverse sources were discussed in a different context earlier in this chapter; additional details are available in recent papers by Kalyanpur, Parsia, and Hendler (2005), Corcho and Gomez-Perez (2005), and Cristani and Cuel (2005). The problems become even more complex in the present case because of the need to access information from multiple countries and cultures. The prototype system, including the key modules, is depicted in Figure 6.4. Detailed information on the system architecture and allied issues are available in Gupta, Crk, Sarnikar, and Karunakaran (2008) and Gupta, Woosley, Crk, and Sarnikar (2007). With proper infrastructure and incentives, pharmacists and pharmacy technicians would be designated agents for collecting raw information on the patient’s medication history, including the adverse reactions experienced by the patient. Development of the prototype system revealed several issues and opportunities. First, some drugs
Outsourcing in the Healthcare Industry
Figure 6.4. Surveillance process for medical drugs (Adapted from Gupta et al., 2007)
are given as samples by physicians to patients, and significant effort would be involved in incorporating such information into the overall system. Second, individual patients buy drugs from multiple pharmacies; in view of the current guidelines for privacy of patient records, it is very difficult to link records concerning the same patient from different pharmacies. Third, the procedures differ very significantly across countries. Fourth, analysis of the information requires the use of sophisticated data mining technology, with the help of (human) domain experts and (human) data mining experts. Such experts are already pressed for time in the U.S.; they are expensive too. It therefore seems appropriate to explore if this type of work could be done abroad. For example, one could envisage the creation of a global center of excellence for this particular field in Mexico, close to the U.S. border, so that one could benefit from the less expensive rates in Mexico in conjunction with the feasibility of experts from the U.S. visiting such a center on a frequent basis. Gopal (2007) and her associates have employed an entirely different approach to assimilate information from patients, especially related to the side effects of alternative medicines. Their approach focuses on the mining of information from chat groups and other online repositories of information voluntarily provided by the patients, such as message boards, blogs, and listservs. They utilize proprietary search and aggregation techniques
to distill raw data into structured information that answers critical questions. Their approach, again, utilizes a combination of computer power and human expertise.
DISSEMINATION OF THE LATEST HEALTHCARE INFORMATION The ideas presented in this section are currently geared more towards medical education and medical research, rather than the provision of improved patient care. The current version of the prototype system enables users to search for current and previous literature, how-to articles, and other educational items. In the future, the enhanced Web site will assist healthcare providers by providing immediate lookups for symptoms and diagnosis. This would not only aid practitioners by giving them access to the latest medication data available, but also reduce treatment times. Further, based in part on a suggestion from a reviewer of this chapter, access to a human expert will be provided for the purpose of providing additional advice and support on specific cases. Medical information has been maintained in books, journals, and specialty magazines. Now, a growing number of people turn to the Internet to retrieve healthcare-related information, and they do so from a variety of sources, most
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of which are run by commercial entities. The next area of growth will be sites that focus on specific fields of medicine, contain data culled from scholarly publications, and are operated by eminent specialists in the field. One such site is being developed for the field of gastrointestinal motility; it builds upon the concept of existing healthcare information sites with the intention of serving the diverse needs of laypeople, medical students, and experts in the area. The site, called Gastrointestinal Motility Online, leverages the strengths of online textbooks, which have a high degree of organization, in conjunction with the strengths of journal collections, which are more comprehensive, to produce a knowledge base that can be easily updated, is comprehensive, and can provide accurate and high-quality information to users. In addition to implementing existing Web technologies such as Wiki- and Amazon-style commenting options, Gastrointestinal Motility Online uses automatic methods to collect information from various heterogeneous data sources to create coherent, cogent, and current information for the diverse base of users. Gastrointestinal motility is a very small part of the vast field of medicine. Books such as Harrison’s Principles of Internal Medicine serve as the main source of information in the field of medicine including gastrointestinal motility (Kasper et al., 2005). Most of these books now also have electronic versions. More recently, electronic texts sites such as Wiki, eMed, WebMD (http://www. webmd.com/), and UpToDate (http://www.uptodate.com/) have evolved and are rapidly gaining popularity. Because these works are designed to provide a broad overview of the field of medicine, they only provide a very superficial treatment to a topic such as gastrointestinal motility. More detailed information about gastrointestinal motility disorders may be found in medical journals. Many journals that were previously in paper format now come out both in paper and electronic formats. Searchable electronic archives, such as PubMed (http://www.pubmedcentral.nih.gov/), now place a
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plethora of information into the hands of researchers and physicians. However, such searches are very time consuming and inconvenient. Sites like AccessMedicine (http://www.accessmedicine. com/) serve as search engines that attempt to place the most suitable information on a medical topic in a user’s hand. As shown in Figure 6.5, Gastrointestinal Motility Online is a hybrid between standard textbooks and review articles (Au & Gupta, 2008). It seeks to centralize and present the information in a scalable manner that is customized to the user’s information requirements. The user base includes: laypersons, patients, medical students, biomedical scientists, physiologists, pathologists, pharmacologists, biomedical students, researchers, pharmaceutical personnel, house staff, specialty fellows, internists, surgeons, and gastroenterologists. Creation of the gastrointestinal motility knowledge repository started with calls to key gastrointestinal experts inviting them to submit a chapter, in electronic form, for inclusion in this knowledge repository. The titles and themes of these chapters were determined through discussions involving the concerned authors and the editors for this project (Dr. Goyal and Dr. Shaker). The inputs from the contributing authors were Figure 6.5. Gastrointestinal Motility Online is a hybrid of online textbooks and journals
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reviewed by the editors and by others. Under the aegis of an unrestricted grant from Novartis Corporation, the two editors worked closely with the staff of Nature Publishing Group on a number of tasks that ultimately led to the creation of the Web site, http://gimotilityonline.com. This site may serve as a model for user-driven, scalable, and interactive medical information at a single site for other specific medical topics. These sites can then be interlinked to cover the broad field of medicine. Since GI Motility Online is a hybrid that includes textbook-type material as well as authoritative up-to-date reviews and interactive features, it poses many new problems and opportunities. Currently, all updates must be initiated manually. Automated content generation or extraction from other publications is not feasible, due to the stringent need to maintain relevance and quality. This applies to addition of new material, editing of existing material, and deletion of parts of existing material as new test results become available. In the next part of the endeavor, the goal is to enable machine-assisted updating of the material in the gastrointestinal knowledge repository. Given the large number of articles published weekly and the difficulty in ascertaining relevance and quality, a number of automated tools will be used to optimize the updating process. One technique that will assist in the maintenance and updating of the site is presented in Sarnikar, Zhao, and Gupta (2005). This method selects articles ranked by relevance using a combination of both rule-based and content-based methods, using the following principles: 1. 2.
3. 4.
Profiles are modeled in the form of rules. The purpose of rule-based profile use is to identify a subset of documents of interest to a user. Each role has a set of predefined rules associated with it. Rules specify knowledge sources to access (for example, nursing journals for nurses).
5. 6.
Rules can specify knowledge depth and knowledge breadth. Rules can specify semantic types of primary importance to roles.
Profiles are used in the gastrointestinal motility context to separate information into categoriesfor example, new clinical findings vs. basic science. Articles could be assigned a category and a weight, given categorization rules based on Unified Medical Language System (UMLS) synonym lists and the categories sign or symptom, diagnostic procedure, therapeutic or preventive procedure, and disease or syndrome semantic types. These tools can form the basis for an RSS XML news feed or to efficiently assemble relevant articles for use by the editors or Web site administrators. While these tools will aid the editor, there is no replacement for the role of humans in selecting and classifying information. Ontologies and semantic networks are necessary prerequisites to the development of and classification of information repositories. Ontologies serve many purposes including to: reuse and share domain knowledge, establish classification schemes and structure, and make assumptions explicit. They also allow analysis of information and complement the stricter terminology that is used in straightforward text searches, with or without synonyms. Examples of ontologies in use today include the National Library of Medicine’s Medical Subject Heading (MeSH), disease-specific terminologies such as the National Cancer Institute’s PDQ vocabulary, drug terminologies such as the National Drug Data File, and medical sociality vocabularies such as the Classification of Nursing Diagnoses and the Current Dental Terminology. In Gastrointestinal Motility Online, the ontological hierarchy will be used to make distinctions between parts of the gastrointestinal tract and the different sections of the stomach and the esophagus (Au & Gupta, 2008). One of the keys to developing an automated system is the set of ontologies presented in the
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UMLS semantic network that relies on the concepts built into the UMLS concept hierarchy. An overview of the UMLS is available at http://www. nlm.nih.gov/research/umls/presentations/2004medinfo_tut.pdf.
THE UNIFIED MEDICAL LANGUAGE SYSTEM: WHAT IS IT AND HOW TO USE IT? UMLS is an aggregate of more than 134 source vocabularies, including the classifications from such lists as ICD-10 and DSM: IIIR-IV. It represents a hierarchy of medical phrases that can be used to classify articles and textbook entries. The system described in Sharma (2005) uses techniques of Natural Language Processing (NLP) to construct a semantic understanding that goes beyond text searching. Using the ATIMED (Automated Integration of Text Documents in the Medical Domain) system, the content and order of phrases are related lexically using a concept called Word-Net. Word-Net operates on the verbs, subjects, and objects of the sentences, comparing sets and subsets of subject-verb-object collections in order to determine relatedness to a desired topic. Sharma (2005) uses the following two sentences as examples: Dysphagia is a disease and defined as a sensation of sticking or obstruction of the passage of food. Dysphagia is related to obstruction of passage of food. Since both sentences use similar objects and subjects, and use the verb “is,” the sentences would be deemed similar. However, the phrase “Dysphagia relates to obstruction of passage of food” would not result in potential match because the action verb is not similar (Sharma, 2005). Developing a schema to accurately represent journal abstracts and determine the relevance of those abstracts is one method of exchanging contexts. Innovation in this domain allows
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Gastrointestinal Motility Online to maintain updated, consistent, quality references without requiring an editor to read all journal articles published immediately. Knowledge-mining tools are being developed to utilize this information as it becomes available to add fast, relevant access and other utility to the information repository. Advanced technologies to aid in the conversion and integration of articles and research into the mainstream science are being integrated and look to impact the breadth and speed of knowledgebase upgrades. These activities involve the use of medical and computer professionals, both in the U.S. and abroad. The base site is hosted by Nature Publishing Group. As this site was being developed, it was found that commercial tools were available to handle the production of electronic journals and static textbook efforts like AccessMedicine (http://www.accessmedicine.com/) and WebMD. The gastrointestinal knowledge repository falls somewhere in between these two cases; accordingly, few off-the-shelf tools and algorithms were available for immediate use. As such, a significant fraction of the necessary material had to be generated and refined through experimentation. An interesting addition to the above system is the addition of a “Gastrointestinal Guru,” based in part on a suggestion from one of the reviewers. In specific cases where a person needs access to a human expert, the system will facilitate access to such experts who can provide support on an instantaneous basis. The situation is somewhat similar to the one we experience when we try to make a travel reservation online, experience difficulty, and feel relieved when we are able to connect to a human being, either by phone or online. However, the level of expertise and the degree of structure with respect to the desired knowledge are vastly different in the two cases. This difference is highlighted in Figure 6.6 (later in this chapter) and its accompanying text.
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MULTI-PRONGED APPROACH While the five scenarios discussed above are drawn from different aspects of medical practice, they have several aspects in common. In all cases, the advent of new information technologies is making a major impact on how the particular task or medical specialty is performed (Siau, 2003; Wachter, 2006). Further, in all cases, automation applies only to part of the effort. Human beings still need to be involved, though to varying degrees in the five examples considered. In some cases, a significant part of the work needs to be performed in very close proximity to the patient, whereas in others, the concept of remote tasks can be applied to a large extent. Finally, in some cases, the off-site work is medical in nature, whereas in others it is largely non-medical in character. While similar approaches have been followed in the healthcare industry to some extent in the past, the relevance and practical importance of this model in today’s scenarios is more significant. This is happening for several reasons including the following: •
•
•
The technology that is available now did not exist earlier. A growing number of previously underserved, remote locations are increasingly able to access medical services through the Internet; and PACS systems are improving rapidly; data and image transfer methodologies are becoming less expensive, more effective, and more error-free. This is resulting in a corresponding need for embarking on international telemedicine endeavors, instead of regional collaborations. There is a growing awareness of the advantages of having interoperable health information systems, especially in addressing mass casualty situations, where fast and timely diagnosis, via telemedicine, attains paramount importance. The increasing incidence of persons moving across national borders for work or
other reasons, as well as the continued trend towards globalization, are making national boundaries lose their traditionally strong importance. As such, one needs the ability to ensure the safety of citizens when they are traveling in foreign countries and taking drugs that were prescribed for them by doctors in the U.S., and to support allied functions. For example, the creation of new global drug efficacy monitoring systems could enable Americans with the same ethnicity or ancestral homeland to be grouped by predictable responses to drugs based on findings by researchers in their native countries. We consider in the following paragraphs the significance of the diverse examples highlighted throughout this chapter. In the case of mammography, a technician needs to attend to the patient in order to take the mammogram; the doctor can be off-site, either in the same country or a different one; and the computer-based data mining algorithms will be executed on an off-site basis too. This is perhaps the earliest example in healthcare where the concept of doing part of the work on-site, part off-site, with the computer providing active decision-support capability, was mooted as the most accurate and the most cost-effective way. In the case of integration of medical records in heterogeneous systems, either for emergency needs or for routine needs, computer-based techniques can be of significant help, but human experts are needed at the initial stage as well as on a continuing basis. Integration of major systems in other fields, such as logistics and manufacturing, is being increasingly done on an offshoring basis. Banks and financial institutions located in the U.S., Switzerland, and other countries were very reluctant in the eighties and nineties to let such work be performed abroad; by the late nineties, many of them accepted the offshoring concept, after they were satisfied that
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the evolving security and privacy protocols were adequate for their needs. The same is expected to occur for the integration of heterogeneous hospital information systems; we will consider the legal and regulatory aspects later in this chapter. In addition to experts in information technology, medical personnel from multiple subspecialties will need to be involved, both on-site and off-site, in order to integrate the concerned systems based on the specific characteristics of the concerned medical institutions. In the current versions of teleradiology, the technician can be in the U.S. or another developed country, and the radiologist can be in India or another less expensive country; in addition, there is a second radiologist in the same state (or nation) as the patient who issues and signs off on the final report. Technology is used almost entirely for transmitting the image from the developed country to the less expensive one. Over time,
technology could be used to partially analyze the images, to compare the image to an earlier one involving the same part of the body of the same patient, and even to compare the image with images of the same part of the body of other patients, in order to make a diagnosis and to evaluate how the symptoms may change over time. In the case of monitoring for adverse drug effects, the MedWatch system needs to be augmented. Some of the new tasks need to be performed by pharmacists in the U.S. Other tasks, such as reconciliation of duplicate records, need to be performed using inexpensive manpower, wherever available, with support from computerbased techniques. Further, individuals in the U.S. are increasingly obtaining less expensive equivalent drugs from Canada and other countries. Such drugs must also be taken into account while designing any comprehensive system for monitoring adverse drug effects. Ultimately, this
Table 6.1.
Scenario
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Tasks by Medical Personnel
Tasks by Non-Medical Personnel
On-site
On-site
Off-site
Tasks by Computer Assisted Techniques
Off-site
CAD Mammography
X
X
Integration of Heterogeneous Healthcare Data Sources
X
X
Teleradiology
X
X
Monitoring of Adverse Drug Effects
X
X
X
X
Dissemination of Healthcare Information
X
X
X
X
X
X
X
X
X
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system will need to be implemented across multiple systems, as a harbinger of a global system. A growing percentage of clinical trials are now being conducted in India and other countries because of lower costs, availability of drug-naïve persons (individuals who had not taken other drugs in the past for addressing the same disease), and access to persons with different heritages. The ability to conduct these clinical trials at lower costs increases the probability that a drug company would decide to take a potential new drug from the lab to the clinical trial stage. This can also reduce delay in the launch of the new drug. However, this also implies transforming local systems for monitoring adverse drug effects into international ones. In such a case, both medical personnel and other personnel need to work from multiple countries. In the case of dissemination of healthcare information, the initial endeavor focused on getting reputed experts from multiple countries to contribute material for inclusion in the evolving knowledge repository. The idea was to gradually support automated updates to such material on a continuing basis. So, if new results from a trusted clinical study became available, such results should be incorporated into the appropriate chapters. While part of this work can be done using computer-based techniques, the experience of the development team is that high quality and accuracy will only be accomplished if the suggested edits and updates were reviewed and approved by human experts. The use of domain experts and editorial personnel located in less expensive countries is more appealing, as it makes the overall endeavor more viable (see Table 6.1). While improvements in Internet communication have made the multi-pronged approach described above possible, the lack of standardization in messaging protocols is a roadblock to the creation of a global healthcare model. We now describe how standards can be applied effectively to each of the five operational scenarios discussed, to reduce costs and improve clinical outcomes:
1.
2.
3.
4.
In the area of CAD mammography and teleradiology, the communication of radiological images and other data clearly depends on the standards used for creating, maintaining, and exchanging medical images (such as PACS and DICOM). The problem on data exchange and integration from heterogeneous data sources can be solved by the effective use of standards such as HL7. Though the current scenario does not easily allow the adoption of a single data standard among all hospital information systems nationwide, using a standard message development framework as a mediating schema could eliminate some of the problems and make the system more portable and scalable. The area of drug monitoring and post-market surveillance could also benefit from the use of standards. Using standards to create and store medication and adverse effects reports and experimental results sent from various participating agencies would create a much richer database allowing for better analysis and quicker response times. Finally, while considering the issue of dissemination of medical information, the use of standards (not medical standards, though) for storing and displaying the information to the end users can increase the productivity and usefulness of search portals.
24-HOUR KNOWLEDGE FACTORY Earlier in this chapter, we discussed the scenario of seeking immediate assistance from an expert in a particular specialty; the geographic location of that specialist was totally irrelevant. The same is true of situations related to some tasks related to mammography and radiology. Finally, in the other two examples of the integration of medical information systems and the creation of global
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drug monitoring systems, it would be appropriate for the concerned pieces of work to proceed on a continuous basis, around the clock. In all such scenarios, the paradigm of a 24-Hour Knowledge Factory bears relevance. The University of Arizona has signed a threeparty collaborative agreement with the Wroclaw University of Technology in Poland and the University of Technology located in Sydney, Australia. Under the aegis of this agreement, researchers at the University of Arizona can work from 9:00 a.m. to 5:00 p.m., Arizona time. At around 5:00 p.m., Arizona time, the research-in-progress can be transferred to fellow scientists at the University of Technology in Australia, who can work from around 9:00 a.m. to 5:00 p.m., Sydney time. At the end of the “research shift” in Sydney, the professional work can be transferred to the Wroclaw University of Technology in Poland where researchers can conduct incremental activities over the next period of approximately eight hours, and can then transfer the evolving endeavor to the first set of researchers in the U.S. This process is akin to the passing of a baton in a relay race, with the notable difference that the baton is returned back to each participant exactly 16 hours after that participant transfers it to a colleague located on a different continent. We believe that this model will be gradually adopted by the healthcare industry, and further analysis of the historical and structural aspects will determine what subset of healthcare tasks can benefit most from the adoption of this evolving paradigm. In general, the 24-Hour Knowledge Factory paradigm is appropriate for situations where the healthcare endeavor can be broken down into components, the underlying knowledge can be digitized, different individuals can potentially work on such components with minimal support from their peers, and the work-in-progress can be transferred at minimal cost from one collaborating center to another.
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INTELLECTUAL PROPERTY AND LEGAL ISSUES The performance of medical tasks in a collaborative fashion, on a regular basis, by individuals located across state and national boundaries, raises new issues. Who owns the intellectual property such as patents on new medical or drug inventions? Who can be sued for medical malpractice, and under which set of laws and regulations? How should the charges for medical services be apportioned? What are the corresponding avenues for seeking reimbursements from insurance companies? And what are the mechanisms for seeking redress if and when it becomes necessary? Besides these, there are also other related social and policy-related concerns such as quality control, and assurance and intensity of workflow across boundaries. In the case of the United States, the FDA plays the dominant role at the national level on issues related to drugs. However, medical professional credentialing and registration are done almost entirely at the state level. As mentioned in the section on radiology, the radiologist can render an initial opinion from outside the particular state or country, but the final opinion is still issued by another radiologist who resides within the particular state and is licensed to practice there. The use of two radiologists, though providing quicker action, increases overall costs. In the case of patents and intellectual property, there is a common feeling among patent holders around the world that others are exploiting your work. In the U.S., there is a feeling that companies in foreign countries are exploiting U.S. inventions and patents without authorization and payment of royalties. On the other side, there are people in India and China that feel the same way; there are instances of patents issued by the U.S. patent office on items of indigenous nature that have existed for thousands of years. This is somewhat akin to
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the situation where different states in the U.S. would render conflicting decisions on the same case, creating confusion. For example, until the 1970s, child custody cases were handled entirely at the state level. So in a case of divorce involving two parents residing in two different states, the first state might well give the custody of the child to the father (who resided in that state), and the second state would likely give custody of the same child to the mother (who resided in the latter state). Finally, in 1992 the Uniform Interstate Family Support Act (UIFSA) was drafted., According to this act, states have the power to reach beyond their borders for the establishment and enforcement of support orders. A similar type of action is now warranted in the healthcare domain. Let us analyze the issue based on how laws, regulations, and norms have evolved over history. Three thousand years ago, all rules were at the village level. The village was the basis of the economy. If a person did something undesirable, the person could be ostracized from using the village well. Without water, the person could not survive. Therefore, the person had to plead with his or her peers. This was one of the mechanisms, then prevalent, to enforce conformity with the norms and mores of that era. As time progressed, the size of the geographic unit increased. In England, one saw the advent of the concept of the manor, typically a collection of a dozen villages, that functioned as a unit for economic and security purposes. The manor was replaced by still larger entities in the form of principalities, which were ultimately replaced by nation states. The lawmaking and enforcement evolved too, sometimes with overlapping provisions. For example, a person residing in Tucson today may be governed by up to four sets of regulations, of the City of Tucson, Pima County, the State of Arizona, and the United States of America, respectively. (In some areas, such as intellectual property, there may be a supranational layer as well, that is, the WTO’s Trade Related Intellectual Property Agreement, which although not applied directly in the United
States affects U.S. intellectual property law). Being governed by laws of the U.S. does not imply having to go to Washington, DC, to seek redress; benches of U.S. federal courts exist in most large and medium-sized cities in the United States. Similarly, in the case of healthcare, the ultimate solution may be an international regulatory system that maintains offices in large cities around the world. This organization could deal with issues related to performing healthcare work across national boundaries. This could include credentialing, registration, medical malpractice, medical accounting, and reimbursement. Such an international regulatory system could be operated under the aegis of the World Health Organization. Issues of trade and intellectual property are currently coordinated at the international level by the World Trade Organization (WTO) and the World Intellectual Property Organization, respectively. These organizations could serve as the nucleus for establishing streamlined mechanisms that would enable better coordination of emerging types of practices, in healthcare and in other disciplines, perhaps under the aegis of the WTO’s General Agreement on Trade in Services. The Agreement on Trade Related Aspects of Intellectual Property is another mechanism of IP protection. Healthcare services will increasingly transcend national boundaries as efforts are made to perform them with speed, efficiency, and in the most cost-effective manner.
CONCLUSION The traditional model of healthcare required medical personnel to be in immediate proximity to patients being attended to. This model will gradually be replaced, for a growing number of healthcare applications, into a three-faceted model that requires: some personnel to be onsite, other personnel to be off-site, and the use of evolving technologies to render support in a manner that is beyond the capabilities of the
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best medical personnel available anywhere in the world. Computers can look at millions of images of mammograms in very short periods of time to locate ones that match the key characteristics of the one currently in the clinic; such power is clearly beyond the capability of a single doctor or even groups of doctors. Off-site personnel can be located in the same state (such as physicians and surgeons of the Arizona Telemedicine program assisting doctors in clinics in Navajo Nation and in other Native American nations), in a different state or a different country. If the support is being provided from a different country, it could be in the same time zone (to provide good overlap) or in a different time zone (to provide complementary advice, especially advice from specialists, during the night in the patient’s country). The time difference was initially perceived to be a hindrance; today, it is considered an asset, as it enables better usage of medical and other personnel in both countries. Initially, outsourcing will be embraced using the notion of two collaborating groups that are 10-12 hours apart in terms of time. Gradually, the model of three collaborating centers will be embraced. The use of this 24-Hour Knowledge Factory paradigm allows three centers located in three countries to continue work on a round-the-clock basis, with all the tasks being performed primarily during the day in the respective countries. New international systems must evolve to address the intellectual property, legal, accounting, and other issues related to the various forms of outsourcing. Medicine is geared to assist mankind as a whole. The offshoring of medical services will benefit developed countries because it can lower overall costs, provide quicker response, and facilitate load balancing. Such offshoring will be advantageous to developing nations because it can widen the range of available medical expertise and enhance the knowledge of healthcare professionals in developing countries. At the same time, one must be conscious of the fact that there is a shortage of medical professionals both in developed
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and developing countries, and the diversion of such resources to address the needs of foreign patients can potentially aggravate the shortage in their respective home countries. These issues will be partially resolved by market forces. Over time, we will witness more cooperative endeavors involving on-site and off-site activities in the healthcare arena.
ACKNOWLEDGMENT The authors acknowledge, with sincere thanks, valuable information, comments, suggestions, and assistance provided by many persons, including Shiu-chung Au, Harvey Meislin, Elizabeth Krupinski, Kurt Denninghoff, Rick McNeely, Richard Martin, Surendra Sarnikar, Yan An, Shawna Sando, David Branson Smith, Kit Cheong, Georgina Apresa, and Zak Campbell. Their insights have contributed to enhance the breadth and depth of this chapter.
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Weinger, M.B., & Ancoli-Israel, S. (2002). Sleep deprivation and clinical performance. Journal of the American Medical Association, 287(8), 955-957. Weinstein, R.S., Lopez, A.M., Barker, G.P., Krupinski, E.A., Descour, M.R., Scott, K.M., Richter, L.C., Beinar, S.J., Holcomb, M.J., Bartels, P.H., McNeely, R.A., & Bhattacharyya, A.K. (2007). The innovative bundling of teleradiology, telepathology, and teleoncology services. IBM Systems Journal, 46(1), 69-84. Wiederhold, G., & Genesereth, M. (1997). The conceptual basis for mediation services. IEEE Expert, 12(5), 38-47.
This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 1-26, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter VII
Offshoring Entertainment and Media to India Alyssa D. Schwender Lions Gate Entertainment, USA Christopher J. M. Leet Intuit Inc., USA
Abstract This chapter explores opportunities for the offshoring of assorted processes in the global entertainment and media industry. Currently, this industry is experiencing incredible growth, much of it spurred by the increased digitalization of media production around the world. The rise of digital technology, faster global connectivity, an increased quality of downloads have been the driving factors behind this growth. The filmed entertainment, recorded music, and television networks and distribution sectors of the industry will undergo major technological changes in the coming years. These changes will provide opportunities for entrepreneurs to enter the global media industry. Using venture funding, startups are utilizing offshoring concepts to create a more efficient cost-effective means of doing business. The Asia Pacific market is currently the fastest-growing region, with India leading the way with offshoring of film functions. The industry will see a change from large media conglomerates as the sole owners of all media to smaller companies offering services, in which they specialize, to these larger companies, as digital media makes it easily accessible around the globe.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Offshoring Entertainment and Media to India
Introduction The global entertainment and media industry has changed drastically since the first printing press was invented, arguably the beginning of mass media distribution. This industry now includes video games, recorded music, Internet advertising, filmed entertainment, casino games, Internet access, television networks, and television distribution (Metrics 2.0, 2007). The global entertainment and media industry will continue to grow at a 6.6% compound annual growth rate (CAGR) to $1.8 trillion in 2010 (PricewaterhouseCoopers, 2006). There are many opportunities to cut costs by moving activities to other places around the world. Specifically, the filmed entertainment sector in the Asia Pacific market will grow significantly in high-definition video, and a lower piracy rate will increase the sell-through video market. The sell-through market is reserved for rentals through stores or the Internet, which has recently become a rapidly increasing trend with companies such as Netflix and Blockbuster’s innovative rental programs. PricewaterhouseCoopers anticipates a global CAGR of 5.3% to $104 billion in 2010 (see Figure 7.1 for global growth potential in all sectors).
The recorded music sector of this industry includes album and single sound recordings, music video distribution, licensed digital distribution, and mobile music. Mobile music includes ring tones and ring backs, which are growing in popularity due to the expansion of the cellular phone market to younger generations. In recent years, the recorded music sector of the entertainment industry has seen lower sales due to fewer revenues garnered from CDs and the rise of illegally downloaded music online. However, in 2004, this trend changed as the music sector grew to about $38 billion. Ring-tone spending and expansion in the digital distribution market are the factors that are driving growth the most (see Figure 7.1). Recorded music spending is expected to rise 5.2% globally to $47.9 billion in 2010 (PricewaterhouseCoopers, 2006). The television networks sector refers to the global industry for any viewing of televised programming. This industry is also projected to grow rapidly around the world with Latin America as the fastest-growing region. Global spending for this sector will increase at a rate of about 6.6% to $227 billion in 2010 (Figure 7.1). The digitalization of this sector will be the main growth driver, as new analog channels, digital broadcasting,
Figure 7.1. Based on information from PriceWaterhouseCoopers and the Ernst & Young Entertainment Report. potential grow th by sector
billions of dollars
0 00 0
00-0 00
00 0 0 Filmed Recorded Music TV Netw orks Entertainment sector
TV Distribution
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Offshoring Entertainment and Media to India
and high definition television are increasing in popularity and accessibility. Television distribution includes consumer spending on subscriptions to various services such as satellite, video on demand (VOD), Internet protocol TV (IPTV), and basic or premium cable. In the U.S. market, this includes advertising on local TV stations. The shift to digital distribution methods, as well as increasing average revenue per user (ARPU), will invigorate this sector’s further growth. This sector is projected to grow by 8.3% to $230.3 billion in 2010 (Figure 7.1). This market is somewhat different from other markets worldwide because the cable operators will be investing in infrastructure as a primary method of competition with the satellite carriers’ new IPTV technology. India is projected to become the third-largest sector of the Asia Pacific region with about $5.4 billion in revenues (Ernst & Young, 2005). The Asia Pacific market is the fastest-growing area in the global entertainment and media industry with a 9.2% CAGR to attain about $425 billion in 2010, led by rapid growth in China and India (PricewaterhouseCoopers, 2006). In 2005, PricewaterhouseCoopers reported that the Indian entertainment industry grossed approximately $4.65 billion with the potential to increase to $10.46 billion in 2009. In 2004, both Spiderman 2 and The Incredibles were listed in the top five films of the year in terms of revenues generated in India. This demonstrates that India has a strong domestic market as well as international interest (Kapoor, 2005). All of these statistics highlight the potential for investment in different segments of this industry. In many cases, this shift in perspective towards offshoring entertainment processes has become possible because of the advances in information technology. The ability to transfer and process information faster allows for greater opportunities to offshore these processes.
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Digitalization of Media In the early years of Hollywood, the 1920s through the 1940s, seven major studios controlled the industry because they exerted their influence over the theaters as well as the talent. Then in the 1950s, they were forced to adapt their strategy for market share, as many people were now staying at home to watch their televisions. When a new Hollywood emerged with the actors acting as free agents, six major media conglomerates ruled the industry, as they were combined with TV and cable networks as well as cable and satellite connections (Deutschman, 2005). Currently, this is changing because of the rise of digitalization worldwide. With the newfound digital world, the entertainment industry is changing completely. Now we are seeing more entrepreneurs in the entertainment market. Take Digital Music Group Inc., a company that went public in February of 2006 and was acquired by The Orchard. Digital Music Group, Inc. operates as a digital media distributor; it buys only the digital rights to music and sells them via online retail stores such as iTunes. Anders Brown, the past COO of this company, stated that with the digitization, the economies of scale are gone for the major labels, and this allows for more entrepreneurial startups to enter the market (Anders Brown, personal communication, June 14, 2006). This shift in digitalization creates a change in industry standards. Previously, only physical sales were the norm. With the use of the Internet downloading (legally or otherwise) movies, music, and television shows; streaming video and music to handheld electronics; and releasing theatrical and DVD versions of films via the Internet is happening simultaneously and commonly. The entertainment companies must learn to adapt to the growing class of “digital consumers” (Deutschman, 2005) before they lose their customer base to the Internet technology.
Offshoring Entertainment and Media to India
Motivations for Offshoring
portunities, it can focus on enhancing the quality and reliability of its products in order to establish a stronger foundation for greater growth and to widen the company’s value chain. This strategy applies to entertainment firms too: when they outsource various functions that are now digital, they can focus on more vital activities such as marketing and publicity for the productions. This is a function of what is called the “outsourcing wheel.” The outsourcing wheel involves changing the direct focus of the outsourcer (Kamal Bhadada, presentation to Outsourcing course at the University of Arizona, January 19, 2007). When the economy is doing well, the company concentrates on time-to-market and quality with a fringe benefit of reduced costs. When the economy is doing poorly, the company’s key driver to source is to reduce costs. Table 7.1 demonstrates the shift in focus for companies that outsource, where “TM” means time-to-market, “Q” means quality, and “$” means cost efficiency.
Both production and distribution processes are becoming increasingly digital. Already, 70% of all media production has become digital, providing corresponding opportunity for offshoring to reduce the associated costs. These digital technologies include aspects of all sectors of the media and entertainment industry, including online rental subscriptions and digital streaming in filmed entertainment, as well as licensed digital downloads and mobile music in recorded music. The significantly lower labor rate is a key driver to offshore to India. According to Maha Phillips (2004), a reporter for Global Investor, the Indian entertainment industry is growing at a rate of 25% per year. The majority of companies initially adopt outsourcing concepts for the sole purpose of reducing costs (Farrell, 2005). This strategy changes in relation to the company’s business success and the strength of the economy. After attaining cost savings and when the economy has substantial growth, a company considers outsourcing as a way to decrease time-to-market and reduce cycle time (V Mishra, personal communication, April 25, 2007). The sooner the company enters the market, the sooner it can generate potential revenue. Decisions relating to maximizing revenue take precedence over decisions to minimize cost (Gupta, Seshasai, Mukherji, & Ganguly, 2006). As the company expands capacity and revenue op-
Offshoring in India A feature unique to the Indian region of this industry is Bollywood. This is a combination of the words Bombay (the old name for Mumbai) and Hollywood. Movies in this sector typically have colorful scenery with a greater focus on the drama in the characters’ relationships. Typically,
Table 7.1. Based on information from TATA Consultancy Services Year Major Reasons for Outsourcing
Late 1990s
2001-2002
2002-2005
Future
#1
TM
$
$
TM
#2
Q
$
TM
Q
#3
$
$
Q
$
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Offshoring Entertainment and Media to India
the Bollywood industry produces between 350 to 400 movies a year (Roy, 2001). The trend of offshoring tasks to India has grown to include tasks related to filming, postproduction, and animation. The opportunity in the country is extensive due to the wide availability of skilled professionals in the relevant fields. Many of these professionals contribute their efforts to making the domestic Indian film industry the largest in the world in terms of the number of movies made. Currently, this outsourcing work is done domestically, but producers, distributors, and entrepreneurs have begun to realize there is a huge possibility for growth abroad, particularly in India, for the filmed entertainment sector. In particular, entrepreneurs are finding that the talent abroad should be utilized for more efficient use of venture funds. Venture capitalists are seeing this too and now allowing for offshoring to take place at the beginning stages of the company in order for the management team to focus on its core competency (Jonathan Deeringer, personal communication, April 27, 2007). As another consequence, companies now seek to attract highly qualified workers residing around the world at earlier development stages (Ho, Torres, & Vu, 2004). Entrepreneurs see the potential for success in this market in India and wish to outsource a portion of their business processes there. Aside from the talent pool, entrepreneurs and entertainment studios are interested in offshoring to India because it costs about one sixth of what it would cost in areas such as London or the United States (White, 2005). There are currently three identifiable and highly profitable trends in offshoring entertainment processes to India: filming, postproduction, and animation. By injecting better talent earlier in media production processes and avoiding costly and time-consuming logistics involved in moving foreign workers to the U.S., entertainment companies benefit in multiple ways; in addition, there are distinct advantages in letting foreign workers remain in familiar cultural settings.
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Once the right management team is in place, the question is what to outsource and to whom. This is the next step according to Vish Mishra, senior venture partner at Clearstone; he stated that venture capitalists expect a company to focus on the top two-thirds of the core competency and to outsource the last one-third (V. Mishra, personal communication, April 25, 2007). Even if a company decides to keep most proprietary work in-house, he believes that operations known as “hygiene” functions should be outsourced. Hygiene functions are those that are not part of a business’s core competency, but are needed to keep the business operating. Examples of hygiene functions include human resources, information technology, payroll, and bookkeeping. This reduces the cost of human capital, and may also limit regulatory costs associated with onshore employees. •
•
Filming: A movie can be filmed in India at much lower costs than in U.S. or Europe. Many domestic companies are available to assist the foreigners with such tasks as finding a crew and obtaining the proper visas needed to film in the country. These companies consist of locals that are familiar with the Indian film industry and possess experience with the production of movies and other entertainment platforms. There are examples of both discretionary and non-discretionary filming in India. Some movies, such as Gandhi, are necessary to film in India because the story centers on the features of the country itself. Another advantage of filming in India is the availability of beautiful settings and great palaces. However, significant travel time is involved, and it is not worth flying several persons to India for a shoot that takes only a week. Postproduction: Postproduction processes include editing, sound, and special effects. Indian technicians that work in this field are experts in producing and editing special
Offshoring Entertainment and Media to India
•
effects for diverse projects including bigbudget blockbusters. Barrie M. Osborne, the producer of popular films such as Lord of the Rings, The Matrix, and Face-Off, has cofounded a visual effects studio with a partner in India; he saw the potential in India to make superlative films, especially when it comes to producing great special effects for such films (Srivastava, 2005). In contrast, Ian White, a reporter for International Business Engineer asserts that “It’s an attractive proposition [the offshoring of postproduction processes] but the likelihood is that most producers and directors in the west would rather stick with the personnel in post houses they know in familiar centers such as London or Paris” (2005). Obviously, Osborne feels otherwise; he has decided that his next film will be based on the book The Alchemist and will have a budget of $100 million. Osborne is optimistic about the future of the special effects and animation markets in India, “with the huge talent pool in the subcontinent, it was possible for international productions to take work from them to produce great films.” His partner, N. Madhusudhanan, shares his enthusiasm for the new venture, and recognizes there is a need for future improvements, “…though Indian animation firms have the skill sets for visual or special effects, they lack the right direction. We are planning to hold a series of training workshops in digital visual effects to develop the talent pool under the guidance and supervision of Osborne” (Srivastava, 2005). Animation: The third principal opportunity for foreign film production companies is in animation. “The total cost for making a full-length animated film in America is estimated to be $100 million to $175 million. In India, it can be made for $15 million to $25 million” (Author unknown, 2006). Since the underlying processes are time-
•
consuming and labor-intensive, it is ideal for them to be outsourced to trained Indian professionals; the studios in the U.S. can then focus on other aspects of the production. Companies such as Sony, IMAX, Viacom, and Disney are beginning to utilize this option for animation. The animation market in India is estimated to reach $950 million by 2009 from the current level of $285 million, according to the National Association of Software and Service Companies (NASSCOM, 2006). Films such as Shrek, Finding Nemo, and Cars have garnered as much money and media attention as nonanimated blockbusters, and it will not be long before future full-length films such as these will rely on Indian studios to further enhance their appeal. Crossover movies: The emergence of the crossover movie industry between Bollywood and Hollywood is personified by films such as Bend It Like Beckham, Monsoon Wedding, and Lagaan. These films blend talent resources in India with other resources from countries around the world. They are made with a global audience in mind because the filmmakers believe there will be greater interest if resources from diverse sources are used. The success of the crossover movies can be partially attributed to the growing number of expatriates from India who are located throughout the world, but long for traditions of their homeland. Accordingly, one should consider how effectively these movies are able to target the preferred audiences, particularly in terms of the ability to accurately portray the theme. Overall, the crossover movie sector presents a potential opportunity for Bollywood and Hollywood companies to merge their resources and appeal to a larger market than before. This means that studios must look for prospective partners within the industry to maintain a competitive edge; one such idea is to merge with a foreign entertainment company. 147
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Film Industry Data and Statistics The film industry tracks successes and failures by box office numbers that are reported by studios and theaters across the United States. In order to determine whether a film is successful, one must consider domestic and international gross revenues, the production budget, and the profit margins associated with the film; this should be done for films that have been domestically produced and for films that have been outsourced. Table 7.2 shows the raw data collected from cross-referencing the Internet Movie Database and the Numbers Box Office Database; Table 7.2a presents data
for productions that have been outsourced while 7.2b shows domestic production revenues. Films that have been partially outsourced were included in this data analysis, meaning that specific parts of production have been taken offshore such as postproduction editing or special effects. On average, the budget of an outsourced production is less than a domestically produced project (with the exception of big blockbusters such as Armageddon). In order to determine whether this affected the quality or appeal of the film, a t-test was run to determine if there was a statistically significant difference between the means of the profit margins of the outsourced and domestic productions. Table 7.3 displays these results.
Table 7.2a. Outsourced Productions Title The Illusionist Capote Armageddon Black Hawk Down The Thin Red Line Dragonfly The Grudge Coach Carter The Truman Show Hostel Mean Std. Dev.
Budget
Domestic Gross
Int'l Gross Worldwide Gross
Margin
16.50 7.00 140.00 95.00 52.00 60.00 15.00 45.00 60.00 4.80
39.90 28.80 201.60 108.60 36.40 30.10 110.20 67.30 125.60 47.30
44.40 17.60 353.00 65.00 0.00 0.00 19.70 10.00 122.80 33.00
84.30 46.30 554.60 173.60 36.40 30.10 129.90 77.30 248.40 80.30
67.80 39.30 414.60 78.60 -15.60 -29.90 114.90 32.30 188.40 75.50
49.53 42.94
79.58 56.22
66.55 107.23
146.12 158.71
96.59 128.02
Table 7.2b. Domestic Productions Title
Budget Domestic Gross
The Prestige 40.00 Infamous 13.00 Deep Impact 80.00 Tears of the Sun 75.00 Windtalkers 115.00 The Mothman Prophecies 42.00 The Ring 48.00 Glory Road 45.00 EdTV 60.00 Turistas 10.00 Mean Std. Dev.
52.80 31.51
Int'l Gross Worldwide Gross
53.10 4.60 140.50 43.60 40.90 35.20 129.10 42.60 22.50 7.03
51.70 0.47 209.00 42.00 36.70 19.40 100.00 0.40 12.80 0.00
104.80 5.10 349.50 85.60 77.60 54.60 229.10 43.05 35.30 7.03
64.80 -7.90 269.50 10.60 -37.40 12.60 181.10 -1.95 -24.70 -2.97
51.91 46.53
47.25 64.71
99.17 108.93
46.37 100.27
Note: Based on information from the Internet movie database and the numbers 148
Margin
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Table 7.3. Std. Error Degrees of Freedom t-value
228.28 14.00 0.22
The small t-value shows that there is no significant difference between the two means of the two samples.
Recorded Music Offshoring Sales of physical copies of music have dropped from 942.5 million in 2000 to 750.4 million in 2005. EMI Group, a major record company, has projected that by 2010, digital music will account for 25% of industry revenues (Goodchild, McNatt, & Merwin, 2007). Record companies are seeking new innovations in order to boost their revenues. One option is to outsource the tasks. EMI Group started this offshoring process in 2004 by moving the manufacturing of its products from Europe and the United States to Japan, Australia, and Canada (McDonough, 2004). As the trend shifts from sales of physical CDs to electronic distribution of music, especially to mobile phones, Indian entertainment specialists are more likely to get involved. Internet technology allows for faster downloads and easier global communication, thereby making music production more accessible to outside companies and individuals.
Television Networks and Distribution Offshoring According to Benson (2006), in-house orders for shows are gradually declining. This gives more incentives to independent producers. Since so much of media production is digital and can be easily outsourced, television networks can offshore appropriate parts of the endeavor. New
Delhi Television (NDTV), an Indian television network, has created a joint venture with Genpact, a leading business process outsourcing (BPO) company, to offer media offshoring services to companies around the world. The main goals are to digitize archives, logging, metatagging, graphics, and set design for media outsourcers (PricewaterhouseCoopers, 2006). The television distribution industry will also grow rapidly, based in part on the development of Internet protocol TV (IPTV), which is a digital television service that is delivered over a network infrastructure. For residential users, this service is generally bundled with other Internet services, and is combined with video on demand (VOD). According to the Metrics 2.0 site (2006), there is currently a 92.5% CAGR that will lead to an overall market size of $39.1 billion by 2011. “IPTV promises to add interactivity, personalization, integration of voice and data and value-added services to television entertainment,” said Frank Dickson, a principal analyst for multimedia content services at iSuppli (a global leader in technology value-chain market intelligence).
Intellectual Property When work is outsourced to outside firms, even on a domestic basis, there is always the possibility that crucial ideas can be leaked out or misused. Also, local entertainment technicians may opt to derive personal advantage by taking ideas elsewhere. (This is a situation that can occur even when the work is not outsourced.) The Indian government has been actively working to reduce the probability of such occurrences as part of its efforts to encourage the entertainment offshoring market based partly on the fact that it provides a valuable link to developed nations. Many venture capitalists do not encourage outsourcing during the first 2 years of operation because the company’s activities consist of controlling operations and finding customers (J.
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Kim, personal communication, April 2, 2007). In the company’s formative period, some venture capitalists are nervous about disclosing processes that are valuable company intellectual property. For others, the fear of theft of intellectual property is less important because of the laws protecting these rights and the poor reputation that a raiding company acquires by improper behavior (V. Mishra, personal communication, April 25, 2007). Further, venture capitalists have an already existing network of relationships that serve to lower the probability of illegal practices. Intellectual property is also sacrificed through piracy. This is prevalent around the world. Many companies are currently working with the governments in each country in the Asia-Pacific region and elsewhere to develop stricter regulations to battle illegal distribution of films, music, and other media products, but the ultimate objective is difficult to accomplish, considering how much of production and distribution is now digital. The problem of piracy is prevalent in the U.S. and Europe too. For example, Brandon Drury and Luke Sample operated Web sites that enabled users to download movies and other media productions illegally. The bigger player in this case is Google, which allegedly allowed these two defendants to buy advertising space on the Web site and sold them search words such as “bootleg movie download,” “pirated,” and “download harry potter movie.” The illegal Web sites relied solely on the advertising provided by Google to drive their sales because they received a profit when someone would click on their advertising (Kamitschnig & Angwin, 2007). While Google has yet to be accused of engaging in illegal activity, media conglomerates such as Disney, Time Warner, and Viacom are upset with Google’s business practice of allowing Web sites to advertise pirated material on Google’s site. As companies opt for offshoring different media production processes, some observers believe that the danger increases, as there is less protection on this property, giving Web sites such as Google easier access to their material. 150
Google’s easy accessibility has proven to affect more than just U.S. and European entertainment markets. Recently, Bollywood movies have been offered as free downloads via Google’s video application. If the situation was reversed and Hollywood films were being downloaded for free on Google, the perpetrators would be punished for copyright infringement due to the legal standards in today’s filmed entertainment. However, Indian film companies do not have the same legal representation as those in Hollywood do, which means that copyright infringement policies are much different for Bollywood films, and are not getting the attention they deserve. While it may be argued that these films are available on other peer to peer (P2P) networks and Google is not the only Web site that provides this service, it is important to remember that by offering them on Google Video, it provides easier access and allows more people to illegally download these titles due to the Web site’s widespread international influence. This greatly affects the international Bollywood markets in countries such as the U.S., Canada, and the UK, where high-speed Internet is cheaper, allowing faster downloads from public sites (Ravneet, 2006). Currently, it is more difficult to find free movies to download on these sites, which suggests that applications such as Google Video are working to remedy the situation. However, it is still possible to attain certain parts of Bollywood movies such as the second half or an hour clip of the film. This is yet another example of how the further digitalization of media allows free and easy access to more people around the world. In today’s digital society, it is easy to download movies, music, and television shows onto one’s laptop, handheld device, or other portable electronics, both legally and illegally. Accordingly, more research is needed to develop new technological and business approaches to combat piracy and to ensure equitable returns to the developers of the intellectual property. As an example, Morgan Freeman is teaming with Intel to launch Clickstar,
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a company that will distribute movies to computers at the same time that they are released in theaters; he plans to make this technology easier to buy than to pirate (Deutschman, 2005). Deutschman believes that companies such as Yahoo and Google will be the winners in this new digital media age because in the past 10 years, they have “help[ed] us search the vast array of digital content that’s out there, find what we want, [bought] it when it’s for sale, and [got] it onto our screens and hard drives” (2005). Overall, piracy is a worldwide phenomenon, and even leading companies such as Google can be held accountable for fostering illegal downloading activity. Therefore, it is imperative for the larger media conglomerates, should they wish to maintain their current market share, to nurture and to adapt new information technologies that include adequate protection of their intellectual property.
Evolving Business Models The evolving paradigms of business process outsourcing (BPO) and knowledge processing outsourcing (KPO) are changing the way the sponsor studio in the U.S. handles and shares risk with the offshoring host company in India. Sometimes the company and vendor buy equity in each other (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). This is done as an incentive: if the host company succeeds, the sponsor succeeds too. In the early days of outsourcing, a sponsor company would contract with the host company by task or project. The BPO host company would then, for example, handle the postproduction aspects of the film and earn the contracted fee without the need to work together in the future. With the desire to establish continuing working relationships, new business paradigms are evolving. With software development and use, for example, a BPO supplier develops and owns the animation software, then licenses the software, and charges a flat monthly or
yearly rate to the company in the U.S. The model has changed further now, allowing a customer (offshoring company) to be charged for exactly what the offshoring company uses. This business model charges the customer for each use, called a “pay-per-drink” model (Kamal Bhadada, presentation to Outsourcing course at the University of Arizona, Jan 19, 2007). In this way, the BPO supplier retains a continuing relationship and becomes more integrated into the sponsoring company. Further, the BPO-sourcing company relationship allows for the sourcing company to produce more films, resulting in more sales and better usage of the business process created by the BPO supplier (Vivek Shivpuri, presentation to Outsourcing course at the University of Arizona, Feb 2, 2007).
Future Outlook As mentioned, the entertainment industry has adapted its strategies to maximize the benefits derived from IT’s evolution. Historically, the entertainment industry has shown its resilience by embracing new technological advances leading to silent movies, “talkies,” and television. It is now adjusting further to digital and highdefinition forms of distribution of entertainment media. Clearly, the digital means are changing the entertainment industry (Eliashberb, Elberse, & Leenders, 2006). The digital age is allowing entrepreneurs to enter the market and capitalize on entertainment industries such as Barrie Osborne (Srivastava, 2005). IT creates a new level of thought; a shift away from development of IT to its adoption by entertainment companies as institutional standards. The future trend is to understand the new development and consumption process involved within the entertainment industry. Without IT, the entertainment industry would be incapable of communicating, distributing, and using on-demand distribution lines; the use of IT makes possible the discovery of a wealth of global
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talent that not only develops the infrastructure for, but also revolutionizes the process of how the world does business. An area that needs greater immediate attention is the creation of new technological solutions that will enable rapid dissemination of music, films, and other types of entertainment services, as well as ensure adequate economic returns to the creators of the intellectual property.
Conclusion While there are some risks associated with offshoring entertainment practices, foreign production studios will increasingly benefit from contracting business processes and other services to India. In coming years, the global entertainment industry will see a substantial increase in the amount of services that are outsourced on an offshore basis, especially to India and other countries that can offer talented persons at lower costs than in the U.S. and Europe. The offshoring of entertainment and media tasks is taking place because of rapid growth in information technologies that enable such work to be transferred from one country to another, in fact from one continent to another, on an instantaneous basis and at insignificant costs. This applies to work-in-progress too. Further research in information technologies will lead to the adoption of more advanced workflow models, such as the notion of the 24-Hour Knowledge Factory, that enable work to be performed on knowledgebased tasks on a round-the-clock basis (Gupta et al, 2006). By allowing films and other types of entertainment endeavors to be completed in much shorter periods of time, studios will acquire a major competitive advantage over other companies that continue to rely exclusively on more traditional work models.
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Future Research There are several sectors within the entertainment industry that have begun the process to outsource and will be making headline news in the future. The journalism sector, another part of the global media industry, is looking to increase efficiency while decreasing costs. Reuters, in 2004, became the first major news organization to cover stories about Wall Street from India. The company planned to employ between 1,200 and 1,800 workers in the foreign subsidiary by mid-2006 (Chepesiuk, 2005). There has been resistance to this in the form of strikes to fight the movement of U.S. jobs abroad, but it is difficult to fight the evolution of outsourcing. Digitalization of media allows for easier flow of communication via the Internet. More firms are vertically integrated, that is, producing media and advertising that media. The task is becoming daunting as a global strategy is becoming more common for small and large businesses. Therefore, marketing organizations in foreign countries are gaining new clients to develop marketing media that will position ones brand in the U.S. and assist with a global strategy. Companies will continue to focus on core-competencies and outsource the bottom one-third of tasks. American Express and Allstate employees are mainly trained to perform other functions, and outsourcing routine activities, such as customer database maintenance and the upkeep of an online store, provides more time to focus on improving their core functions (McGovern & Quelch, 2005). In the near future, more firms will be outsourcing marketing functions to more specialized firms in the field to increase time-tomarket and quality while reducing costs. Lastly, another area to look into is the technological changes that allow for ease of transfer of data. MJPEG2000 or MJP2 (Motion JPEG2000) is becoming the digital film standard (Muramatsu, Ishida, & Kikuchi, 2002). It is the ability to com-
Offshoring Entertainment and Media to India
press a motion file (video) into a small file size while losing less video quality than past standards. This will lead to changes in video distributions on mobile phones, PDAs, and the ability to stream higher quality of video online (Fukuhara, Katoh, Kimura, Hosaka, & Leung, 2000). The IT presented has been developed and will play a role within many industries besides the entertainment. Look for technology to increase the likelihood of outsourcing and evolution of business structures and business models.
References Benson, J. (2006). Outsourcing the fall schedule. Broadcasting & Cable, 136(2), 18. Chadha, G., & Kumail, N. (2004). Outsourcing learning: Choosing the model for success. Retrieved Feb 1, 2007, from http://www.clomedia. com/content/templates/clo_webonly.asp?articlei d=534&zoneid=78 Chepesiuk, R. (2005). Outsourcing the western media. Retrieved August 30, 2007, from http:// www.globaljournalist.org/magazine/2005-1/outsourcing.html Deutschman, A. (2005). The new wave. Fast Company, 101, 50-59. Dibbern, J., Goles, T., Hirschheim R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. Advances in Information System, 35. Eliashberb, J., Elberse, A., & Leenders, M. A. (2006). The motion picture industry: Critical issues in practice, current research, and new research directions. Marketing Science, 25, 638661. Epstein, E. J. (2006). Northern expenditure. The Hollywood Economist, February 13. Retrieved June 18, 2007, from http://www.slate. com/id/2136064/
Ernst & Young Organization. (2005). News release: Ernst & Young entertainment report, 1-3. Retrieved May 9, 2007, from http://www.ey.com/global/download.nsf/India/ FastForwardPressRelease/$file/Fast%20Forwar d%20Mumbai%20Release.pdf Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of Management Studies. 32(3). Fukuhara, T., Katoh, K., Kimura, S., Hosaka, K., & Leung, A. (2000). Motion-JPEG2000 standardization and target market. Retrieved Aug 30, 2007, from http://ieeexplore.ieee.org/ iel5/7221/19473/00899225.pdf?tp=&isnumber= &arnumber=899225 Goldsmith, B., & O’Regan, T. (2005). The film studio film production in the global economy. Lanham: Rowman & Littlefield Publishers, Inc. Goodchild, H., McNatt, R., & Merwin, P. (2007). Record labels need a digital hit. Business Week Online. Retrieved May 21, 2007, from http://www. businessweek.com Gupta, A., Seshasai, S., Mukherji, S., & Ganguly, A. (2007, April). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2). Hershey, PA: Idea Group Publishing. Ho, L., Torres, M., & Vu, P. (n.d.). Dynamics of outsourcing: Offshoring, insourcing, and a case study—India. Retrieved Jan 9, 2006, from http://www.bangalore.com/ban%5CDynamicso fOutsourcing.pdf India grows increasingly animated as graphicsheavy movie houses outsource. Financial Times, 1. Retrieved October 9, 2006, from Academic Search Premier Database, University of Arizona Library. Internet Movie Database. Retrieved November 18, 2006, from http://www.imdb.com
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Kamitschnig, M., & Angwin, J. (2007). Media firms say Google benefited from film piracy; accusation cloud talks on copyright licensing; imposing new controls. Wall Street Journal, February 12, A-1. Kapoor, D. (2005). The Indian entertainment industry: An unfolding opportunity. Media & Entertainment Insights, 1-8. McDonough, M. (2004). Downstate city to lose jobs in EMI outsourcing. Chicago Sun Times. Retrieved May 21, 2007, from http://findarticles.com/p/articles/mi_qn4155/is_20040401/ ai_n12545952 McGovern, G., & Quelch, J. (2005). Outsourcing marketing. Harvard Business Review. Retrieved August 30, 2007, from http://www.tiama-fr.com/ Tiama_Blocnote_fichiers/HarwardBusinessRev. pdf
PricewaterhouseCoopers. (2006). PricewaterhouseCoopers says entertainment and media industry in solid growth phase, will grow 6.6% annually to $1.8 trillion in 2010. Retrieved May 9, 2007, from http://www. pwc.com/extweb/ncpressrelease.nsf/docid/ 283F75E5D932C00385257194004DDD0A PricewaterhouseCoopers. (2006). Global entertainment and media outlook: 2006-2010—Industry preview. Retrieved May 9, 2007, from http://www.pwc.com/extweb/industry.nsf/docid/ CF0A9E084894A5A85256CE8006E19ED?opend ocument&vendor=#FE Ravneet. (2006). Google Video Opens eases Bollywood piracy. Retrieved August 22, 2007, from http://www.emergintex.com/blog/?p=133 Roy, S. (2001). Coming to America. A Magazine of Art and Culture, 1(1).
Metrics 2.0: Business Market & Intelligence. (n.d.). IPTV rising: 92% CAGR to 103 million in 2011. Retrieved May 9, 2007, from http://www. metrics2.com/blog/2007/04/04/iptv_rising_92_ cagr_to_103_million_in_2011.html
Smith, E. (2007). Sales of music long in decline plunge sharply. Wall Street Journal, A1. Retrieved May 14, 2007, from http://online.wsj. com/article_email/SB117444575607043728-lMyQjAxMDE3NzI0MTQyNDE1Wj.htm
Metrics 2.0: Business & Market Intelligence. (n.d.). Retrieved May 9, 2007, from http://www. metrics2.com/blog/2006/09/19/global_entertainment_media_industry_will_grow_to_1.html
Srivastava, S. (2005). India animated by special effects outsourcing. Asia Times Online. Retrieved November 18, 2006 from http://www.atimes. com
Muramatsu, S., Ishida, T., & Kikuchi, H. (N.D.). A design method of invertible de-interlacer with sampling density preservation. ICASSP IEEE, 4. Retrieved Aug 30, 2007, from http://ieeexplore. ieee.org/xpl/freeabs_all.jsp?arnumber=1004611
White, I. (2005). Sixth sense. IBE: International business engineer, 20-21.
Additional readings
National Association of Software and Service Companies (NASSCOM). (n.d.). Retrieved May 1, 2007, from http://www.nasscom.in
Adiga, A. (2004). The next big draw for India. Time South Pacific, 27, 38-39.
The numbers: Box office data, movie stars, idle speculation. (n.d.). Retrieved June 18, 2007, from http://www.the-numbers.com
Anderson, N. (2006). An introduction to IPTV. The art of technology. Retrieved August 30, 2007, from http://arstechnica.com/guides/other/iptv.ars/2
Phillips, M. K. (2004). Backing Bollywood. Global Investor, 171, 8.
Bhushan, N., Sutherland, M., & Butler, S. (2007). Business is blooming. Billboard, 119(8), 29-33.
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Dorfman, R. (2006). Venture capitalists warm to Hollywood for wrong reason. Venture Capital Journal, 46(1), 47-48.
Kusek, D., & Leonhard, G. (2005). The future of music: Manifesto for the digital music revolution. Boston: Berklee Press.
Ebenkamp, B. (2007). Hollywood redirects licensing; Snoopy couture is coming. Brandweek, 48(26), 8.
Lonsdale, C., & Cox, A. (2000). The historical development of outsourcing: The latest fad? Industrial Management and Data Systems, 100, Retrieved December 11, 2006, from http://www. emeraldinsight.com/Insight/viewContentItem. do?contentType=Article&hdAction=lnkpdf&co ntentId=850009
Eskicioglu, A. M. (2003). Protecting intellectual property in digital multimedia networks. IEEE Computer Society. Retrieved May 8, 2007, from http://ieeexplore.ieee.org/iel5/2/27278/01212689. pdf?tp=&isnumber=&arnumber=1212689 Fisher, L. (2006). The big picture. Accountancy, 137(1354), 44-46. Gallaugher, J., & Stoller, G. (2004). Software outsourcing in Vietnam: A case study of a locally operating pioneer. The Electronic Journal of Information Systems in Developing Countries, 17. Retrieved August 31, 2007, from http://www. is.cityu.edu.hk/research/ejisdc/vol17/v17r1.pdf Grant, C. (2005). Outsourcing production and design will help to cut costs. Music Week, June 11, 22. Retrieved August 30, 2007, from http://ezproxy.library.arizona.edu/login?url=http://search. ebscohost.com/login.aspx?direct=true&db=bth& AN=17330939&site=ehost-live Hyman, P. (2005). Offshoring: The good & bad news. The Hollywood Reporter. Retrieved August 30, 2007, from http://www.hollywoodreporter. com/hr/search/article_display.jsp?vnu_content_id=1001178955 IndianTelevision.com. (2003). India can be entertainment-outsourcing hub. Retrieved August 30, 2007, from http://us.indiantelevision.com/headlines/y2k3/nov/nov188.htm Khanna, P. (2007). Made-in-Hollywood Bollywood films get off the mark. Retrieved August 30, 2007, from http://www.indiaenews.com/bollywood/20070819/66224.htm
Loos, J. (2005). Media and entertainment: New frontier for outsourcing. TVB Europe, 14(9), 52. On the Road Productions. (2007). Filming in India. Retrieved August 30, 2007, from http://www. otrproductions.com/?page=filminginindia Outsource2India. (2007). Outsourcing film services to India. Retrieved August 30, 2007, from http://www.outsource2india.com/creative-services/film/default.asp Palmer, I., Dunford, R., Rura-Polley, T., & Baker, E. (2001). Changing forms of organizing: Dualities in using remote collaboration technologies in film production. Journal of Organizational Change Management, 14. Retrieved August 20, 2007, from http://www.emeraldinsight.com/Insight/ ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Pdf/0230140205.pdf Pike, G. H. (2007). Google, YouTube, copyright, and privacy. Information Today, 24(4), 15-16. Pomerantz, D. (2006). The digital redemption. Forbes, 178(1), 146-148. Seshasai, S., & Gupta, A. (2007). The role of information resources in enabling the 24-Hour Knowledge Factory. Information Resources Management Journal, 20(4), 105-127. Subramanian, A. (2007). Indian animation coming of age. Business Today, 16(16), 20. Subramanian, A. (2007). IT’s in the picture. Business Today, 16(5), 64-66.
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Tabesh, A., Bilgin, A., Krishnan, K., & Marcellin, M. W. (2005). JPEG2000 and Motion JPEG2000 content analysis using codestream length information. Computer Science: Data Compression Conference IEEE. Retrieved Aug 31, 2007, from http:// ieeexplore.ieee.org/iel5/9633/30443/01402194. pdf?arnumber=1402194 Tan, C. (2007, June 21). India: That’s entertainment. Global Technology Forum. Retrieved August 30, 2007, from http://globaltechforum. eiu.com/index.asp?layout=rich_story&channeli d=4&categoryid=30&title=India%3A+That%92 s+entertainment&doc_id=10954 Thurston, R. (2006). BT awards $1 billion offshoring contract. Business Week Online. Retrieved August 30, 2007, from http://www.businessweek. com/globalbiz/content/dec2006/gb20061222_ 112508.htm?chan=search
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Chapter VIII
Outsourcing of Medical Surgery and the Evolution of Medical Telesurgery Shawna Sando University of Arizona, USA
Abstract With rising and often unreasonable costs in the U.S. healthcare system, Americans are becoming more inclined to seek cheaper alternatives. In some cases, Americans do not have to search for such alternatives on their own because their employers are offering them incentives to receive care from a foreign institution. Employees can go abroad to countries, such as India, in order to receive medical services for prices that are at least half of what the procedure would cost in the U.S. This emerging market seems to be beneficial to all involved except U.S. healthcare providers; however, this outsourcing of healthcare services sends a powerful international message. It seems that the U.S. has a healthcare system that cannot adequately serve all economic classes of the American public. In contrast, though India has the proper facilities and professionals, there are concerns regarding malpractice litigation, postoperative care, and possible negative effects on the Indian public. Having given consideration to all affected constituencies, it seems that the outsourcing of medical procedures is in the best interest of lower- and middle-class Americans as well as medical professionals in India. In reality, though medical tourism is receiving much attention, it will most likely not be a pressing concern for the American market in the near future. A widening discrepancy in the Indian public may, however, be cause for nearer concern. This new trend does foreshadow a push for more preventative changes in the business of U.S. healthcare, such as the development of information technology specific to the growing international healthcare market. Whereas, it will initially be beneficial to send patients abroad, with the evolution of technology, the latter ideal will instead be to have medical professionals abroad that care for patients located in the U.S.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Outsourcing of Medical Surgery and Evolution of Medical Telesurgery
Introduction The cost of healthcare in the United States seems to be approaching a level that is beyond the economic means of the general public. Even with insurance, expensive surgeries sometimes require thousands of dollars in out-of-pocket costs. Americans have found the cheaper alternative of seeking less expensive healthcare in a foreign country. This practice, which is often coupled with sightseeing and actual tourism, is appropriately referred to as medical tourism. Since there are plenty of advantages for both Americans and their foreign counterparts, medical tourism seems like the natural solution in the short run, and has the potential to become a rapidly growing market. However, when taking all constituencies into consideration, in the long run, this growing market could have some indirect, unfavorable side effects.
operations in New Delhi, India. The 60-year-old needed both his gall bladder removed and his rotator cuff mended, and was delighted at the opportunity to avoid paying $10,000 in deductibles and out-of-pocket fees (Milne-Tyte, 2006). The cost for Blue Ridge was so low in comparison to the charge that the company would have incurred from U.S. medical fees that they actually offered to return a portion of their savings to Garrett. In another case, Howard Stabb, a successful business owner, sought physicians in India rather than in the United States. Stabb had chosen not to have health insurance and found that he could save over $150,000 by receiving heart surgery out of the country. He brought a patient advocate with him, and both of them agreed that his decision to seek services abroad was best for both his personal well-being and for the financial stature of his company (U.S. Senate Hearing, 2006).
Encouragement of Foreign Procedures
The Preference Towards India
Perhaps the largest instigators in this recent trend are the employers. They could be playing a large role in the development of medical tourism simply by introducing the idea to their employees and, in some cases, even offering some economic incentive. In an effort to save on insurance fees, several companies have begun to promote foreign healthcare options. Blue Ridge Paper Products, based in Canton, North Carolina, is one such venturous company. Their healthcare claims were initially projected to be $36 million by 2006; however, due to these foreign alternatives, their actual claims in 2006 were closer to $24 million (U.S. Senate Hearing, 2006). These savings will be to the advantage of the company and its employees because they will be able to internalize more revenue as well as keep wages reasonable. Carl Garrett is a technician at a Blue Ridge paper mill who had plans to receive two medical
One might wonder, of all the third-world countries where one might be able to receive care, why would India be a good choice? Why would the global leader in importing foreign patients be half-way around the world? Though a possible reason could be coincidence, as in, Indians were the first to create such a market, there are more likely, tangible reasons for this phenomenon. For instance, there is less of a language barrier in India as opposed to some other possible foreign destinations. Most Indians begin learning English in school at a young age, so odds are that the healthcare professionals would be able to communicate with an American in English. Also, helping to make their foreign patients feel secure with the care that they will be receiving, many Indian physicians have been trained in the west (Rai, 2006). Much American hesitation to travel abroad for care comes from uncertainty about the quality of care and knowledge and experience of the foreign physicians.
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Thus, knowing that an Indian physician has an American medical education would make the possibility more appealing. Not only might the qualifications of the physicians testify to the care that they can provide, but the experiences of former patients can also be a strong point of persuasion. If individuals that are considering receiving care abroad know someone that can give a recommendation based on experience, they are much more likely to do it themselves. With the volume of medical tourism in India, half a million patients per year and growing, they have a large constituency that can vouch for the quality of care provided in the country (Hutchinson, 2005). Maggie Ann Grace, patient advocate for Howard Stabb, has stayed with patients both in India and the United States. She noted in a statement to the U.S. Senate that she, “would sooner leave her loved ones in the care of doctors and nurses in the Indian Hospital” (U.S. Senate, 2006). She attributed this opinion mostly to the fact that nurses in the U.S. are too busy and because of this, care is given based on the level of the patient’s severity and the nurse’s schedule. Cost is also to India’s advantage, not only in comparison to U.S. prices, but to other countries as well. In a 2005 comparison of estimated fees for a coronary artery bypass graft surgery, India’s more expensive hospital was still $15,000 less expensive than a Mexican hospital and $5,000 cheaper than Thailand (U.S. Senate, 2005). Thus, for reasons that range from financial to human interaction, India is a strong competitor in the international market for medical tourism.
The American Perspective American disdain for the healthcare system has the potentional of becoming a detriment to U.S. society. The situations of both Carl Garrett and Stabb seem to favor medical tourism. It is a favorable option for the patient and their employer, but are there possible adverse affects? On a larger
scale, considering all constituencies both directly and indirectly involved, there is a variation in those that benefit from this particular form of outsourcing. For the growing constituency that benefits from and is in favor of medical tourism, there is an opposing set of constituencies that will find this disadvantageous. From 2002 to 2005, there was an increase of 350,000 foreigners that traveled to India for care, this number is projected to increase by 30% each year (Hutchinson, 2005). If this pattern of receiving healthcare abroad does continue to progress, it does not present a sustainable future for the present state of our domestic healthcare system. Howard Stabb was operated on in India, stayed for a month, and returned with a positive impression of the care provided. His cardiologist in the States reported that he was healthy and that the operation had been successful (U.S. Senate, 2006). That was the best option for Stabb personally, but on a societal level, Stabb’s, advertisement for medical tourism may have a negative impact. Carl Garrett received his operations in the U.S. instead of in India as intended, due to strong opposition. Garrett is part of the United Steelworkers Union, who saw this growing trend toward medical tourism as an excuse to lower the quality of care and a denial of the right to safe healthcare. Stan Johnson, a speaker for the Union, stated that outsourcing healthcare would lead to corporate profiteering and that if we allow traveling abroad for treatment to remain a feasible option, it may one day become the only option (Milne-Tyte, 2006). Bruce Cunningham, president of the American Society of Plastic Surgeons, presented other concerns, while providing what would most likely be the shared opinion of many American physicians on this subject. He could understand the desire to receive healthcare at a lower cost, but warned of the potential to increase risks (U.S. Senate, 2005). Travel done shortly after having surgery can be risky. Also, many procedures require follow-up care; if an American provider will be administering postoperative care, they should be 159
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found and agree to provide care before the patient leaves the country. There was no evidence found that would justify American physicians having a fear of losing revenue. On the contrary, American physicians and hospitals may begin to feel some reprieve from a diminished patient load. This seems to be the optimistic view of UK physicians. In 2002, it was the National Health Service (NHS) of the UK that began to encourage citizens to seek care abroad in order to alleviate long wait lists (Maini, 2005). Also, patients that would not be eligible for a procedure under NHS would travel abroad to receive it. Thus, it seems that for the present time, such outsourcing is beneficial. For long-term concerns, there is comfort in the fact that for many procedures, proximity is essential. For instance, childbirth and emergency care are not services that could withstand the 20-hour flight. IndUSHealth, one of many companies that coordinate visits for medical tourists, caters to interested Americans by providing direct information and offering assistance with planning the trip and procedure. Their Web site will most likely convince Americans with limited financial resources that this is their best option for receiving medical care. The company assigns each patient a personal case manager that handles the details of their visit (IndUSHealth site, 2005). Their Web site is subjective; it sheds a positive light on all aspects of receiving care in India. Interested patients should investigate their own reasons for going and whether or not they find any ethical bias against it. Overall, the American perspective is torn. Not necessarily a question of quality vs. cost, there are several factors and variables to consider.
The Indian Perspective The healthcare system in India is complex. The healthcare facilities are divided first into two categories, government and private, and under each
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of those two categories are three main branches: tertiary, secondary, and primary (the lowest level of care) (Van Hollen, 2003). The government institutions are generally considered inferior to the private due mostly to overcrowding, less funding, and less expensive care. As one goes further from the city, the medical facilities become less technologically advanced, have minimal staff, and lowered sanitation standards. The divide between the private and public sector is growing. In fact, the spending on public healthcare is the sixth lowest in the world. On the other hand, India is among the top 20 nations for spending in the private sector (Nundy & Sengupta, 2005). This is due to spending on healthcare being a lower priority. To compensate, the government encourages growth in the private sector. The government uses subsidies and tax exemptions as some methods of encouraging the private sector. This increasing divide between public and private healthcare factors into not only the care provided, but also the providers of the care. Healthcare professionals prefer working in the private sector due to higher wages and a more pleasant working environment. It is this lack of interest in public sector employment that has propelled entrepreneurial endeavors such as venues for medical tourism, because the Indians involved in the development and implementation of these endeavors do benefit from them. Unfortunately, there does also seem to be negative repercussions for Indian patients both in the private and public sectors. It seems probable that their care and access to the best physicians might be compromised by the influx of foreigners with more elastic checkbooks. One large downfall of the private sector is that it is not regulated so there are no standards of quality or costs (Nundy & Sengupta, 2005). Thus, their success is measured by profit rather than the actual care being provided. Unfortunately, the private sector also tends to pull the focus away from the public health situation. Since India has plenty of internal health concerns such as widespread diseases and rural
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communities with minimal healthcare facilities, it seems that a greater focus should be put on the public sector. The problem is that the attraction to the private system is prevalent both to the care providers and patients. In such a profit driven situation, to make this shift from privately to publicly focused is challenging.
Comparative Data All Indian hospitals involved are approved by the WHO supported Joint Commission International. The mission of the Joint Commission International is to improve the safety and quality of care in the international community. Many contributing Indian hospitals are part of a private national chain; for instance, the Apollo Hospitals in Chennai and New Delhi and the Wockhardt Hospitals, one of which is in Mumbai. There is also a chain in Delhi, Fortis Healthcare. Just as the market for medical tourism has grown in India due to enticing profit margins, reciprocally, American consumers are similarly convinced by the savings. All of these options have a major financial advantage over U.S. providers. Americans also benefit from some insurance relief since some insurance companies that traditionally only covered emergency, out of country procedures have evolved to a coverage plan for non-emergency situations. BCBSAZ, Cigna, Humana, and Aetna are examples of providers that support the concept of receiving healthcare abroad (personal communication, March 3, 2007). Aetna
would only be willing to cover a non-emergency if it is proven to be medically necessary. Perhaps the growing popularity of coverage for procedures conducted abroad has a correlation to the rising insurance premiums. According to the Kaiser Family Foundation, insurance premiums have risen 87% in the last 6 years (Galles, 2007). In 2006, the average annual premium for coverage for a family of four was $11,500 (Fitzpatrick, 2004). That means that the premium was greater than the gross earnings for a full-time minimum wage worker. It would be economically impossible for them have insurance, which explains why 43 million people in the U.S. do not have health insurance (Hutchinson, 2005). This trend of forcibly keeping people from having insurance seems to be a force that is perpetuating the outsourcing of medical care.
The Malpractice Issue Speaker of the Union, Stan Johnson, expressed an additional concern that most would not consider, having already been strongly convinced by the savings that receiving care abroad affords. However, consumers should consider the possibility of a malpractice lawsuit and who, if any, would be the responsible party. In accordance with their agenda, IndUSHealth has a reasoned response to concerns about malpractice litigation. They claim that India has a similar court system to the U.S. and American patients have the right to file cases there. In reality, however, it seems that though American patients would have the right to
Table 8.1. (Chart: U.S. Senate, 2005) Procedure
U.S. Cost (appr)
Indian Cost
Airfare (appr)
Money Saved
Heart Bypass
$70,000
$6,000
$2,000
$62,000
Angioplasty
$41,000
$6,000
$2,000
$33,000
Hip Replacement
$37,000
$5,000
$2,000
$30,000
Spinal Fusion
$55,000
$8,000
$2,000
$47,000
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file a case in India, the proceedings of a lawsuit would differ from the American process. The major difference between the systems of the two countries is that in the U.S., such a case would be tried in a state court, while in India there are more specific consumer courts. The trend in U.S. courts is to present the patient as victimized and almost guilt the jury into awarding the patient a large sum of the rich doctor’s income. In India, on the other hand, there is a less-biased perspective. Awards are given based on damage; lawyers are not permitted to accept cases that may have facetious intentions. Culturally, doctors in India are so highly respected that most patients would not challenge the decision of their doctor, though there is a possibility that India’s system may be swaying toward the favor of the consumer. In 1992, the Kerala High Court proposed an extension to the Consumer Protection Act to include malpractice and negligence. Due to opposition from physicians, the proposal was reviewed by the supreme court but, to the favor of consumers, was upheld. It was not only upheld in Kerala, but courts were established in all states to handle the complaints of consumers (Studdert, Mello, & Brennan, 2004). However, there has not been much change toward the American mentality of a more persuasive litigation process. This is dually reflected in the contrasting price of malpractice insurance. According to the Pacific Research Institute, Indian doctors pay $4,000 per year for insurance while American doctors have been known to pay 25 times that amount (Brunell, 2007). Although this may seem to correlate with the view of foreign malpractice laws as being too relaxed, within both healthcare systems there is a problem of keeping record of errors and any resulting injuries. There is currently an emerging program in the U.S. to hold doctors and hospitals accountable for recording errors (Studdert, et al., 2004). No such program has been initiated in India, but perhaps that will change with an increased influx of foreign patients. A responsible system
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to track liability would, in turn, keep malpractice suits in both countries honest and less biased. Overall, even if an American patient were willing to chance a system that had no tendency to be in the consumers’ favor, considering the financial aspect of such a process may cause them to reconsider. Financially, there is the added cost of traveling back and forth, as well as lawyer’s fees. Also, if compensation is awarded, it would be a much smaller amount than one would expect in the U.S. (Milne-Tyte, 2006).
Technological Innovations Consider a more cooperative approach to crosscultural care, where liability is spread amongst providers in two separate countries; there are several technicalities that tend to hamper innovation in healthcare. However, new developments may also serve as solutions to greater struggles. It seems that advances in technology will correlate with the popularity of medical tourism. Telesurgery, a specific branch of telehealth, provides the opportunity for surgeons that are physically located in different locations to communicate through operative videoconferencing. One surgeon observes the procedure through a camera and then offers visual and auditory feedback to the surgeon at the operating site (Cheah, Lee, Lenzi, & Goh, 2000). Among the more developed teleradiology, telepathology, and teleoncology, telesurgery seems to be the branch of telecommunications that is directly applicable to medical tourism. International telesurgery proved to be successful in two laparoscopic cases between the United States and Singapore. More specifically, an experienced U.S. surgeon observed a less experienced surgeon perform both a radical nephrectomy and a varicocelectomy (Lee, Liew, Fabrizio, Li, Jarrett, & Kavoussi, 2000). This practice would be beneficial to the medical tourism market both by alleviating the distrust of foreign physicians, as well as keeping
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cost minimal by still undergoing the procedure in a foreign institution. A more recent 2003 study of procedures conducted between the United States and Brazil noted a feasible future for telesurgery. In two cases of telepresence surgery, a U.S. surgeon directed a robot attached to a laparascope in a bilateral variococelectomy, and the other robot was used for needle placement in a percutaneous nephrolithotomy (Rorigues, Mitre, Lima, & Fugita, 2003). However, there are barriers to implementing this technology, the language divide, for one. One would assume the physicians in this example corresponded in English, but it cannot always be assumed that that will be feasible. Additionally, the cost of higher bandwidth communication lines is still expensive, which makes it difficult for such technology to access foreign countries (Lee, & Png, 2000). The financial emphasis on healthcare is truly an overpowering barrier, which explains why the success of telehealth relies on the private sector. It seems that an established relationship with a university that is willing to do research and provide resources, as well as a partnership with several private healthcare organizations to incorporate, is key to establishing a successful telehealth program. Not only is a structural foundation necessary, but a substantial need for such an innovation is also required. The success of the UltraClinics telehealth solution to mammogram screening was due to the yearly demand of over 48 million mammograms and the one million additional that require biopsy (Weinstein, et al., 2007). As of now, though there are crowded emergency rooms and stymied appointment schedules in the U.S. and UK, the demand is not overpowering, thus, there has been no push for the combination of medical tourism and telesurgery. Beyond financial barriers it seems that in the future, when demand as well as technology has increased, this may be a strong asset to the growing medical tourism market. Telesurgey supplements both problems of communication and postoperative care. Comprehensive hospital information
systems, such as the system implemented at the U.S. Veterans’ Affairs institutions, have initiated electronic health records. With the correct considerations of patient privacy, the ability to transfer records with such technological ease will improve communication and understanding across country borders. Based on the UltraClinics example, increased use of technology can keep the patient more informed, accelerate their care, and allow more time for the physician to care pre- and postoperatively (Weinstein, et al., 2007). There are more benefits than detriments to the globalization of healthcare, but it will require a more cooperative attitude toward sharing advances in research, techniques, and technologies.
Conclusion Medical tourism will most likely continue to grow in popularity. Though it is negative propaganda for the arguably outrageous cost of healthcare in the U.S., it is helping to ease some strain on the American system. Essentially, American physicians are keeping most of the patients that can afford the procedure, losing middle-income patients that opt to save money abroad, but still have the burden of the low-income population that cannot afford the less-expensive option. This seems to prove that the medical environment in the U.S. is now driven by money rather than the desire to provide quality care to each patient. However, the money lost (see Table 8.1) to foreign markets seems to have little effect on the U.S. healthcare market. As long as there are overcrowded emergency rooms and the need to schedule doctor’s visits months in advance, like the UK, the U.S. will probably consider this new trend to be beneficial. The fact that the market in India has a 30% consumer increase yearly is significant, but not enough to severely damage the American market in the near future. If we do come to a breaking point where benefit becomes burden, the U.S. healthcare system would be forced
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to make some changes, such as the compromise of telesurgery, that would attract the middle-class constituency and minimize the outsourcing of medical services. No major preventative changes have been made as of yet, due mostly to one major barrier; policymakers and government officials cannot agree on the best way to control costs. Some possible solutions would be implementing price controls or strict budgets (Fitzpatrick, 2004), although it may be time to consider a system that provides healthcare to every American citizen. With millions of uninsured citizens, people will avoid seeking care until it is necessary. The U.S. still spends more on healthcare than any other industrialized nation. As with many shifts toward outsourcing, the need for change originated in the home country, which led to the need to seek out supplementation, not substitution, in foreign markets.
in the effort to heighten the quality of care that they can provide. Though this may reduce some of the competition in the market, it will increase the appeal to American consumers who are wary about the quality of care provided abroad. Telesurgery, an innovative technology that may prove to be a solution to several problems, has already been successful in a few operations. However, there will have to be a great deal more data collected to ensure the usefulness of this innovation. Additionally, the cost of such a procedure would have to be reduced before it would be willingly adopted into the market. Overall, since this market is still in its fledgling stages, there is little data from which concrete conclusions can be made, making further research essential to future progress.
References Future Research There is still much to be determined about the future of medical tourism and economic solutions to healthcare, domestically. Though price difference and the savings to be had abroad are well advertised, there are few documented patient experiences. It would be beneficial, both for prospective patients and providers, to have a well-rounded description of the medical tourism industry. Inclusive in such a description should be what drove each patient to seek care abroad, their experience throughout the process, whether they benefited overall from the savings and what recommendations they would give to prospective patients. Such documentation should also include reasoning behind choosing the country in which care was given, it seems that regional specificity may emerge along with this growing trend (i.e., for cardiac surgery one would seek care in Mexico, while facilities in India would specialize in dentistry). Realistically, it would be to the advantage of foreign providers to specify their fields of care,
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Brunell, D. (2007). Medical tourism creates global competition. The Columbian. Retrieved April 21, 2007, from http://www.columbian.com Cheah, W., Lee, B., Lenzi, J., & Goh, P. (2000). Telesurgical laproscopic cholecystectomy between two countries. Surgical Endoscopy, 14(11), 1085. Fitzpatrick, C. (2004). Facts on cost of health care. Retrieved March 11, 2007, from http://www.nchc. org/facts/cost.shtml Galles, J. (2007). Unsustainable health care premium increases. Greater Charlotte biz. Retrieved March 11, 2007, from http://www.greatercharlottebiz.com/article.asp/id=62 Hutchinson, B. (2005). Medical tourism growing worldwide. UDaily. Retrieved April 25, 2007, from http://www.udel.edu Indushealth Web site. (2005). Retrieved April 24, 2007 http://www. indushealth. com
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Lee, B., Png, D., Liew L., Fabrizio, M., Li, M., Jarrett, J., & Kavoussi, L. (2000). Laparoscopic telesurgery between the United States and Singapore. Annals Academy of Medicine Singapore, 29(5), 665-668. Maini, A. (2005). India: Untapped potential in the medical tourism market. Healthcare Management, Issue dtd. Janurary 15-31. Milne-Tyte, A. (2006). Medical tourism meets healthy opposition. American Public Media. Retrieved September 13, 2006, from http:// marketplace.publicradio.org/shows/2006/09/13/ PM200609137.htm Milstein, A., & Smith, M. (2006). America’s new refugees seeking affordable surgery offshore. The New England Journal of Medicine, 355, 1637-1640. Nundy, S., & Sengupta, A. (2005). The private health sector in India. BMJ Journal, 331, 11571158. Rai, S. (2006). Union disrupts plan to send ailing workers to India for cheaper medical care. The New York Times, October 11. Retrieved February 13, 2007, from http://www.boston.com/yourlife/ health/other/articles/2006/10/11/ Rodrigues Netto Jr., N., Mitre, A., Lima, S., & Fugita, O. (2003). Telementoring between Brazil and the United States: Initial experience. Journal of Endourol., 17(4), 217-20. Studdert, D., Mello, M., & Brennan,T. (2004). Medical malpractice. New England Journal of Medicine, 350, 283-92.
We Care Health Services. (N.D.). The comparative costs between India and other developed countries like U.S., UK, and Singapore approximate figures in U.S. dollars. Retrieved February 15, 2007, from http://content.nejm.org/cgi/content/ full/355/16/1637 Weinstein, R., López, A., Barker, G., Krupinski, E., Descour, M., Scott, K., et al. (2007). The innovative bundling of teleradiology, telepathology, and teleoncology services. IBM Systems Journal, 46(1), 69-84.
Additional readings Bradley, W. G., (2004). Offshore teleradiology. Journal of the American College of Radiology, 6, 244-248. Firth-Cozens, J., & Cording H. (2004). What matters more in patient care? Giving doctors shorter hours of work or a good night’s sleep? Quality and Safety in Healthcare, 13, 165-166. Fontanarosa, P. B., Rennie, D., & DeAngelis, G. D. (2004). Postmarketing surveillance: Lack of vigilance, lack of trust. Journal of the American Medical Association, 292, 2647-2650. Franken, E. A., Berbaum, K.S., Brandser, E.A., D’Alessandro, M.P., Schweiger, G.D., & Smith, W.L. (1997). Pediatric radiology at a rural hospital: Value of teleradiology and subspeciality consultation. American Journal of Roentgenology, 168, 1349-1352.
U.S. Senate Hearing. (2006). The globalization of health care. Retrieved March 12, 2007, from http://www.medicaltourisminsight.com/articles/0701-senate.htm
Graschew, G., Roelofs, T. A., Rakowsky, S., & Schlag, P. M. (2006). E-health and telemedicine: Digital medicine in the virtual hospital of the future. International Journal of Computer Assisted Radiology and Surgery, 1, 119-135.
Van Hollen, C. (2003). Birth on the threshold: Childbirth and modernity in South India. Los Angeles: University of California Press.
Halliday, B. E., Bhattacharyya, A. K., Graham, A. R., Davis, K. R., Leavitt, S. A., Nagle, R. B., et al. (1997). Diagnostic accuracy of an international
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static imaging telepathology consultation service. Human Pathology, 28(1), 17-21. Herzlinger, R. E. (2006). Why innovation in healthcare is so hard. Harvard Business Review 84, 5, 55-66. Kayser, K., Szymas, J., & Weinstein, R. S. (2005). Telepathology and telemedicine—Communication, electronic education and publication in e-health. Berlin: VSV Interdisciplinary Medical Publishing. Olszak, A. G., & Descour, M. R. (2005). Microscopy in multiples. IEEE oe magazine 5(5), 16-18. Weinstein, R. S., Bhattacharyya, A., Halliday, B. E., Yu, Y-P, Davis, J. R., Byers, J. M., et al. (1995). Pathology consultation services via the ArizonaInternational Telemedicine Network. Archives d’Anatomie et de Cytologie Pathologiques, 43, (4), 219-226. Wysocki, W. M., Komorowski, A. L., & Aapro, M. S. (2005). The new dimension of oncology: Teleoncology Ante Portas. Critical Reviews in Oncology/Hematology, 53(2), 95-100.
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Chapter IX
The Use of Outsourcing as a Business Strategy: A Case Study
Ram B. Misra Montclair State University, USA
Abstract In this chapter, we discuss how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both the short-term tactical goals as well as the long-term strategic goals. We present a framework consisting of seven factors that should be used by companies using outsourcing as a business strategy. This framework was used to analyze the outsourcing practices used by this company. The framework includes the driving forces for offshore outsourcing, the selection process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. We also present the challenges of making these things happen, what worked well, and the lessons learned.
Introduction Today’s global business environment has put companies ever so more under pressure to have competitive advantage over its competitors. The competitive advantage can be manifested in many ways such as reducing the cost, having a unique product, being able to meet changing marketing (customer) needs quickly, and achieving opera-
tional excellence. Operational excellence means doing more work with less resources. In this age of lean production (Just-in-time), companies are forced to become lean in keeping their internal resources, both capital as well as human resources. This has forced companies to look outside to get access (often temporary) to resources of other companies. They are looking for outsourcing arrangements, collaborations, and partnerships
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The Use of Outsourcing as a Business Strategy
with other companies. Outsourcing has become a common phenomenon in the IT world. With the power of high-speed telecommunications, it is now possible to access skills for almost everything, from answering the telephone to developing computer systems, at a fraction of the costs in the USA It should be mentioned that IT outsourcing has been practiced in the USA since the late-eighties. Some of the notable examples are Kodak’s outsourcing its IT functions to IBM and GM outsourcing its IT functions to EDS. This wave of outsourcing was driven more by the strategic goals (outsourcing the functions that were not part of core competency of the client company) and less by the operational goals such as cost savings. The current round (mostly over the last 5 years) of outsourcing has been both strategic and operational (tactical). Such is the case with Telcordia Technologies, a leading supplier of telecommunication network management systems in the USA. It has undergone through an upheaval in the last 4 to 5 years. It is into its fourth CEO and third vice president of software systems division. Simply put, it is fighting for survival. This chapter analyzes how Telcordia Technologies has used outsourcing as a business strategy and how its outsourcing strategy has evolved during this period. In doing so, we not only focus on strategic issues, but also operational issues that are essential to achieving success in outsourcing.
Background Information: Telcordia Technologies Telcordia Technologies is a leading global provider of telecommunications software and services for IP, wireline, wireless, and cable networks. The company delivers flexible, standards-based solutions that optimize complex network and business support systems, enabling customers to manage, transform, and grow their businesses. Telcordia is headquartered in Piscataway, N.J., with offices
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throughout the United States, Canada, Europe, Asia, Central and Latin America. On March 15, 2005, Providence Equity Partners and Warburg Pincus announced completion of their acquisition of Telcordia Technologies from Science Applications International Corporation. Formed out of Bell Labs, AT&T, and Western Electric as the central service organization (CSO) at the time of the Bell System Divestiture in 1984 to provide research and development support to the seven Regional Bell Operating Companies (“Bell Bells”), it was named the Bell Communications Research (Bellcore) in 1985. Bellcore, consisting of 3,000 employees, was owned by the RBOCs. In 1995, Bellcore’s revenue was $1B out of which $650M was from software sales and $350M was from professional services. Between 1984 and 1995, Bellcore established itself and was renowned for research and development that led to: ADSL, ATM, Frame Relay, SONET, AIN, ISDN, a generic open switch interface (a predecessor of the international V5 interface), and so forth. After the Telephone Reform Act of 1996, when the Baby Bells started competing with each other and the joint ownership of Bellcore was considered not viable, they sold it to SAIC in November 1996. From 1996 to 2000, Telcordia saw a tremendous growth; its revenue grew to close to $2B with over 8,500 employees. Since 2001, with the slowdown in the telecom industry due to overcapacity and competitive pressures from cable and voice-over-IP, Telcordia has been under tremendous pressure and has been fighting for survival. Telcordia’s Web site shows its annual revenues (in 2006) of $800 million USD with 2,900 employees worldwide. Telcordia Technologies has also sought to increase its presence in India. The original model of outsourcing development work to Wipro, an Indian outsourcing company, has evolved to opening its own branch (Telcordia Technologies India) in India. At this time, Telcordia is on record to be following the relational model (Dyer & Singh, 1998) for outsourcing. Its partners are Accenture,
The Use of Outsourcing as a Business Strategy
Wipro, and Nokia. Telcordia has partnered with Wipro, an Indian IT company, since 2003 for its software development offshore contracts. The partnership with Nokia and Telcordia is designed to help mobile operators support 2G, 2.5G, and 3G mobile services via Telcordia software systems.
Previous Related Research A search in the scholarly journals (ABI/INFORM database) on ‘Outsourcing as a Business Strategy” yielded 29 PhD thesis references, but no publications in scholarly journals. A secondary search on business strategy and competitive advantages yielded tons of scholarly papers. However, we are going to focus on only a few scholarly works that are directly relevant to the current discussion. Davidow and Malone (1992) reported a twodimensional matrix comparing a company’s internal capabilities to perform various activities (in relation to its competitors) with their potential competitive value. This matrix was the result of a joint work by a team of academics, corporate executives, and consultants in the context of studying the functioning of a virtual corporation. The team was chartered to recommend steps to be taken by a corporation when deciding whether to develop internally or use outside resources. Insinga and Werle (2000) have refined this methodology and attempted to link it to management theories, thus, making it theoretically sounder. They argue that their methodology is grounded in two management theories, resource driven and relational driven. The resource driven view (Barney, 1991) maintains that a company’s survival depends on achieving competitive advantage by having resources that cannot be imitated. The relational view (Dyer & Singh, 1998) argues that a company can achieve competitive advantage by getting access to outside resources by establishing good relationship with other firms that have those resources. The recognition here is of the fact that the sources of achieving competitive advantage
may lie (and often they do) outside a company. In this age of global economy, the challenge for a corporation is how to balance these two views. Another outsourcing phenomenon that has been observed for some industries (McClellan, Marcolin, & Beamish, 1995) is the outsourcing of functions considered to be core for the industry. This was observed for the banking industry. This is contrary to the current outsourcing theories. One explanation is that banks are displaying imitation behavior, the so-called theory of imitation behavior, we must do what our competitors are doing to stay competitive. Various aspects of outsourcing and related issues have been discussed in the leading trade (IT) magazines (Information Week, MIS, etc.), financial sections of leading newspapers (Financial Times, WSJ, NYT, etc.) and IT journals (Optimize, for example). Aron (2003) discusses the importance of right light on sourcing; Goolsby (2003) makes the case for outsourcing to keep business strategy on track; Funk, Sloan, and Zaret (April) warn the users of outsourcing about its dangers; Moran (2003) discusses the promise of savings on distant horizons; Raynor and Littmann (2003) suggest not to outsource core values; and Skapinker (2003) presents a skeptical view of outsourcing, and suggests questioning of the benefits of outsourcing. The framework used in this chapter for analyzing Telcordia’s outsourcing activities is a comprehensive view of the factors discussed by these authors.
Main Thrust of the Chapter The first and foremost is the framework (model) that was used to collect the data and perform the analysis.
The Framework The framework used in this chapter to analyze the use of outsourcing by Telcordia Technologies
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consists of examining (1) the driving forces for outsourcing, tactical vs. strategic, (2) the process used to decide what to outsource, (3) selection of the operational model, interworkings of the in-house staff and outsourced-staff, (4) the process to select vendors, (5) the quality of contract negotiations, thoroughness, risk analysis, and contingency planning, (6) quality of execution and program management, team formation, transition, knowledge transfer, work and relationship management, (7) and the quality of results, service level agreements (SLAs) conformance, customer satisfaction, and so forth. 1. Driving forces: Strategic and/or tactical. There are two types of driving forces that motivate a company to outsource, strategic and operational (tactical). Strategic goals include ability to react to market conditions quickly, ability to bring a product (a Telephony Operations Support System in Telcordia Technologies’ case) in a short interval, ability to compete for new business (IP telephony for example). Operational goals include reduction of costs, increased margins, and control of products while ensuring the quality of work. Often companies who are fighting for survival must focus, in a short term, on operational goals such as lower costs, as well as be strategic. Telcordia Technologies is doing both. 2. Process of deciding what to outsource. Fundamentally, a company ought to outsource what it cannot do well or can get it done cheaper or what will bring new, more profitable business in-house. The first has to do with the lack of core-competency; the second has to do with the inefficiency of in-house operations; and, the third is a byproduct of partnering with the outsourcing vendor. Closely related to this is to determine what work not to outsource. One should almost never outsource processes or functions that involve interactions with customers. If
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3.
you give the impression that customer issues are not important enough to warrant your attention, customer will sooner or later find someone who does. This is contrary to current practices of outsourcing call centers or product support functions. If one must (for cost savings), companies ought to have an overseas captive center that is an extension of the company as opposed to an outsourced center. Also, you should not outsource your core competencies. If you do, your core competencies would start eroding and eventually make you less competitive. One ought to examine all the functions of a system development life cycle (SDLC) from two angles, the potential relative (to in-house) value created if outsourced and the relative higher risk that outsourcing brings to the table. The functions that yield most value and present least risk are the candidates for outsourcing. Typically, in the software industry, software coding and testing functions fall in this category. Selection of the operational model. This is one of the most neglected parts of planning for outsourcing, often relegated to the time when for all practical purposes, decision to outsource to a particular company has been made. Current practices can be grouped into three models, autonomous operations, partial autonomous and staff extension model. In the first model, the vendor is doing all or majority of the phases of a project, and there is very little interference from the client company (that outsourced the project). The pros of this model include reduced need for local (in-house) staff and shifting of the risk for project overruns to the vendors. The cons are loss of control and loss of knowhow. In general, this model is suitable for non-strategic final stages of the life-cycle projects. In the second model, some project phases are outsourced while others are being done in-house. This model requires a
The Use of Outsourcing as a Business Strategy
Figure 9.1. Risk, value, and degree of outsourcing Risk of Failure due to outsourcing
High
Value that Outsourcing creates
Risk or Value
Low Low
High Degree of Outsourcing
Figure 9.2. Staffing operational model
High Staff Extension Model: Suitable for Strategic Projects
Strategic Value
Low
Semi-autonomous Model: Suitable for well defined projects
Autonomous Model: Suitable for routine jobs
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4.
5.
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great deal of cooperation between the two staff as well as a high quality of knowledge transfer. Proper documentation and training are a must for the success of this model. The pros and cons of this model are similar to the first model on a varying scale. This model is suitable for well-defined projects whose components have well-defined interfaces. In the last model, vendor staff works as an extension of in-house staff. This poses its own challenges in terms of accountability and manageability of work. The pros of this model are that it keeps the knowledge base at home. It is easier to adapt to rapidly changing requirements and it is less threatening to the local staff. This model is more suitable for strategic projects. Process to select outsourcing vendor(s). Simply stated, the vendor must have a track record of demonstrating core competency in the functions you want to outsource. It must have a stable, skilled work force. It must be economically viable, its survival cannot depend on just one or two projects. It must understand the business and customer issues (even though it may not be directly involved with your customer). It must understand the client company’s culture. Its employees must demonstrate the sensitivity to local staff’s feelings (which can be often hostile, as some of them might be losing their jobs. The vendor must be from a region that is politically stable, has an ample supply of highly trained workers. It is a good practice to issue an RFI (Request for Information) that seeks this kind of information about a potential vendor. Caution here is not just for the lowest cost vendor, but to look at the total picture with a special eye for identifying the risk (of not getting things done, of company going into bankruptcy, of company not being able to hold on to its skilled staff, etc.) Quality of contract negotiation. Literature is abundant on this topic. In addition to a
well-defined statement of work (SOW) that should include the normal governance (management) process, one must put contingency (handling of the unexpected) clauses and risk mitigation clauses. The contingency clauses ought to include an immediate upper management (from both companies) review, right to obtain outside expert assistance, and step-in rights that include potential termination of outsourced work and taking over by the in-house staff. It is a good idea to talk about termination rights in the beginning while both parties are in a spirit of cooperation. If work needs to be terminated before completion, for whatever reasons, the client company must ensure that the works gets completed without putting the company in a financial jeopardy. Under risk mitigation, the contract must address no compete clause, intellectual property protection, data integrity, security, and employee turnover issues. 6. Quality of execution and program management. All wonderful planning and contract negotiations go to waste if they are not executed properly by both parties. Key requirements for successful execution are putting a top-notch management team on both sides (program/project managers, technical managers, and technical leads), selecting the people with the right skills, transition activities that kick-off the outsourced work, insuring that knowledge transfer is taking place, and finally, making sure that things are happening, or finding out quickly when they are not (happening). A common mistake companies make that team members are selected based on their organizations rather than their skills. The overall program manager has to be from the client company. He or she must have visibility in the outsourcing company so that the right people are selected in the teams. Also, the team members must be trained in
The Use of Outsourcing as a Business Strategy
cultural sensitivities, more so to be able to communicate effectively. 7. Quality of results. The challenge here is how to see quality (or the lack of it) from a distance. As part of quality planning (quality by design), the program manager must insure that the outsourced company follows quality processes such as those based on ISO9001 or CMM5. Do not just depend on the fact that the company has these certifications. Ask for a quick audit. Also, define service level agreements (SLAs) for each stage of the project (initiation, interim, and final), defect density, response time, and defect fix time thresholds. Monitor the intermediate milestones and above all, have periodic operational reviews.
Data Collection The data was collected mainly through informal unstructured and semistructured interviews. Interview participants were two technical mangers and one business manager. One manager made his material available to us that he used during outsourcing. The second technical manager was the author of this case. The interview with the business manager was oral, but an e-mail exchange was made on the summary. The time period covered in this case is from 1998 to 2003.
Data Analysis Approaches as outlined by Creswell (1988) and Yin (1994) were used in conducting this qualitative study in which data analysis was integrated with data collection. The analysis focused on classifying data (information about outsourcing) into appropriate framework dimensions and relating the findings to existing strategy literature. This process of data collection and analysis allowed us to organize new insights into the practice of outsourcing.
Data Collection and Analysis Time period 1998-2000. At the peak of dotcom frenzy and unparalleled projected high growth of broadband services, Telcordia Technologies faced, like many other software companies, the shortage of high quality domestic software developers. Its customers, the network and service providers, were planning to deploy newer network elements and the new generation network management systems. There was a general shortage of people and the expertise needed. The Y2K projects had sucked all the development (programming) resources not only within the company, but also within the U.S. software industry. Telcordia Technologies managers were encouraged to think out of the box to find solutions. Cost savings was not the issue, but meeting the customer needs was. A Telcordia Technologies manager, a RussianAmerican, paid a visit to his homeland to explore offshore outsourcing. He signed a contract with a small Russian company to develop the software. This was the first time Telcordia Technologies had outsourced any work. The company did not have any outsourcing strategy. It was just a local effort. The main criteria used in selecting this Russian company were the technical expertise and the infrastructure (secure and reliable high speed lines used for downloading the software from Russia). No other criteria mentioned in the framework in the previous section were used. According to the outsourcing contract, the Russian company was going to develop software based on the requirements provided by Telcordia Technologies. The Russian company will test the software to ensure that there are no bugs and that it meets the requirements. Integration testing will be done at Telcordia Technologies by its staff. Any quality issues discovered during the integration phase related to the Russian company developed software will be fixed by them within the time specified in the contract. The management structure for managing and controlling the outsourced work consisted of one manager from
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each company communicating with each other on as needed basis. This was a learning experience for the company. The language issue became paramount. Engineers of the two sides could not communicate with each other. Russian engineers, though superb in programming, could not hold conversation in English. Miscommunication could result into misinterpretation of the requirements and that could affect the quality of the software. Soon, some cultural issues were identified. These programmers were taking “artistic liberty” in interpreting the written requirements supplied by Telcordia Technologies. If a programmer thought of a “cuter” way (a better way in their opinion) of showing some information on a screen or on a report they would do so, and in doing so, they would ignore the requirements. They did not treat the requirement document as a baselined frozen document that cannot be changed without going through the change control procedure that was in place (and was part of the contract.) The management structure had to be changed. It was decided that a lead Russian engineer who knows English (write, read, and speak) be located at the premises of Telcordia Technologies. This person would report to the Telcordia Technologies development manager. This change fixed some of the issues, but increased the cost of the project. Also, the turnover in the Russian company was becoming a problem. People once trained were finding more lucrative jobs elsewhere in other Russian companies. Time period 2001-2003. The dotcom balloon has busted. The Telecom industry is in big trouble; barely breathing. The Client Companies of Telcordia Technologies have cut down the spending. Cost savings is a big issue. Telcordia Technologies’ cost structure is on the high end of the industry. The company must reduce its cost to be competitive to get new business. It has just hired a new vice president of Software Systems Division who is big on outsourcing. The company is beginning to develop a company-wide outsourcing strategy.
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A senior manager has been appointed to look at outsourcing, possibly to some Indian companies. An analysis has been done to determine what to outsource. A contract is signed with a leading Indian IT outsourcing company to perform some limited functions for a legacy network management system. Telcordia Technologies client companies, its main revenue base, are not very happy to learn that Telcordia Technologies might outsource some of their work. There are two concerns, the quality of products, and quality of support. Also, if Telcordia Technologies is going to get work done cheaper overseas, they (the Client Companies) should not have to pay Telcordia Technologies at the old rates. They are now demanding Telcordia Technologies to reduce the maintenance cost of the legacy (network management) systems widely deployed in their networks. The turmoil within Telcordia Technologies is still going on. Downsizing is continuing. The work that was outsourced to the Indian company is not going well. Telcordia Technologies is now reexamining its outsourcing strategy. There is a new senior manager, an IndianAmerican, in charge of this task. The previous manager has left the company. In a post analysis, it was discovered that there were gaps in communications here too, but they were of different nature. This had to do with the culture than the language. “Politeness” of Indian staff was often (mis)understood by their American counterparts in Telcordia Technologies as consent. However, Telcordia Technologies faced two problems that were more significant. One was technical and the other was political. From its own value analysis and the pressure to reduce the maintenance costs (of mostly legacy systems that were written in the languages of the eighties that were not obsolete), Telcordia Technologies wanted to outsource the legacy system maintenance work. But, that expertise was nowhere to be found in the fresh computer science graduates either in the USA or in India. Training became a big issue and it took longer to
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train. The second problem was political. Its client companies wanted to pay less for maintenance, which means lower profitability, something that was not acceptable to its parent company. In the absence of new business, Telcordia Technologies had only one choice, to downsize at a faster rate, even to the point of losing the legacy expertise that was needed to train the Indian company staff. To make the matter worse, the company was very tight-lipped about the specifics of what work would be outsourced, and so forth. Even though the Indian company was given the outsourcing work, there were no announcements about this. Morale of people was low. Even though back in 1998, Telcordia Technologies outsourced development (coding) of a new system to a Russian company more for strategic reasons, its later outsourcing was driven by cost reduction, which, in a way is also strategic because
Telcordia Technologies must reduce its costs to continue doing business with its client companies. Telcordia Technologies has decided to outsource to an Indian company the majority of testing and development functions for a legacy system, while keeping the functions of program/project management, systems engineering, installation, deployment, and customer service center. In doing so, Telcordia Technologies has learnt from its previous outsourcing experiences, and is prepared to put the right kind of program management team, along with the Service Level Agreements that will insure the success of the outsourcing effort and above all, to meet the needs of its customers. Telcordia Technologies hopes to convert this partnership with the Indian company into a strategic alliance that will result into the growth of Telcordia Technologies’ business in the future.
Table 9.1. Analysis of Telcordia’s outsourcing practice against the framework Framework Dimension
Period 1998-2000
Period 2001-2003
Driving Force: Strategic and/or Tactical
Strategic: looking for the technical competencies outside (in-house resources not available) to shorten the time to introduce a new product in the market
Tactical: looking to outsource the work to reduce the cost; it can be called a strategic move also as the company is fighting for its survival.
Process Used to decide what to outsource
Value-based process; All SDLC phases outsourced except for requirements formulation and integration testing.
Process used to identify higher savings and lower work: mainly maintenance and testing functions outsourced:
Selection of Operational Model
The Staff Extension Model
The Semi to Fully Autonomous Model
Process Used to Select Outsourcing Vendors
Combination of Competency Needed and The Personal Contact: The technical manager was Russian who knew this Russian Company.
Strategic Long-Term Relationship; SAIC, the owner of Telcordia, had signed a partnership relationship with an Indian Company.
Quality of Contract Negotiations
Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW). However, since the company was a small company, not enough contingency safeguards were put in the contract.
Telcordia has a long history of doing a quality job of negotiating a contract. It lists what is included and what is not included in the Statement of Work (SOW).
Quality of Execution and Program Management
Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.
Cultural Issues A lot of emphasis on Metrics MORE ON THIS IN THE NEXT SECTION.
Quality of Results
Some surprises; developer’s creativity, “ We thought this would be nice.”
Quality issues were raised by the customers.
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Management of Outsourced Work by Telcordia Technologies It should be pointed out that Telcordia Technologies was originally formed to provide professional services and develop application software systems (operations support systems) to a group of telephone network/service providers (the client companies). Telcordia Technologies was also owned by these Client Companies. Telcordia Technologies was like an outsourced development center (ODC) for these client companies. Not surprisingly, many of the issues encountered in outsourcing are similar to those faced by Telcordia Technologies and the client companies in their interworkings. Telcordia Technologies has used various metrics to manage its outsourced work. As part of using outsourcing to achieve its business goals, Telcordia Technologies outsources only selective pieces. This is very similar to what Lacity and Willcocks (1998) identified in their work as the first best practice, that is, selective outsourcing decisions had higher success rates than total outsourcing or total insourcing decisions. As part of service contracts with Telcordia Technologies for the maintenance of the software systems, client companies have defined service level agreements (SLAs) for Telcordia Technolo-
gies to meet. As part of these SLAs, Telcordia Technologies is required to have a customer service center open 24 hours a day and 7 days a week. The reason for this SLA is the mission critical operations support systems (service assurance systems) that run around the clock. The customer service center has a 24-hour hot line where a live person must answer the phone call from the RBOC personnel who are managing these systems in the field (spread all over the USA). The client companies can either call Telcordia Technologies or enter the trouble report directly into the trouble record system (a software system dedicated just to this function). Other SLAs that have been defined are related to the turnaround time taken to resolve a customer trouble report (TR). Depending on the nature of the trouble (crash causing, service affecting, or just a nuisance), the turnaround time varies. In order to execute these SLAs, there is a process in place to classify the trouble reports into severity 1 (most serious), severity 2 (next most serious), and severity 3 (least serious but needed to be done). The specific criteria for each of these severities have been defined and agreed upon with the client companies. The first SLA regarding the trouble reports that Telcordia Technologies has to meet is the response time (the time taken to acknowledge the submitted trouble report). The range for this
Table 2. Examples of metrics for a software development project Phases
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Metrics
Planning
The proposal win rate, Over-price margin
Requirements Formulation
The number of changed milestones, the number of change controls, and the number of defects in the requirements.
Design
The number of issues in design reviews
Development
Unit testing results (# test executed), Multi-unit testing (# test executed)
System (Product) Testing
# test executed and passed, # test passed first time, Defect tracking charts (graphs), Defects being fixed, defect fixed, defects in test
Deployment, and Maintenance
Cutover time, surprises, # severity 1, #severity 2
Overall Performance/Productivity
The number of new lines of code The number of changed lines of code
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SLA is from the average of 15 minutes (for Severity 1 TR) to 3 hours (for Severity 2 TR). Another SLA is for problem identification. The average time for identifying the problem (root cause) is 12 hours. Another SLA has to do with the system restoration time. If a system is down, it has to be bought back in operation within 24 hours. If a problem requires a software release, that must be done within 15 days. These are just a few examples of many SLAs that Telcordia Technologies has to meet for client companies. The other types of metrics (Table 9.2) that Telcordia Technologies uses have to do with the quality of the software that either it develops inhouse or outsources. There is a direct impact of these metrics on the trouble reports in the field. Telcordia Technologies is an ISO 9001 and CMM5 company. It has some very rigorous quality metrics and process checks in place throughout the software development life cycle phases: planning, requirements formulation, design, development, product testing, deployment, and maintenance. Telcordia Technologies requires the outsourcing companies to meet the same metrics and SLAs that it meets for its clients. Its SLAs and metrics are keyed to its business goals. Recently, when the Client Companies wanted Telcordia Technologies to lower the maintenance cost, Telcordia Technologies negotiated a new set of SLAs that were relaxed compared to the old ones and can be achieved at lower costs. Thus the SLAs can be important to remain competitive.
Conclusion This chapter discussed how a leading telecommunications software development company went about outsourcing some phases of the system development life cycle (SDLC) of network management systems in order to achieve both short-term tactical goals as well as the long-term strategic goals. Next, we discussed the driving forces for offshore outsourcing, the selection
process of outsourcing vendors and the infrastructure (communication links, hardware, software, and organizational structure) that was needed to insure that the outsourced work meets company’s internal quality requirements, which are derived from CMM5 and ISO9001 certifications. Finally, the chapter presented the challenges of making these things happen, what worked well, and the lessons learned.
Future Research Directions For the future directions of this research, we will watch if Telcordia Technologies stays with their current outsourcing strategy. It just (January 2007) got yet another CEO, and the vice president in-charge of outsourcing (and setting up a branch in India) is gone. If Telcordia Technologies stays with its current strategy, discussed in this chapter, and implements it, we will keep track of its success and whether indeed it helps the company become competitive, and hence, survive and grow. As fellow researchers look at other companies that faced similar opportunities and challenges, we will gain the ability to make in-depth cross comparisons.
References Aron, R. (2003). Sourcing in the right light. Optimize, June. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Jounal of Management, 39, 32-36. Creswell, J. W. (1998). Qualitative inquiry and research design: Choosing among five traditions. London: Sage Publications. Davidow, W. H., & Malone, M. S. (1992). The virtual corporation. New York: Harper Business.
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Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23, 660-679. Funk, J., Sloan, D., & Zaret, S. (2003). Beware the dangers of outsourcing, Optimize, April. Gardner, W. D. (2003). Outsourcing’s benefits too much to ignore. TechWeb News, October 31, 2003. Goolsby, K. (2003). Outsourcing bears the freight of keeping business strategies on track. Outsourcing Journal, June. Insinga, R. C., & Werle, M. J. (2000). Linking outsourcing to business strategy. Academy of Management Executive. Lacity, M. C., & Willcocks, L. P. (1998). An emperical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3). McClellan, K., Marcolin, B. L., & Beamish, P. W. (1995). Financial and strategic motivations behind outsourcing. Journal of Information Technology, 10, 299-321. Moran, N. (2003). Looking for savings on distant horizons. Global Outsourcing Overview, FT. Special Report on Outsourcing, July 2. Raynor, M. E., & Littmann, D. (2003). Outsource IT, not core value. Optimize, February. Skapinker, M. (2003). Much to question on outsourcing. FT Special Report on Management, June 30, 2003. Yin, R. K. (1994). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.
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Additional readings The reader is advised to the following references for further information related to the success of outsourcing engagements: Goth, G. (1999). The ins and outs of IT outsourcing. IT Professional (IEEE), 1, 11-14. Heeks, R., Krishna, S., Nicholson, B., & Sahay S. (2001). Synching or sinking: Global software outsourcing relationships. IEEE Software, 18(2). Karabulut, Y., Kerschbaum, F., Massacci, F., Robinson, P., & Yautsiukhin, A. (2007). Security and trust in IT business outsourcing: A manifesto. Electronic Notes in Theoretical Computer Science (ENTCS), 179, 47-58. Lindskog, H. (2005). SOTIP as a model for outsourcing of telecom services for the public sector. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences, 3(6), 261-261. Verhoef, C. (2005). Quantitative aspects of outsourcing deals. Science of Computer Programming, 56(3), 275-313. Wentges, P., Brandes, H., Lilliecreutz, J., & Brege, S. (1997), Outsourcing—Success or failure? Findings from five case studies. European Journal of Purchasing and Supply, 3(2), 63-75.
Section IV
National and Societal Implcations
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Chapter X
Changing IT Skills:
The Impact of Sourcing Strategies on In-House Capability Requirements Christine V. Bullen Stevens Institute of Technology, USA Thomas Abraham Kean University, USA Kevin Gallagher Northern Kentucky University, USA Kate M. Kaiser Marquette University, USA Judith Simon University of Memphis, USA
Abstract The increasingly global sourcing of IT work and other socio-economic trends are prompting fundamental changes in the availability of IT skills needed in both client and vendor organizations. This chapter analyzes the results of a survey conducted in 2005, in which IT executives were asked to describe the skills they felt were critical to keep in house now and in 2008. The top ten current skills included three in project management, five in business domain and three in technical. In 2008, the top five emerging skills are almost all business domain while the top five exiting skills are all technical. Our findings indicate that the critical skills to keep in-house are primarily client-facing skills, even when they are technical. Findings indicate that IT professionals need to have a balance that demonstrates a foundation in the traditional “hard skills” and experience with “softer” business-oriented skills.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Changing IT Skills
Introduction The increasingly global sourcing of IT work, the shift from exclusively IT services to business process services, pending baby-boomer retirements, and a period of declining IT enrollments in universities are prompting fundamental changes in the availability of IT skills and capabilities needed in both client and service provider organizations. The impact of these changes affects employers and employees:
•
Client facing: “Client” in this phrase is the client of the IT organization, which is usually an internal department or business area within the organization. “Client facing” is an activity that requires intensive interaction with the business client, requiring a common business language and sharing a common business knowledge base with the business users.
Literature Review •
•
•
How can organizations respond to these changes through hiring their workforce or retraining employees? How can students learn the needed skills to become marketable for a changing workforce? How can mid-level workers insure their marketability?
In order to answer these questions, we will review literature pertaining to information technology skills and capabilities both from an academic and practitioner perspective. Then we will describe the research methods used to understand the changing workforce. The results follow with a discussion of implications for individuals, academics, and future research.
Terminology Here are some working definitions for terms that we use frequently: •
•
Skill: Proficiency that is acquired or developed through training or experience (e.g., Java or Visual Basic programming). For simplicity, we sometimes use the term “skill” to cover both skill and capability. Capability: The ability to acquire and apply skills in different settings. For instance, a programming capability is the ability to learn and apply many programming languages in many settings.
The very significance of IT to an organization has been questioned. Carr (2003) argued that as information technology becomes more pervasive it will become more of a commodity and that investing in IT for differentiation or for competitive advantage is futile. This argument would appear to call for greater outsourcing of the IT function and a greatly reduced need for in-house IT skills and capabilities. More recently, Gottfredson, Puryear, and Phillips (2005) suggest that sourcing is itself becoming a strategic opportunity and that even strategic functions like engineering, R&D, manufacturing, and marketing can be moved outside. In a report published by the Cutter Consortium, Rottman and Lacity describe the positive effect that sourcing has had in the U.S. on IT jobs, IT productivity, IT costs, and IT quality (Rottman & Lacity, 2004). UBS, in a report for their investors, predicts a labor drought in the U.S. that will require some jobs to move offshore (Ryan, Farrell, & Doerflinger, 2005). Tapscott (2004), in a rebuttal of Carr, responded that companies with bad business models tend to fail, regardless of whether they use IT or not. In a recent Deloitte Consulting report, the authors conclude that outsourcing is complex and that results have been mixed (Deloitte, 2005). Their evidence suggests that most (70%) of the participants in the study had significant negative experiences with outsourcing and will be more selective in using it. A McKinsey report (Farrell,
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Laboisiere, & Rosenfeld, 2005) finds that a single global labor market exists but that it is small. Offshoring accounts now for only about 1% of the service jobs in developed countries. Even though the report projects that this proportion will gradually increase as the global market becomes more efficient, it does not forecast a sudden discontinuity in employment for developed countries. The report cites a U.S. Bureau of Labor statistic that the growth rates for wages and jobs in computer and data-processing services are higher than those in the economy as a whole. The extent to which organizations subscribe to one or another viewpoint on the importance of IT and sourcing to a business strategy will affect the changes in the IT skill set. A literature review looking at IT workforce, skills, employment, and outsourcing uncovers many articles that were written, which focus on the movement of “non-core” IT skills out of the corporate organization and into the realm of third party providers (3PPs), both foreign and domestic (Slaughter & Ang 1996). In addition, Ang and Slaughter (2001) have applied social exchange theory to the study of workplace attitudes and behaviors of contract and permanent professionals. They discussed the Internal Labor Market theory where they propose two approaches an organization can take to develop career paths: Industrial and Craft. Under the industrial strategy, employees enter the organization and progress along clearly marked job ladders. They are selected based on high education requirements, they receive training in skills and knowledge specific to the organization, and they advance due to merit and personality. Under the craft strategy, employees often are viewed as having more loyalty to the profession than to the organization and that their skills are less organization specific and more mobile. Their work suggests that contractors are typically given tasks with low task identity and low autonomy, often coding narrowly specified programs. Contractors have little business and industry knowledge. Understanding the quality
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of the skills at 3PPs may be a key to understanding the workforce decisions that client companies will make. An assessment of workforce globalization found that businesses want to retain certain kinds of IT services and software work in the United States (Anonymous, 2004). The report states that the characteristics of such IT work includes products or processes in which there is uncertainty about customer needs or specifications, projects requiring highly iterative development processes, work that involves a high degree of personal interaction with end-users or clients, work that crosses many disciplines, applications with complex procedures, applications that involve a high degree of integration with other systems developed and maintained onshore, work involving nuances or deep cultural understanding, work in which much of the knowledge exists only in the minds of the onshore IT staff, analytical tasks, leading-edge research, non-rule-based decision-making, high levels of creativity, high management interaction requirements, process design, business analysis, technology and systems integration, and fusion of industry knowledge, high level IT skills, and business process expertise. A key aspect of our research is to better understand the skills that organizations deem critical to maintain in-house as opposed to those that can be sourced to 3PPs. Several articles have applied theories from diverse fields to study IT skills and the approach to outsourcing. Gomes and Joglekar (2005) have applied the theory of transaction cost economics to explore the nature of software development tasks that remain in-house. Their analyses show that process asset specificity indicated by task interdependence and task size predicts outsourcing the task. Ang and Slaughter (2004) apply internal labor market strategies to classify the human resource rules used to govern IT workers—Chief Information Officer (CIO), Applications Manager (AM), Project Leader/Analyst (PLA), Programmer (PGM), Infrastructure Manager (IM), Database Administrator (DBA), Network Specialist (NWS),
Changing IT Skills
and Systems Programmer (SP). They found that the more managerial jobs—CIO, AM, and IM—are usually governed by the industrial strategy, leading to lower turnover and higher tenure. The other, more technical, jobs were governed by the craft strategy, leading to higher turnover and shorter tenure. There are factors affecting the individual career decision, which must also be considered in trying to understand the trajectory of workforce skill trends.
IT Skills and Capabilities Reviewing the literature on the skills and capabilities themselves reveals a number of interesting research projects that are related to ours. In a very recent paper, Prabhakar, Litecky, and Arnett (2005) reviewed the current IT job market and conclude that the need for development work in Web-related applications has changed the demand for these programming skills. They report that these skills are mentioned in 42.6% of job ads. Specifically, Java has remained important and is required in more than one-fifth of all jobs. However, it has not replaced the need for C++ and C programmers. SQL programming is also required in more than one-fifth of the job openings. .Net has grown in importance and now represents 13% of skills required by employers. The demand for network skills was growing in 1995 as increasing numbers of companies entered the world of the Web (Litecky, Prabhakar, & Arnett, 1996). Koong, Liu, and Liu noted in 2002 that expertise in Java, XML, TCP/IP, and other Internet-related skills demanded higher compensation than other IT professional positions. Research based on systematic reviews of want ads showed that older IT skills tended to disappear from the advertisements, indicating less interest in hiring those skills on the parts of IT managers (Arnett & Litecky, 1994). The research based on advertised positions may be biased by a tendency to list required technical skills but omit additional skills that
are determined in the interview process. Below we discuss a two stage hiring model that is not reflected in the want ads. Previous studies have shown that managers rate non-technical skills higher than technical skills even for entry-level employees. In addition, managers’ expectations with regard to the non-technical abilities of new hires are usually higher than the actual ability the new hires exhibit (Cappel, 2001, Van Slyke, Kittner, & Cheney, 1998). An earlier paper looked at the “expectation gap” between what skills and experience industry expects from college graduates in IT versus what they find (Trauth, Farwell, & Lee 1993). A survey of ACM SIGCPR proceedings resulted in the same general conclusion that non-technical skills were equally or more important than technical skills for IT professionals (Nakayama & Sutcliffe 2001). In addition, managers have less of a preference for a specific programming language, but rather value the learning of programming concepts in any language (Cappel 2001). ITAA (2004) found that interpersonal skill was the highest rated non-technology skill in the survey. Fifty-two percent of respondents cited this attribute, far more than any other. This preference proved true for IT and non-IT companies as well as companies big, small, and in-between. A few variations also appeared when comparing IT and non-IT hiring manager responses in this area. IT companies placed substantially higher importance on project management than non-IT firms. The report suggests that project management may be more of a core competence for IT firms--a critical component of what these companies offer their clients. An evolution of the relationship between clients and 3PPs proposes that under certain conditions “cosourcing” is an appropriate model that requires the parties to work in a close partnership, which results in an exchange of skills and capabilities (Kaiser & Hawk 2004). Ross, Beath, and Goodhue (1996) identify three IT assets for competitiveness. One of these
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is the human asset, which they describe as an IT staff that solves business problems and takes advantage of business opportunities through the application of information technology. They conclude that the IT professional needs a blend of current technical skills, a deep understanding of the business and a talent for problem solving. Foote (2005) describes the “hybrid” IT job that requires multidimensional skill sets, blending technology skills and customer focus. A variety of studies have been done to assess the quality of IT professionals’ skills and knowledge. Two of these have established sets of skills/knowledge that should be measured: technical specialties, technical management, business functional, and interpersonal and management (Byrd & Turner 2001; Lee, Trauth, & Farwell, 1995). Generally, the results of these studies have indicated that a blend of all of the skills is required for success as an IT professional. All of these research areas underline the importance of a balance of skills that are both technical and non-technical. This supports our findings.
Inconsistencies Between What is Said and What is Done A study of classified advertising for IT positions from 1988 to 2003 found a recruiting gap exists whereby organizations say they want well-rounded individuals with business knowledge and soft skills, however, they advertise for individuals with hard technical skills (Gallivan, Truex, & Kvasny, 2004). The paradox is further explored in a study proposing a new model for IS recruiting called image theory (Litecky, Arnett, & Prabhakar, 2004). This research posits a two-stage hiring process: selection/filtration stage and choice/hiring stage. The selection/filtration stage is what is represented in job postings. It is the necessary technical background required for a position. The choice/hiring stage is where additional skills and experience on the softer side come into play in the hiring decision. 184
Implications for Academic Programs George, Valacich, and Valor (2005) examine the recent and rapid rise and fall of university student enrollments in information systems programs and describe how these enrollment fluctuations are tied to the job opportunities of graduates. Drawing on the work of Ives et al (2002), they recommend that programs can influence the number of majors they attract by focusing more on why information technology is valuable to an organization rather than on what the technology is or how it works. Foote reported a 10.3% decline in computer science undergraduate enrollment from 2000 to 2004 and noted that UCLA had calculated a 60% decline in undergraduates declaring computer science as their major from 2000 to 2004 (Foote, 2005). Other universities have indicated similar drops (Trewyn, 2005) In the Gallivan et al. (2004) paper, they also determine a need for life-long learning for IT professionals and the academics who teach them. Cappel (2001) also addresses the issue of how students can better prepare for the marketplace requirements. The decreasing enrollments in all IT-related programs (i.e., MIS and Computer Science) are a concern for the industry and is an important factor motivating our research. Most recently, the decline appears to be leveling off, and there is an indication of a new growth in enrollments about to begin. However, mixed messages persist about the value of a career in IT.
Method The Society for Information Management (SIM) sponsored a study to explore the impact of socio-economic trends on the IT Workforce. Data was gathered from senior IT managers by 20 researchers in the US and Ireland using a structured interview script.
Changing IT Skills
The objectives of the study were to •
•
•
•
•
Explore the current and future needs for IT skills and capabilities in U.S. and European organizations, including private and public sector organizations and client and vendor organizations. Determine how organizations do/will recruit, develop, and retain in-house IT skills and capabilities to meet current and future needs. Understand how organizations do/will access IT skills and capabilities through third party global sourcing. Assess what skills and capabilities universities should be providing in their graduates; Identify patterns of skills and how capabilities will change over the next three years.
This chapter analyzes the results of parts of the survey in which IT executives were asked to describe the skills they felt were critical to keep in-house now and in 2008. It also analyzes some of the data on employment trends for IT.1 This chapter excludes data from 3PPs. There is a follow-up study underway specifically looking at the workforce needs of these service providers. The interview script was developed by a subset of the research team, all of whom have extensive experience with interview-based research. The research objectives, along with appropriate demographic information, were the focus of the design. Pre-test interviews were conducted to verify the practical use of the interview script. The data was collected using the interview script, through structured, one-hour interviews between a researcher and a respondent. All researchers used the same interview script thus providing the same data for the collective database of interviews. Some of the interviews were conducted face-to-face and others via the telephone. The sample was initially chosen from organizations that are members of SIM. There
was a goal to include companies of all sizes. In much management research, there is a focus on the largest, Fortune 500 companies. In fact, the majority of employers are firms in the SME (small to medium size enterprises) category and these are often overlooked. While we would have liked to have even more firms in this category, we were pleased to have 37% of the sample fall into the SME group. The sample was increased through references from respondents and through personal contacts. A structured interview script with multiple choice answers wherever possible was used by all researchers, which mitigated any individual researcher bias. Respondents were asked to discuss what they were actually doing and their formal strategy for the next three years. There were checks built into the script. For example, if a respondent said they were not hiring in the current year, then we did not use their answers about what skills they were looking for in new hires. This was to avoid “blue skying” and stay with actual activities.
Demographics The initial sample was drawn from senior IT executives solicited through members of the Society for Information Management and expanded through references from those respondents and through researchers’ contacts to organizations that recruit from their universities. The design included organizations of varying sizes, both profit and non-profit, in a range of industries and geographies in the United States and Europe. More than 100 interviews were conducted with 96 usable for analysis, representing more than 80 different organizations. Table 10.1 illustrates that the majority of respondents, approximately 82%, were executives in the IT organization. Since we were asking respondents about the hiring strategies of their organizations, we decided that the highest-level managers would be able to give us the most ac-
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Table 10.1. Respondents by title Respondent Title
Percent
CIO
38%
Vice president
24%
Executive director/director
16%
CTO
4%
CIO report
3%
HR related
7%
Top management
7%
Table 10.2. Respondents by industry group Industry Group
Percent
Heavy industry
22%
Financial services
18%
Professional services
18%
2
Other
curate picture of the current and future (three years out) plans. While lower level managers, if interviewed, may have focused more on specific technical skills, we were looking at the career paths for IT professionals and were therefore interested in what top IT management judged were the critical skills for someone to have a productive career path within the organization. The industries represented in the sample are shown in Table 10.2. The sample included a range of organizational sizes based on revenue. For analysis purposes, size categories were created as follows: • • •
Fortune 500—greater than USD 3 billion. Large—between USD 3 billion and USD 500 million. SME—less than USD 500 million.
Respondents by size are illustrated in Table 10.3.
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28%
Table 10.4 lists the five categories and their related skills drawn from previous research (Byrd et al., 2001; Lee et al., 1995) and adding skills related to sourcing and to IT administration. We reorganized the categories to reflect where we felt they fit in terms of the type of work being done. For example, we did not have a separate category of “interpersonal skills” but rather included such skills in the category where it would be employed. Thus, skills and capabilities related to planning, organizing, and leading projects appear under project management. We asked subjects the following: • •
•
What skills and capabilities they believed were critical to keep in-house in 2005. Which skills and capabilities they thought would be critical to keep in-house by 2008. To identify skills and capabilities that they planned to source either through independent contractors (ICs) or third party providers (3PPs).
Changing IT Skills
Table 10.3. Respondents by size
Size by Revenue
Percent
Fortune 500+
41%
Large
22%
SME
37%
Table 10.4. Skills/capabilities by category TECHNICAL Systems analysis Systems design Programming System testing Database design/management Data warehousing IT architecture/standards Voice/data telecommunications Operating systems Server hosting Security Mainframe/legacy Operations Continuity/disaster recovery Desktop support/helpdesk Other BUSINESS DOMAIN Industry knowledge Company specific knowledge Functional area process knowledge Business process design/re-engineering Change management/organizational readiness Managing stakeholder expectations Communication Other
continued on following page
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Table 10.4. continued PROJECT MANAGEMENT Project planning/budgeting/scheduling Project risk management Negotiation Project leadership User relationship management Project integration/program management Working with virtual teams Working globally Capability maturity model utilization Other SOURCING Sourcing strategy Third party provider selection Contracting and legal Managing 3rd party providers Other IT ADMINISTRATION Financial management Internal HR management IT governance Other
• •
To identify critical skills and capabilities for both entry-level and mid-level hires. Which critical skills and capabilities were usually absent in the new hires.
We coded all responses into the same sets of skills and capabilities. This approach allowed us to better understand the desirability of each as indicated by the respondent. Thus, as opposed to previous studies that determined skills based on what appeared in classified advertising or based on existing in-house talent, we investigated how organizations valued skills and capabilities, measured by what they wanted in-house versus what they wanted to source.
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The categories covered a variety of aspects of work carried out in IT. We used both specific skills and more generalized capabilities. For example, the first item listed under technical is systems analysis. We viewed this as a broad capability that included any form of systems analysis regardless of platform such as traditional computing, desktop computing, or Web development. Using this approach, we are able to report on the generalized need for talent in each of the specific areas. This logic carries through to all the items allowing us to look at the broad capability rather than the application of the capability. Therefore, the capability is relevant to any and all IT projects regardless of specific technology or specific business application.
Changing IT Skills
Results/Analysis Overview of Critical Skills and Capabilities Figure 10.1 shows the top ten skills (with a tie for tenth) that were cited by respondents as “critical to keep in-house in 2005.” The top item and two others are in project management (indicated by the darkest shading), five are in the business domain category (the lightest shading), and three are in technical (the medium shading). It is interesting to note that two of the technical items, systems analysis and systems design, are technical skills that are client facing. Therefore, the top ten shows a strong bias toward skills that require this type of interaction between clients and IT professionals. Thus, our research supports the strategy that IT executives value the skills and capabilities that are client facing and want to keep them in-house rather than source them. While this is consistent with previous research, we have been able to demonstrate that this is an explicit choice of IT executives. We asked our respondents what skills and capabilities they thought would become less critical to keep in-house in 2008—because they would become irrelevant, be automated, or be
outsourced, for example. Figure 10.2 shows the top five that are not critical to keep in-house. In general, there were very few skills that more than 10% of our respondents thought would disappear by 2008. The top ranked ones in this question were programming, desktop/help, and mainframe/legacy items. Note that only technical skills were mentioned by more than 10% of the respondents. No business domain, project management, sourcing, or IT administration items were identified as potentially disappearing. In fact, the skills that are leaving in-house appear to be migrating to 3PPs. This will be discussed further in the section below on the changes in full time equivalent (FTE) data. We asked our respondents what skills and capabilities they thought would emerge as newly critical to keep in-house in 2008. Figure 10.3 shows the top five in this category. Five emerging items are in the business domain area. This reinforces the interpretation that client-facing skills are and remain important to keep in-house. One technical and one project management skill are tied for fifth place. Respondents also mentioned items that might be considered “new” programming or operations skills and capabilities (e.g., Java, .Net, Linux, wireless, etc). While these were mentioned by 10% of the respondents, they were specifically
% Respondents
Figure 10.1. Top ten critical skills and capabilities in-house in 2005 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
77% 75% 71% 70% 70% 69% 67% 67% 66% 61% 61%
ss ge ng g e BPR sign rsh ip g mt ctu re gmt sis nn i Proce w led n aly w led a De de l k M ite eM o o m s t Lea t Ris Arch han g ct P Area y Kn em s A y Kn e e t j s c c C IT S y roje roje P ro nctn l m pan S yst d ustr P P F In Co
Skills
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Figure 10.2. Top five skills and capabilities leaving in-house by 2008 18%
17%
% Respondents
16%
15%
14%
13%
12%
11%
11%
Voice/Data
Operations
10% 8% 6% 4% 2% 0% Programming
Helpdesk
Mainframe
Skills
named during the interviews. This is consistent with the interpretation that skills related to newer technologies need to be in-house while they are being learned and understood. It is also consistent with the pattern in which previous researchers have found that the items listed in classified advertising change depending on the technologies that are becoming of interest. Some respondents pointed out that their mainframe operations were not going away any time soon. While this would, on the surface, appear to be contradictory, we believe that this represents a business-specific need related to an organization’s culture and values. That is, when an organization is in a stage in which it is still highly dependent on a technology (e.g., mainframe technology), it will want to maintain some of those skills inhouse, and therefore the skills and capabilities would not disappear. Managing third party providers and IT governance were also becoming more important capabilities to have in-house. There were a few items in the technical category that were seen to be increasingly critical to have in-house in 2008-notably security and IT architecture. In addition, the one technical item whose criticality increased the most was continuity/disaster recovery. We asked what skills and capabilities are critical for new hires. Figure 10.4 shows the top ten
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entry-level items. It is interesting to note that 8 of the top 10 are technical and that programming is at the top. As discussed previously, we used skill categories to describe broad capabilities; therefore, “programming” here includes any form of programming regardless of platform such as traditional computing, desktop computing, or Web development.3 Organizations still value the traditional IT skill set for entry-level hires. We investigated the degrees that organizations sought and found that entry-level applicants with undergraduate degrees in computer science are desirable.4 Communication skills and industry knowledge are now also highly valued. It is important to note that programming represents the generalized capability of programming and not a specific programming language skill. By combining the fact that programming is the highest entry-level skill or capability with the generally accepted evolution toward newer technical areas, one can interpret this to mean that organizations are looking for programming skills in the newer technologies (e.g., Java, .Net, Linux) along with more traditional programming language skills. This is supported by the respondents who specifically named newer technology skills and capabilities that are critical to have in-house in 2008.
Changing IT Skills
Figure 10.3. Top five emerging skills and capabilities in-house in 2008
% Respondents
30%
24%
25% 20%
20%
19%
18%
16%
16%
16%
15% 10% 5%
n tio m un ica
M
Co m
U
se rR
ela
tn sh p
ite
ctu
gm t
re
ge led
Ar ch IT
pa ny
Kn ow
led ge
BP R
Kn ow Co m
Fn ctn
In du str y
lA re a
Pr oc e
ss
0%
Skills
Figure 10.4. Top ten entry-level skills and capabilities
% Respondents
35% 30% 25%
31% 28% 23%
21%
20%
21% 17%
17% 14%
15%
14%
13%
10% 5% 0%
ing ge ds sis io n sk nt on s ign sting led cat icati elp de me d ar mm n aly s Des Te n un i A ag e /S tan Know g ra H u m s n m / o m e t r e a m t e r m m r P s st ry ste Sy Co leco m u pp o ign /M tectu Sy ust Sy e hi es pS I nd ta T sk to ase D T Arc a I /D D e atab i ce D Vo
Skills
This data supports the concept of the twostage model in hiring IT professionals (Litecky et al., 2004). The technical skill set is necessary to be considered for a position; however, it is not sufficient. The softer skills represented by communication skills and industry knowledge must be present to create the balance that makes a candidate desirable. We asked respondents what skills and capabilities are critical for hiring employees into mid-level positions. Figure 10.5 shows the top ten items shown for mid-level positions. At the mid level, the set shifts away from the technical skills of the entry-level and towards project
management skills and capabilities. Gomes et al. (2005) found increased project management expertise is positively correlated with increased outsourcing. Therefore, as sourcing has increased in recent years, organizational need for project management skills is also increasing. Most of these mid-level skills can be described as client facing, even the technical ones such as systems analysis and systems design.
Specific Skill Categories In order to better understand the specific skill categories, we looked at the top five skills reported in each of the five categories of skills. 191
Changing IT Skills
Figure 10.5. Top ten mid-level skills and capabilities 45% 40%
39%
39%
39%
36%
% Respondents
35%
35%
34%
33%
32%
30%
30%
27%
27%
25% 20% 15% 10% 5% 0%
t s ng ge mt sis h ip esign ess iation atio n eam gm nn i aly r T Mg sk M ow led Proc ers An ct P la Lead m s D s hp g ot I nteg rtual i a n e s e R r K N i t m ltn je ste ct ct ry lA j ec n g V ste Sy P ro P roje er R P roje d ust ctn Sy k P ro Us Fn In Wr
Skills
Figure 10.6. Top five technical skills and capabilities in-house in 2005
% of Respondents
80%
70%
70%
67%
61%
60%
54%
54%
Database Design
Security
50% 40% 30% 20% 10% 0% Systems Analysis
Systems Design
IT Architecture
Skills
Figure 10.6 shows the top five in-house items in the technical category. Numbers one, two, and four, systems analysis, systems design, and database design/management are client-facing technical skills that require a lot of interaction between IT professionals and clients in the course of their accomplishment. It architecture/standards and security, numbers three and five represent technical areas that are critical today in most organizations. One would expect a standard-setting capability such as IT architecture to be one that is
192
needed in-house where the specific nature of the business and the IT required to enable it are well understood. The security skill encompassed both the management of security and the day-to-day operations of security. Many firms indicated that they are sourcing the day-to-day operations (e.g., issuing security cards and passwords, maintaining a security force); however, it became clear in our interviews that the management-level functions of security strategy and standards are seen as skills best maintained in-house at the present time.5
Changing IT Skills
Figure 10.7. Top five project management skills and capabilities in-house in 2005
% Respondents
90% 80% 70%
77% 67%
66%
60%
60%
60% 50% 40% 30% 20% 10% 0% Project Planning
Project Leadership
Project Risk Negotiation Mgmt
Project Integration
Skills
Figure 10.8. Top five business domain skills and capabilities in-house in 2005 0%
%
%
0%
% Respondents
0%
% %
0% 0% 0% 0% 0% 0% 0% Functional Knowledge
Company Knowledge
Industry Knowledge
BPR
Change Mgmt
Skills
Figure 10.9. Top five sourcing skills and capabilities in-house in 2005 70%
% Respondents
60%
57% 50%
49%
50%
46%
40% 30% 20% 10%
4%
0% Mng 3PP
Sourcing Strategy
3PP Selection Contracting
Other Sourcing
Skills
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Changing IT Skills
Figure 10.10. Top IT administration skills and capabilities in-house in 2005 70%
% Respondents
60%
57%
56%
55%
50% 40% 30% 20% 7%
10% 0% IT Governance
Financial Mgmt
Internal HR Mgmt
Other IT Admin
Skills
Figure 10.11. Projected full time equivalent (FTE) changes
70000 65000
Full-time Equivalents
60000 55000 50000
13%
Third-party Provider
9%
Independent Contractor
45000 40000 35000 30000
78%
25000
In-house
20000 15000 10000 5000 0 2005
2008
2005 vs. 2008 In-house
Independent Contractor
Third-party Provider
Figure 10.12. Projected third party provider (3PP) changes 4500
Full-time Equivalents
4000 3500 3000 2500
2005
2000
2008
1500 1000 500 0 Dom3PPdomestic
Dom3PPoffshore
For3PPdomestic
Domestic vs. Foreign 3PPs
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For3PPoffshore
Changing IT Skills
Figure 10.7 illustrates the top five project management skills and capabilities kept in-house in 2005. The five items shown here are unsurprising as they are core skills in project management. The high percentage of respondents choosing these as critical skills to keep in-house indicates the increasingly important role of project management in organizations. Comments made by the respondents indicate that project management is important both for improving the management of in-house projects and for management of projects that have been sourced to 3PPs. The IT organizations appear to be responding to past criticism of IT projects being traditionally late and over budget. The data in Figure 10.8 emphasize the importance of specific business knowledge for today’s IT professional, with functional knowledge, company knowledge, and industry knowledge as the top three in this category. Business process design/reengineering is fourth, indicating the degree to which organizations today are engrossed in implementing ERP systems. Change management/organizational readiness is the last item in this category and represents a clear understanding on the parts of IT executives of their roles as change agents for the organization. Past research efforts have not focused on sourcing skills for IT professionals. Our investigation of these skills covers new ground in understanding the nature of work within the IT organization and demonstrates that this is becoming part of the job of an IT professional. As sourcing to 3PPs has increased, so has the need to manage these relationships. Thus, we find items represented in Figure 10.9 for the various phases of the sourcing activity. The “other” category included resource management and PMO (project management office) experience. Finally, in the skill category of IT administration, Figure 10.10 indicates that IT governance skills are the most critical to maintain in-house, along with financial management and human resource management skills. In the “other” cat-
egory, the most frequent answer was program management. This answer most likely represents the increasing complexity that the typical CIO faces in today’s organization, necessitating a strong ability to manage multiple high-pressure projects.
Full-Time Equivalent IT Employment Data Although this study looked primarily at predictions of IT skills and capabilities that would remain in-house vs. those that would disappear or be sourced elsewhere, we also asked participants about their expectations for changes in overall full-time equivalent (FTE) IT employment. Using total FTEs provided by the participants, we found a very small decrease (0.2%) expected in overall FTEs. Although the total FTEs will continue to be largest in-house (over 70%), the largest increase in FTEs is expected in the use of third-party providers. The distribution of FTEs going to third-party providers is currently greatest for domestic thirdparty providers using domestic staff and will continue to be the largest group in 2008. Projections for 2008 indicate increases in FTEs for all four categories (domestic 3PP with domestic staff, domestic 3PP with offshore staff, foreign 3PP with domestic staff, and foreign 3PP with offshore staff), although the increase is negligible for those with a foreign headquarters using domestic staff. The greatest increase will occur in the category of providers with domestic headquarters using offshore staff. A comparison of changes in domestic staff vs. offshore staff of third-party provider FTEs indicated (Figure 10.12) that increases are expected in both categories. Currently, the domestic staff represents over half of the total FTEs of thirdparty providers, but the projection for 2008 is the reverse--over half of the total FTEs of third-party providers will be offshore staff.
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Changing IT Skills
Figure 10.13. Projected changes in distribution of third party provider (3PP) staff 2005
2008
Offshore staff 3PP 43%
Domestic staff 3PP 44%
Offshore staff 3PP 56%
Domestic staff 3PP 57%
Figure 10.14. Projected changes in full time equivalents (FTEs) 40000
35000
Full-time Equivalents
30000
25000 2005
20000
2008
15000
10000
5000
0 1 = Fortune
2 = Large
3 = SME
Organization Size
Table 5. Expected changes in FTEs by number of firms
196
Size
Decrease
No Change
Increase
Fortune
29.4%
14.7%
55.9%
Large
38.9%
5.5%
55.6%
SME
15.6%
21.9%
62.5%
Changing IT Skills
Further analysis (Figure 10.13) of IT employment was done by counts of individual organization responses rather than by total FTEs, since a change in FTEs of one very large organization could significantly influence the trend picture. A comparison of the expected change in FTEs by size of organization showed that the largest organizations (i.e., Fortune 500 and large categories) expected a decrease in total FTEs by 2008, while the small and medium enterprises (SMEs) expected an increase in FTEs. The McKinsey study (Farrell et al., 2005) predicted a gradual increase in overall offshore FTEs. Figure 10.11 shows a 5% increase by 2008 in the FTEs based in 3PPs in all locations. In Figure 10.13, however, we separate the domestic and offshore FTEs of 3PPs indicating an increase of offshore staff of 13%. This is the increase reported by client firms, that is, client firms are planning to increase their use of offshore 3PPs by 2008 in the amount of 13%. In the next figure, Figure 10.14, it is clear that the largest organizations are those decreasing their in-house FTEs in favor of increasing their use of 3PPs. Further analysis (Figure 10.14) by numbers of organizations rather than by total FTEs determined that a majority of firms expect an increase in FTEs by 2008. Less than one-third of the Fortune organizations expect a decrease in FTEs by 2008, with over half expecting an increase. Over half of the large and SME organizations also expect an increase in FTEs. The data shown in the FTE figures indicates a rearrangement of IT FTEs. The overall number of FTEs from 2005 to 2008 remains basically stable. However, there is a shift away from in-house FTEs and towards 3PPs. This illustrates the migration of skills from in-house to service providers. Given the previous data presented on what is happening to specific skills, the migration is very clearly one of traditional technical skills (e.g., programming) to service providers. It is important to understand that what is specifically included in the technical category may be dependent on the culture of the
organization. Thus for some, the skills that are migrating are those related to “old” technology (e.g., mainframe, COBOL) while for others they are “newer” technologies (e.g., HTML, Web design). However, the client-facing technical skills along with the many in project management, business domain, sourcing, and IT administration are not migrating at this time.
discussion Our research has implications in a variety of areas: • • •
Understanding how organizations value skills and capabilities in IT. Considerations for career development within organizations. Guidelines for universities educating graduates in computer science and information technology.
Understanding How Organizations Value IT Skills and Capabilities There has been much discussion and concern about the impact of IT outsourcing on IT jobs here in the U.S. People have predicted a serious loss of positions. Vocal detractors such as Lou Dobbs on CNN have been declaring the crisis. This concern added to the depressed state of employment in IT stemming from the dot com bust has filtered to the university community and had the effect of decreasing enrollments in computer science and IT programs. Nicholas Carr’s article declaring that IT doesn’t matter gained notoriety and added to the confusion (Carr, 2003). Unfortunately, much of this discussion has been based on emotions and not on facts. Our data confirms that some IT jobs are moving to 3PPs in offshore locations; however, more importantly it also confirms the continuing need and value for people trained in technical skills. It is
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also clear from the data that the technical capabilities should be coupled with soft skills in project management and the business domain. This is evident in that the technical items that top the list of most critical now and continue to be important in the next three years are client-facing technical skills--systems analysis and systems design. The message here is that whatever technical expertise individuals develop (e.g., programming in Java, designing in .Net, wireless networking), they should also be developing project management and general business/industry knowledge. The specific technical skills and capabilities that are critical are dependent on the organization’s business model, culture, and values. Organizations’ needs vary depending on what technologies they are working with and whether the culture believes in maintaining in-house talent that might otherwise be sourced (e.g., mainframe technologies). Therefore, while the majority of our respondents were tending to source traditional technical work like programming, mainframe, operations, there were some who did not. Skills specific to Internet applications inhabit a complex space in the IT skill world. They are not limited to the skills required to create Web pages such as Java, PHP, and HTML, but rather become a critical element of the problems that many organizations face in integrating their many platforms. The focus of this integration task is allowing Web-based applications to draw from and interact with the existing legacy foundation. For example, a legacy customer database developed from the 1970s may be the base of a Web-based customer relationship management (CRM) application. Therefore, when we discuss Internet skills, we include their interaction with legacy applications as well as the stand-alone Web languages and tools. Previous research has shown that the specific technical skills appearing in want ads change depending on the technology du jour. With the migration pattern that we are seeing in this research, there will be a similar change in technical talent
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considered critical to have in-house that relates to the ability to source this work adequately. IT sourcing decision research indicates that the decision-making is dependent on a variety of factors: demand and supply, transaction cost economics and IT executive choice. Each of these will influence the migration of technical skills to 3PPs. Respondents tended to focus on the need for basic technical skills in hiring at the entry-level. They also named the undergraduate degree in computer science as the one they would look for the most. At the same time, they chose skills in business knowledge and communication as important in an entry-level candidate for this person to have a successful career within the organization. This apparent inconsistency can be explained by understanding that for most IT organizations in client firms (i.e., not in service providers), technical skills are necessary but not sufficient for career success. The majority of our interviews took place in client firms, therefore this finding relates to the clients and not to the service providers. This is supported by the image theory, a two stage model of IS recruiting where the first stage is a filtration stage as an employer screens potential hires for a minimum requirement of technical skills. This is followed by the second stage where the final choice is made and influenced by softer skills and other factors (Litecky et al., 2004). Such a finding raises the question of whether individuals who have chosen a technical track for their careers will be able to succeed. Our research does not address this directly. Hiring at the mid-level exhibited a similar inconsistency. While the critical skills were in the project management and business domain categories, the IT executives still wanted their midlevel candidates to have a strong basic technical foundation. The end result is that IT professionals at all levels need to be concerned about developing a balance between the hard technical skills and the soft client-facing skills.
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Career Development Programs The need for a balance in hard and soft skills calls for organizations to create career development programs for their IT professionals that enable them to create the needed balance. The increase in sourcing as an IT strategy underlines the need for strength in both hard and soft skill areas. As sourcing increases, the criticality of IT professionals who can manage sourcing effectively will also increase. IT professionals will need their technical skill foundation in a variety of areas plus skills in project management, business knowledge, team leadership, and managing 3PPs. Ang et al.’s (2001) discussion of the two approaches an organization can take to develop career paths, industrial and craft, can be used to describe the heyday of the dot com boom, in which most IT professionals appeared to be using the craft approach--they were like “hired guns” who came into an organization, performed, and then moved on to a higher level at the next organization. To a certain extent, there is an analogy here with sourcing: the client organizations that are sourcing certain skills are using the Craft approach for those skills. However, for the skills respondents reported as critical to maintain inhouse, firms need to use the Industrial strategy in order to develop the strength and depth in those particular areas. Thus, the technical skills that we see migrating to 3PPs are in the craft mode, while the project management and business domain skills are in the industrial mode. Interestingly, the previous strategy is only from the point of view of the client organization. Service providers, on the other hand, will need to follow the industrial strategy for technical skills that they are called upon to provide. The dual project management hierarchy model provides a mechanism for clients and vendors to share career development and learn from each other (Kaiser et al., 2004).
Guidelines for Computer Science and Information Technology Programs Our research also has implications for universities in developing programs that support the need for a balance of skills in their graduates. This balance has been called for in the past (Lee et al., 1995) specifically noting that computer science programs should be restructured to include more breadth and business education. Cappel made the specific recommendation that undergraduate programs include more opportunities for internships to help students gain the necessary business education (Cappel, 2001). We echo this call for diversifying the traditional undergraduate program through internships and relationships with the business community. We understand that traditional computer science curriculum is fundamental to training the highly skilled CS graduates that are needed for future generations of hardware and software development. We are not calling for a merger of CS and IT programs. What we are recommending is that even within the traditional CS curriculum it is becoming critical to expose students to real organizations, solving real problems. One approach is through internships and work-study programs.
Summary We have investigated the impact of sourcing strategies on what skills IT executives prefer to maintain in-house vs. source to third party providers. IT executives indicate that the critical skills to keep in-house today are primarily client facing, including technical items with client facing elements. Looking to 2008, the only skills that are seen as no longer critical to maintain in-house are technical skills, which do not contain any client-facing activities. There are exceptions to this pattern based on organizational-specific characteristics
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of business model and culture. This result is also moderated by the position level in the organization. Entry-level positions tend to require more technical skills while mid level positions tend to require more project management skills. We have also looked at how the total number of IT FTEs will change from 2005 to 2008. Our research shows that while the mixture of in-house FTEs versus sourced FTEs is changing, the overall number of IT FTEs will remain stable over the next three years. The changing mix indicates an increase in IT FTEs at 3PPs with offshore locations. Looking at the migration of certain technical skills out of organizations along with the FTE patterns implies that the most likely skills to be sourced to 3PPs are the non-client facing technical skills. Our study is consistent with previous findings that indicated the migration of traditional technical skills (e.g., programming) to 3PP. However many of those were based on the availability of technical talent in 3PPs and on the definition of technical skills as being “non-core.” In our research the IT executives explicitly chose which skills they wanted to hire and maintain in-house as opposed to those they were willing to source to a 3PP. As a result, some technical skills migrated to 3PPs while others remained in-house. The findings are consistent with the paradox observed by others of a “recruiting gap” where organizations purport to seek well-rounded individuals although they advertise for those with “hard skills” and technical backgrounds. Findings indicate that IT professionals need to have a balance that demonstrates a foundation in the traditional “hard skills” and experience with “softer” business-oriented skills.
Future Research This chapter is focused on the changing skills from the viewpoint of the client organizations. We are currently conducting further research into the skills and capabilities desired by the service provider organizations. The client organization 200
choices will cause a migration of some skills to 3PPs. This migration needs further investigation in order to provide a comprehensive picture of how skills and capabilities are evolving in the IT industry. In our first study, the universe of 3PPs was too small to perform any meaningful analysis. The research raises questions for further exploration about the needs for entry-level professionals and how those candidates are filtered based on their technical skills. Future research should investigate actual job hiring data in specific industries. Young people entering the market and making career decisions will be better served by an increased understanding of these dynamics.
ACKNOWLEDGMENT The following researchers made up the original team that conducted the SIM research project. All team members contributed to this chapter by collecting data and sharing their thoughts and insights. Pamela Abbott, University College Dublin Thomas Abraham, Kean University Cynthia Beath, University of Texas at Austin Christine Bullen, Stevens Institute of Technology Erran Carmel, American University Roberto Evaristo, University of Illinois Chicago Mike Gallivan, Georgia State University Kevin Gallagher, Northern Kentucky University Tim Goles, University of Texas-San Antonio Steve Hawk, University of Wisconsin-Parkside Joy Howland, Seattle SIM Kate Kaiser, Marquette University Seamas Kelly, University College Dublin Mary Lacity, University of Missouri John Mooney, Pepperdine University Judith Simon, University of Memphis C. Ranganathan, University of Illinois Chicago
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Joe Rottman, University of Missouri Terry Ryan, Claremont Graduate School Rick Wion, Smith Bucklin Associates
References Ang, S., & Slaughter, S. (2004). Turnover of information technology professionals: The effects of internal labor market strategies. The DATA BASE for Advances in Information Systems, 35(3), 11-28. Ang, S., & Slaughter, S. A. (2001). Work outcomes and job design for contract versus permanent information systems professionals on software development teams. MIS Quarterly, 25(3), 321350. Anonymous. (2004). Six-month assessment of workforce globalization in certain knowledgebased industries. Technology Administration (July). P1-12. Arnett, K. P., & Litecky, C. R. (1994). Career path development for the most wanted skills in the MIS job market. Journal of Systems Management, 45(2), 6-11. Byrd, T. A., & Turner, D. E. (2001). An exploratory analysis of the value of the skills of IT personnel: Their relationship to IS infrastructure and competitive advantage. Decision Sciences, 32(1), 21-54. Cappel, J. J. (2001). Entry-level IS jobs skills: A survey of employers. The Journal of Computer Information Systems, 42(2), 76-83. Carr, N. (2003). IT doesn’t matter. Harvard Business Review, 81(5), 41-49. Deloitte. (2005). Calling a change in the outsourcing market. Deloitte Consulting Report (April). Farrell, D., Laboisiere, M. A., & Rosenfeld, J. (2005). Sizing the emerging global labor market. The McKinsey Quarterly, 3, 93-103.
Foote, D. (2005). Managing IT organizations and professionals. Presentation to The Advisory Council, Foote Partners, LLC. Gallivan, M. J., Truex Iii, D. P., & Kvasny, L. (2004). Changing patterns in IT skill sets 19882003: A content analysis of classified advertising. Database for Advances in Information Systems, 35(3), 64-88. George, J. F., Valacich J. S.,& Valor J. (2005). Does information systems still matter? Lessons for a maturing discipline. Communications of the Association for Information Systems, 16, 219-232. Gomes P. J., & Joglekar N. R. (2005). The costs of coordinating distributed software development tasks. Boston University Working Paper. Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing: From periphery to the core. Harvard Business Review February 2005. ITAA. (2004). Adding value…Growing careers-The employment outlook in today’s increasingly competitive IT job market. Information Technology Association of America (ITAA) Annual Workforce Development Survey (September). Ives, B., Valacich, J., Watson, R., Zmud, R., Et Al. (2002). What every business student needs to know about information systems. Communications of the AIS, 9, 467-477. Kaiser, K. M., & Hawk, S. (2004, June). Evolution of offshore software development: from outsourcing to cosourcing. MIS Quarterly Executive, 3(2), 69-81. Koong, K., Liu, S., Lai C., & Liu, X. (2002). A study of the demand for information technology professionals in selected internet job portals. Journal of Information Systems Education, 13(1), 21-29. Lee, D. M. S., Trauth, E. M., & Farwell, D. (1995). Critical skills and knowledge requirements of IS professionals: A joint academic/industry
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investigation. MIS Quarterly, 19(3), 313-341, September. Litecky, C. R., Arnett, K. P., & Prabhakar, B. (2004). The paradox of soft skills versus technical skills in IS hiring. The Journal of Computer Information Systems, 45(1), 69-77, Fall. Litecky, C. R., Prabhakar, B., & Arnett, K. P. (1996). MIS job market: Shaken but not stirred. Journal of Systems Management, 47(4), 50-54, July/August. Nakayama, M., & Sutcliffe, N. G. (2001). IT skills portfolio research in SIGCPR proceedings: Analysis, synthesis, and proposals. ACM SIGCPR. Prabhakar, B., Litecky, C. R., & Arnett, K. P. (2005). IT skills in a tough job market. Communications of the ACM, 8(10), 91-104, October 2000. Ross, J. W., Beath, C. M., & Goodhue, D. L. (1996). Develop long-term competitiveness through IT assets. Sloan Management Review, 3813; 38, 1, 31–42. Rottman, J. W., & Lacity, M. C. (2004). Proven practices for IT offshore outsourcing. Cutter Consortium Executive Report, 5(12), 1-31.
Trauth, E. M., Farwell, D., & Lee, D. M. S. (1993). The I/S expectation gap: Industry expectation vs. academic preparations. MIS Quarterly, 17(3), 293-308. Trewyn, P. (2005). U.S. faces IT worker shortage. Milwaukee Business Journal. Retrieved May 20, from http://milwaukee.bizjournals.com/milwaukee/stories/2005/05/23/focus3.html Van Slyke, C., Kittner, M., & Cheney, P. (1998). Skill requirements for entry-level information systems graduates. Journal of Information Systems Education, 6-10, Fall 1998.
Endnotes 1
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Ryan, M. P., Farrell, M. C., & Doerflinger, T. M. (2005). Where have all the workers gone? UBS Financial Services Report, UBS Wealth Management, 27 June 2005. 4
Slaughter, S., & Ang, S. (1996). Employment outsourcing in information systems. Communications of the ACM, 39(7), 47-55, July. Tapscott, D. (2004). The engine that drives success: The best companies have the best business models because they have the best IT strategies. CIO Magazine, 1-6, May.
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A white paper describing the full results of the research is available via the SIM website: http://www.simnet.org The “Other” is large at 28%, however it contains a diverse group of primarily services organizations, e.g., publishing, entertainment, non-profit, etc, Analysis indicated that there were not enough organizations in any one area to merit additional breakdowns. We found in our interviews that this was how the respondents discussed skills. They were less interested in specific programming skills, for example, than in the programming capability that anyone who learns to program acquires. Additional analysis on our data focusing on hiring characteristics such as desired degrees will be reported in future publications. In addition to the information collected using the standard script, each researcher also recorded the anecdotes and explanations supplied by each respondent. These are being compiled into individual case studies for further research.
This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 24-46, copyright 2007 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XI
New Trends in Global Offshore Outsourcing:
A Comparative Assessment of India and China Suresh Sharma JS3 Global, LLC Yuanyuan Chen JS3 Global, LLC
Abstract With the rapid rise of globalization, the challenge of global outsourcing today is not “Why and what to outsource?” but “How to outsource?” The theme today is “Let us do it right the first time.” The barriers to outsourcing are companies’ own mind-sets, local regulations, and the robustness of their internal processes. The domain knowledge in many industries has gone fully global. Likewise, new product development and R&D must be global in order to compete in emerging economies and to tap into global talent to compete globally. Software development and IT outsourcing can be done from anywhere, virtually! The availability of mobile technology and superior digital infrastructure is giving way to “distributed IT,” making “homes” as the future nodes of outsourcing factories. China and India have emerged as the major leaders in this industry due to their capacity, talent pool, and lower cost structure. This chapter compares their strengths, challenges, and growth potential based on the authors’ own hands-on experience of doing outsourcing in these countries for the past 15 years.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
New Trends in Global Offshore Outsourcing
Introduction With the rise of globalization, the world has witnessed a spectacular growth in offshore outsourcing. The offshore information technology outsourcing (ITO) market continues to grow at a remarkable rate. Worldwide offshore IT spending will reach U.S. $29.4 billion in 2010.1 Offshore business process outsourcing (BPO) is estimated to grow at a compound annual rate of 37%, amounting to U.S. $55 billion by that time, according to a McKinsey study. This market is bound to increase exponentially. No industry or size of business is untouched by outsourcing anymore. The availability of low-cost communications and transportation, the commoditization of Industrial Era technologies, the availability of baseline education across emerging economies, and the easy access to global human resources have collectively enabled many businesses to successfully do the same job better somewhere else. Apart from major corporations, small and medium enterprises (SME) are realizing that the opportunities related to globalization are not limited to selling their goods in global markets, but also include tapping into global talent to enhance their competitiveness and profitability. The debate today is not about “Why and what to Outsource?” but “How and where to outsource? How to do it right the first time.” The remaining barriers to outsourcing emerge largely from companies’ own mind-sets, local regulations, and weaknesses of internal processes. India and China are among the top players in the offshore outsourcing market. The two countries have taken very different trajectories as they evolve and mature in the offshore outsourcing arena. India took a more independent approach, encouraging local entrepreneurship and free enterprise. This constituted a bottomsup approach, a type of worker-driven revolution, in which people learned the IT skills and offered their services globally to improve their quality of life (Meredith, 2007). The development of this
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skill set created an opportunity that was further capitalized and accelerated by free enterprises. China, on the other hand, depended more on foreign direct investment (FDI) in economic development. Initially focusing more on exportdriven manufacturing and infrastructure, it is now moving forward to grow its services sector in a top-down driven way. Although the theme of this chapter is new trends in global outsourcing, especially relating to India and China, this chapter does not make any predictions as to which country will overtake the other, but instead offers a high-level comparative assessment that is more focused on analyzing the on-going evolution of their offshore outsourcing services. The next section, Section 2 briefly introduces the new trends in global offshore outsourcing, followed by Section 3, which outlines the nature and competitive advantages of offshore outsourcing in India and China. Section 4 identifies the respective challenges of offshore outsourcing in India and China. In the final sections, we conclude by providing strategic and policy agenda for the governments and offshore enterprises, and offer our thoughts for future research directions.
New trends in global offshore outsourcing Nearly one-fifth of all organizations are currently using offshore service providers (Computer Economics 2006). Here are some of the principal trends: •
Growing importance of distributed IT outsourcing: If a company knows how to manage a distributed workforce, has reliable network connectivity, and provides a good mobile phone to its people, then it should be able to do IT–based work at any place any time. In the long-term, IT outsourcing is going to go to homes. Future IT factory nodes will be the homes of the workers. Fu-
New Trends in Global Offshore Outsourcing
•
•
ture competition is not going to come from a particular country, but from enterprises that have mastered the art of delivering through distributed IT. Efficient global project management skills among team leaders will become an essential core competency. Several companies are launching major rural area initiatives to overcome challenges of scarce urban resources, infrastructure, attrition, real estate costs, and rural-urban digital divide. This trend will bring the frontend customer-care functions back onshore, closer to the customer. . Customer care is being recognized as a core competency that businesses ought to keep in-house rather than outsource, because of the immense potential to do data mining and to improve services; these benefits offset the temporary cost benefits driven by labor-arbitrage (Robinson, Kalakota, & Sharma, 2005). Domain knowledge has gone global: Only a few years ago, corporations classified low-end jobs for offshore outsourcing and retained the domain knowledge in-house. That perception is changing. Increasingly, companies are realizing that although it is important to understand local issues, there is very little difference, at least structurally and functionally, between the operations of most industries at home vs. in another country. A utility is a utility (almost a cost-plus business model all over the world), a bank is a bank, and a telecom service provider is not much different either; therefore, many offshore functions are being outsourced as complete solutions. One sees innovative solutions coming mainly from offshore vendors, not from clients. Further, global product development is essential to offer variable price points in emerging markets, and to capture a full spectrum of innovations: technology, usage, marketing, and talent. Product innovation alone is not a sustainable business growth strategy: The
commoditization of design and engineering knowledge has reduced the gap the competition faces in innovating the next and improvised version of the product. Note that soon after iPod came to the market, several other models were introduced by competitors at a much lower price. Accordingly, one needs to be creative in all aspects of launching new products and services. The impact of mobile business on outsourcing is radical: Mobile business is altering outsourcing in a profound manner. Organizations must incorporate emerging convergence of mobility in usage, content creation, and delivery. Emerging economies have already adopted the mobile phone and related technologies. Just as the mechanical advantage of the Industrial Era enabled the western world to become prosperous in the last century, some developing countries will utilize mobile technologies to accomplish similar goals at this stage.
•
The Race for Global Resources: India and China Offshore Outsourcing in India Since 1990, India’s government has pursued the strategy of economic reforms through privatization and liberalization to encourage the development of domestic entrepreneurship. The breakdown of monopoly by the state-owned telecom companies in the early 1990s spurred the golden era for the IT industry and the BPO industry. Since then, the software and IT industries in India have been growing at around 50% annually, and are expected to account for 7% of GDP by 2008 (NASSCOM-McKinsey 2002 report). The sector consists of more than 3,000 companies and employs a half-million software engineers; 85% of the IT products and services are exported. Companies from English-speaking countries are among the major clients (http://www.nasscom.org). 205
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Since the early 1990s, Indian companies have been heavily involved in the business process outsourcing (BPO) arena. Today, India is the hub for process outsourcing, especially from the U.S. and UK. The government has identified BPO as a key contributor to economic growth, and has prioritized the attraction of foreign direct investment in this segment by establishing software technology parks and export enterprise zones. BPO providers enjoy tax benefits and assistance from local governments in manpower recruitment, retention, and training. In addition to government support and a positive policy environment, the major reasons for India’s success in this industry are the availability of large pools of English-speaking talent, high quality at low cost, increasing domain expertise, and more sophisticated performance metrics and program management skills2. As the second most populous country in the world with a population of 1 billion, India also has the largest English-speaking population in the world. India’s 380 universities and 11,200 highereducation institutes produce 3.1-million graduates every year3. The number of working-age people in India is expected to reach 250 million in 2020. Surveys by NASSCOM reveal that Indian companies are better focused on maintaining quality and performance standards. In 2003, among the 80 software centers that were assessed at CMM Level 5, 60 (75%) were in India. In recent years, organizations that achieved ISO 9000 certification are migrating to the ISO 9000:2000 standards; further companies on the CMM framework are realigning themselves to the CMMI model. The Indian IT service industry is making inroads into the global marketplace and competing with global giants like IBM, Accenture, EDS, and Deloitte. In 2005, the big three Indian IT firms, Infosys, Tata Consultancy Services (TCS), and Wipro, reported a combined annual growth rate of more than 30% and surpassed $2 billion in revenue. Indian companies are expanding in the U.S. to create the closer customer relationships required to compete in providing high-end con-
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sulting services. In fact, big Indian IT companies are acquiring U.S. consulting firms and hiring hundreds of software professionals from within the U.S. to reduce their disadvantage in terms of cultural alignment and customer relations with American clients. At the same time, they are opening branches in lower-cost countries like China and Vietnam to leverage the labor arbitrage. In terms of service provided, Indian firms have developed capabilities for providing a wide range of products and services, such as vertical solutions. They have developed a reputation for successfully managing small- and medium-size projects in the $1 million to $50 million range using the global system. Currently, the Indian firms are moving to capture high-end and large-scale projects (Konana, 2006). Finally, overseas Indians possess years of experience in IT-enabled services; nearly 35% of Silicon Valley startups are by Indians.
Offshore Outsourcing in China China, the giant neighbor and closest competitor to India, adopted a different development track. From 1979 to 2005, China’s GDP grew at an average annual rate of 9.6%. China’s economic boom is largely the result of inflow of foreign capital, which totaled U.S. $61 billion in 2004, and a rapid growth in productivity. In the past 2 decades, China has established itself as a leader in the hardware industry, and is also doing well in the field of offshore software development. China’s outsourcing companies are aiming to replicate the success of their Indian competitors to attract a larger share of U.S. companies seeking to diversify business beyond India. Low labor cost, huge labor pool, surging domestic demand, and government support are the major factors driving the economic boom. Similar to India, China has low cost as its key competitive strength. In China, salaries of information technology professionals are roughly one-sixth (or even less) of those earned by their
New Trends in Global Offshore Outsourcing
U.S. counterparts (Hoffman & Thibodeau, 2003). China’s promising market opportunities make it a strategic location for multinational companies planning to serve new markets in the future. China’s market accounts for 10%to 15% of sales for many of the larger multinational IT firms. For example, FedEx did about $9 billion in sales in China in 2005, and P&G has bought out 88 jointventure partners in China. To benefit from the world’s largest cell phone consumer market, cell phone companies like Motorola, Siemens, Nokia, and Samsung have invested heavily in R&D. Other high-tech companies, including Cisco Systems, Airbus, and GE Capital, are also moving business processes or expanding their existing China operations, with the objective of providing support to their operations in Asian countries. Today, the nature of offshore outsourcing in China has moved up the value chain from the manufacturing of goods, to business-process outsourcing and knowledge-process outsourcing. Telecom manufacturing operators, in particular, have benefited from this increased involvement. France Telecom, for example, opened its first wholly owned R&D facility in China. For software development, China is the world’s number two destination, trailing India. China’s offshore software outsourcing market totaled U.S. $1.4 billion in 2006, an increase of 48% compared to that of the previous year (IDC, 2007). IDC anticipates that China’s offshore software market will grow five-fold over the next 5 years. The BPO service providers include support for back-office processes, such as call centers, finance management and accounting, payables, and some research and development. In 2003, China’s BPO market was U.S. $20 million; it is growing by 20% to 30% annually. China-based ITO and BPO providers are strongest in the Asia-Pacific market due to geographic proximity and cultural affinity with nearby nations. More than 60% of offshore software
development revenue is from Japan and Korea. Due to a large population of northeastern Chinese who speak Japanese, multinational companies such as Dell Computer, General Electric, or CSK Group opened Japanese-language call centers in China. In addition to the built-up network in the Asia-Pacific market, the domestic IT market offers tremendous potential. China’s IT spending totaled $119 billion in 2005, about four times that of India. Most of this went toward telecommunications equipment and services (79%), reflecting the priorities of a growing infrastructure. China’s IT spending is expected to grow 6.5% annually through 2009, significantly; most of this amount will be spent on the purchase of software (17.5%) and IT services (14.5%). As the IT and BPO markets expand, leaders of Western corporations and Indian companies are moving into China. For example, in February 2007, Tata Consultancy Services, India’s number one outsourcer, began operation of a new joint venture (JV) in Beijing’s Zhongguancun Software Park (zPark). Similarly, Infosys Technologies announced that it intended to increase its presence in China to 6,000 employees by 2010 with centers in Shanghai and Hangzhou and a total investment of U.S. $65 million4. The development of China’s IT industry is a top priority for China’s political leaders. In the “Summary of the Tenth Five-Year Plan (2001-2005) – Information Industry,” the Chinese government included a commitment to build, in China, an IT industry “comparable to those in the United States and Japan.” This plan includes policies to make this growth a reality by offering tax breaks and space in high-tech parks to startups, expanding universities, and providing funding to software vendors for international-standards certification. The Ministry of Science and Technology’s Torch Program funds the China Offshore Software Engineering Project (COSEP) and invites foreign outsourcing and project management service experts to join the program.
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Challenges of IT Development in India and China The success of economies is dependent on five ingredients: political stability, infrastructure, level of economic development, local and export markets, and human resources (Pempel, 1999). Table 11.1 compares the two countries on these five perspectives. India is a democratic country and has better political stability. In contrast, China’s offshore prospects are tempered by the regulatory and political climate; concerns about its political regime, private property protection, contract enforcement, and intellectual property rights are among the top risk management challenges for many offshorers (Chen, 2007; Zanatta, 2007). When comparing the infrastructure in the two countries, China rates higher: it has built up an ultramodern infrastructure, offers 10 times as many express highways, and power costs 40% less than in India. The edge also goes to China when it comes to local markets. Its per capita GDP is more than twice that of India, and it has more consumers with buying power. As for exports, China’s manufacturing productivity and process-improvement skills overwhelm India’s in most industry sectors. With respect to human resource, both countries have their own strength: China excels at process creativity, India at innovation (Welch, 2007). Given these advantages and disadvantages, Indian and China face dissimilar issues with respect to the global sourcing market.
Challenges in India India is the most popular offshoring destination. The country currently holds 80% to 90% of the ITO and BPO offshoring market, and is now aspiring to emulate Chinese-style exports in laborintensive manufacturing. Certainly in comparison to China, India has weak domestic demand (only
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15% of IT service clients are from India) and has a disadvantage in competing against China in the Japanese and Korean markets due to the cultural difference and language barriers. As India prepares to become an economic superpower, it must expedite socioeconomic reforms and take steps to overcome two major economic barriers (Panagariya, 2007) discussed next. •
•
Wage inflation, rising turnover rate, and shortage of talented manpower: In recent years, India has had double-digit wage inflation. Large IT companies like Wipro, Infosys, and TCS saw average wage increases of 15% and turnover rates of 10%to 12% in entry-level positions and 15%to 20% in middle management in 2006 (http://www.cio.com). In addition, a recent McKinsey-NASSCOM report indicates that India will face a shortfall of 500,000 IT staff members equipped with the skills to work in the offshore outsourcing industry in 2010. China has an advantage when it comes to education and talent supply. Roughly 15% of China’s population aged 18 to 23 is enrolled in higher education, compared to 7% in India. In addition, 91% of Chinese adults are literate, vs. 61% in India, according to the CIA World Factbook. China adds 600,000 new engineers a year, whereas India produces about 350,000 new engineers per year (National Academies, 2006). Indian companies will have to adapt their value proposition to retain their cost advantages in the competitive market. Infrastructure: Although India’s political leaders intend to use the IT industry to create the next IT superpower, India faces the paradox of change and development due to inadequate power-generation capacity and weak communication infrastructure (Gardner, 2000). At the beginning of the 1990s, India’s highway and railway infrastructure
New Trends in Global Offshore Outsourcing
Table 11.1. Comparison between India and China Indicators Political System
India
China
Parliamentary Democracy
Authoritarian Communism
Regulatory and Business Climate Ranking (2007)1 Starting a business Dealing with licenses Registering property Protecting investors Paying taxes Ratio of long-term economic growth expectation in the world’s total in 2010
134 155 110 33 158 6.3%
93 153 21 83 168 17.7%
Infrastructure Broadband subscriber (per 1,000 people) Mobile phone subscribers (per 1,000 people) Railways, goods transported (million ton-km) Information and communication technology expenditure (% of GDP)
1 82 407,398 6
29 302 1,934,612 5
Market Size (Local) Population (billion, 2005) GDP (billion $, 2005)
1.1 800
1.3 2200
Market Size (Global Links) Export (billion $, 2005) Import (billion $, 2005) FDI (billion $, 2005)
95 135 6.6
762 660 72.4
Human Resources Annual salary of software engineer Salary growth rate Literacy rate (age 15 and above)
$10300 11.5% 59.5%
$13400 7.5% 90.9%
Sources: Official statistics of China and India, UNDP (human development index), WTO (exports and imports), UNCTAD (FDI, inward FDI potential index), Mercer Human Resource Consulting LLC, World Bank. i
Countries are ranked on their business climate rankings, from 1-175, with first place being the best. For example, a high
ranking on the ease of doing business index means the regulatory environment is conducive to the operation of business (The World Bank’s “Doing Business Project”).
was ahead of those in China in terms of total route kilometers (km), route km/square km, and route/km/population. During the period of 1992 to 2002, China’s highway and railway development overtook that of India’s. China’s overall railway route km extended by 24%, adding 13,797 km to the system. In contrast, over this period, the railway network in India grew by only 682 route
km (1%). In India, while road network grew by 600,000 kilometers in 10 years, virtually all of the increase was in low-standard roads in rural areas. High-standard arterial highways to connect the four main cities of India were largely neglected. During the same period, China emphasized the development of arterial networks, and built 25,130 km of access-controlled expressways with a
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minimum of four lanes and another 27,468 km of four-lane dual carriageway highways (World Bank, Transport Notes 2005). With a coastline of 7,500 kilometers, India has only 12 major ports, which handle 75% of port traffic. Only 15% of India’s traffic is container-based and the capability to manage cargo is very limited. Power networks, roads, transportation systems, and ports are facing huge demands from India’s rapidly growing economy. For example, the total cargo at Indian ports is expected to grow from 395 billion tons in 2004 to 800 billion tons by 2009. However, shortages in infrastructure are eroding the country’s competitiveness and hurting the growth of labor-intensive enterprises, particularly export-oriented manufacturing ones that hold the potential to absorb India’s fast-growing working population.
Challenges in China The challenge for China is how to move up the global value chain to the commanding heights of innovation and global marketing prowess. In IT, the particular challenge is whether China can transfer its demonstrated expertise in low-margin, high-volume hardware manufacturing into highmargin software and IT services. •
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Fragmented industry: Compared to India’s software/IT industry, the Chinese IT sector is fragmented and under development. Most of the Chinese software companies are small: only two firms have more than 3,000 employees, and the number of firms with more than 1,000 employees is less than 20. The top 10 IT service providers account for only 30% of the market share. India’s IT industry is heavily concentrated, with the top 20 players accounting for 48% of the total
•
IT service and software revenue, and the top three companies having sales in excess of U.S. $2 billion. Lack of experience and high-level talent: Chinese IT service companies are inexperienced in global business and enterprise IT. The whole industry lacks project managers and senior-level talent. In the software and IT industry, 50% of China’s IT market is controlled by foreign companies. Although several of China’s companies are gaining a significant share of international markets, most of them lack the experience with the scale and deliverability of large and complicated projects compared to India’s IT companies. There are few Chinese companies capable of meeting the full standards of the Carnegie Mellon Software Institute’s capability maturity model (CMM)5. Although more than 100 companies in China have undertaken and achieved CMM certification at various levels, 80% of them are at level 2 or 3. Only one is capable of level 5.6 Japanese clients account for 60% of the total offshore business, and most of the offshore outsourcing projects are for low-end application development, maintenance, and testing. Even in manufacturing outsourcing, foreign investors have controlled a major share of the domestic market. In 2005, an OECD report showed that China briefly overtook the U.S. as a high-tech exporter in 2005, but the Chinese government reported that 90% of these exports were made by foreign firms operating in China. In fact, Motorola, Nokia, and Ericsson control 70% of the total output of mobile phones. Therefore, Chinese companies have a long way to go to compete with foreign companies, especially in the ITO and BPO offshore outsourcing market.
New Trends in Global Offshore Outsourcing
Strategic Implications for Offshore Outsourcing Industries in India and China Although the world is getting “flatter” by the day (Friedman, 2005), the one who runs faster will always win. It is more about competitiveness than about “flatness.” A flat world only enables a lot more people to gather at the starting line. One has to be able to manage projects globally and profitably in an open environment to win the race. Therein lays the future growth of both countries and the companies that opt to operate there. Indian enterprises are feeling the heat of global cost-competitiveness. They are learning the realities of the impact of rising costs, wage inflation, resource attrition, and currency exchange rates in a relatively unprotected business environment. On the other side, China is nurturing a more cautious, protected, but directionally correct approach for its own historical, cultural, and social reasons. Indian companies are more likely to move freely outside India to penetrate globally, while the city GDP-driven services-sector approach by the local mayors in China tends to feed local growth first. It is not surprising for a foreign company to be approached by representatives of several cities in China for setting up their facilities in the respective cities. In the case of India, it is enterprise centric; while in the case of China, it is location centric. The execution of the project through effective global managers will be a key differentiator. Although China and India both have large domestic markets to provide resilience over time, their abilities to innovate global products will ultimately decide their ability to gain dominance in global markets.
Future Research Three broad areas of future research are suggested in the following paragraphs.
This chapter highlighted the trends based on the authors’ own experiences of doing outsourcing activities on an extensive basis. More rigorous research is needed to understand the underlying drivers that are leading to the current set of challenges in India and China. More study is needed on interdependence of various factors; what makes it work in one company, location, or country and not in the other. This can best be done through rigorous comparative studies , an option seldom utilized so far. Such studies will also help to identify new hubs of sourcing. The impact of global sourcing is now widely spread across most business functions: IT, product support, human resource, product development, marketing research, sales, design and engineering, production, manufacturing, and even R&D. Global sourcing of these business functions is fundamentally changing the way that new innovative products are being developed in today’s world. New enterprises will need to seriously rethink their structure and processes. This is going to lead to a new round of global innovation across all functions. The key questions are: How will it impact future growth of businesses? Is core competency really core to a company anymore? A very small set of companies is now at the forefront of being truly global enterprises where the work does not seem to stop; round-the-clock global factories. How to start and sustain a new enterprise of this type that can leverage the best talent, resources, time, and locations in the most competitive way? This is a fundamental question that needs to be explored as we proceed forward.
References Chen, Y. (2007). Intellectual property rights protection in IT outsourcing contracts: The impacts of transaction costs and institutional environment. Emory University Working Paper.
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CIA World Factbook. (2007). Retrieved from https://www.cia.gov/library/publications/download/ Communist Party of China (CPC) Central Committee. (2000). Summary of the Tenth Five-Year Plan (2001-2005)—Information Industry. Computer Economics. (2006). IT spending, staffing, and technology trends 2006/2007. Retrieved from http://www.computereconomics.com/article.cfm?id=1161&gclid=CLfDhPTGu4wCFQI pFQodjSVBaQ Friedman, T. L. (2005). The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux Press. Harral, C., Sondhi, J., & Chen, G. Z. (2006). Highway and railway development in India and China, 1992-2002. The World Bank Transport Notes #TRN 32. Hoffman, T., & Thibodeau, P. (2003, April 28). Exporting IT jobs. Computerworld. Retrieved from http://www.computerworld.com/managementtopics/management/outsourcing/story/0,10801,80661,00.html Jain, P. (2006). Offshore outsourcing “India vs China”: An empirical investigation. The Business Review, 6, 316-325. Konana, P. (2006). Can Indian software firms compete with the global giants? Computer, July 2006. Meredith, R. (2007). The elephant and the dragon: The rise of India and China and what it means for all of U.S. W. W. Norton & Company. Panagariya, A. (2007). Why India lags behind China and how it can bridge the gap. The World Economy, 2, 229. Pempel, T. J. (1999). The politics of the Asian economic crisis. Cornell University Press.
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Qu, Z., & Brocklehurst, M. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67. Robinson, M, Kalakota, R., & Sharma, S. (2005). Global outsourcing: Executing an onshore, nearshore and offshore strategy. Mivar Press. Schwankert, S. (2007). India and China outsourcing: Trading places? Computerworld Hong Kong (April 01, 2007). Retrieved from http://www. cw.com.hk/computerworldhk/article/articleDetail.jsp?id=416089 Welch, S. (2007). Choosing China or India; Here’s a way to figure out which, if either, is right for your business. Business Week, 4026, 110. Wu, Y. (2007). Service sector growth in China and India: A comparison. China: An International Journal, 5(1), 137-154. Zanatta, (2007). The role of national policies on the attraction and promotion of MNEs’ R&D activities in developing countries source. International Review of Applied Economics, 21(3), 419.
Additional Reading Books Corbett, M. F. (2004). The outsourcing revolution: Why it makes sense and how to do it right. Kaplan Business. Gu, Z. (2006). China’s global reach: Markets, multinationals, and globalization. Fultus Corporation. Lacity, M., & Willcocks, L. (2001). Global information technology outsourcing: Search for business advantage. Chichester: Wiley.
New Trends in Global Offshore Outsourcing
Robinson, M, Kalakota, R., & Sharma, S. (2005). Global outsourcing: Executing an onshore, nearshore and offshore strategy. Alpharetta, GA: Mivar Press.
Lacity, M., Feeny, D., & Willcocks, L. (2003). Transforming a back-office function: Lessons from BAE Systems’ experience with an enterprise partnership. MIS Quarterly Executive.
Sheth, J., Sisodia, R. S. (2005). Tectonic shift: The geo-economic realignment of globalizing markets. New Delhi, India: Response Books.
Lee, H.-S., & Anderson, B. B. (2006). Automobile industry in China and India: Backgrounds, trends and perspectives. The Business Review, 6(1), 308-315.
Willcocks, L., & Lacity, M. (2006). Global sourcing of business and IT services. London: Palgrave Macmillan.
Journal Papers Chandra, A., Fealey, T., & Rau, P. (2006). National barriers to global competitiveness: The case of the industry in India. Competitiveness Review, 16(1), 12-20. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development projects. Information Systems Research, 14(3), 291-314. DiRomualdo, A., & Gurbaxzni, V. (1998) Strategic intent for IT outsourcing. Sloan Management Review, 39(4), 67-1998. Filippo, G. De, Hou, J., & Ip, C. (2005). Can China compete in IT services? McKinsey Quarterly, (1). Gopal, A., Sivaramakrishnan, K., Krishnan, M., & Mukhopadhyay, T. (2003). Contracts in offshore software development: An empirical analysis. Management Science, 49(12), 1671-1683. Hall, J., & Liedtka, S. (2005). Financial performance, CEO compensation, and large-scale information technology outsourcing decisions. Journal of Management Information Systems. 22(1), 193-205. Kern, T., Willcocks, L., & Lacity, M. (2002). Application service provision: Risk assessment and risk mitigation. MIS Quarterly Executive, 1(2), 113-126.
Lee, B. L., Rao, D. S. P., & Shepherd, W. (2007). Comparisons of real output and productivity of Chinese and Indian manufacturing. Journal of Development Economics, 84, 378-416. Levina, N., & Ross, J. (2003). From the vendor’s perspective: Exploring the value proposition in information technology outsourcing. MIS Quarterly, 27(3), 331-364. O’Connor, T. (2006). China, India and the U.S. rail industry: Overview and trends. Journal of Transportation Law, Logistics, and Policy, 73(4), 510-521. Qu, Z., & Brocklehurst, M. (2003). What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection. Journal of Information Technology, 18, 53-67. Rottman, J., & Lacity, M. (2004). Proven practices for IT offshore 0utsourcing. Cutter Consortium, 5(12), 1-27. Susarla, A., Barua, A., & Whinston, A. (2003). Understanding the service component of application service provision: An empirical analysis of satisfaction with ASP services. MIS Quarterly, 27(1), 91-124. Vogel, J. H. (2007). Why India is not the next China. Real Estate Finance, 23(5), 3-8. Zainulbhai, A. S. (2005). What executive are asking about India. McKinsey Quarterly, 2005 Special Edition.
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Business Press and White Papers Economist Intelligence Unit. (2007). Country commerce report (China). New York: The Economist. Economist Intelligence Unit. (2007). Country commerce teport (India). New York: The Economist. Lewis, J. A. (2007). Building an information technology industry in China: National strategy, global markets. Washington, DC: The Center for Strategic and International Studies (CSIS) Press.
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New IBM research quantifies the long-term impact of IT outsourcing on three business metrics. 12/05 press release.
Endnotes 1
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“Worldwide and U.S. Offshore IT Services 2006-2010 Forecast,” IDC Market Analysis DOC #202411.
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“India maintains outsourcing advantage,” by Anthony Mitchell, E-Commerce Times. 05/30/05. http://www. ecommercetimes.com/story/42781.html http://forum.simplyhired.com/archive/index.php/t-223.html “India and China outsourcing: trading places?” by Steven Schwankert, Computerworld Hong Kong. http://www.cw.com. hk/computerworldhk/article/articleDetail. jsp?id=416089 CMM is based on quality standards defined by the Software Engineering Institute (SEI). CMM ensures that various software processes are clearly defined to ensure quality control and delivery. Its scope covers the software development process and definition of project scope, time, software design, development, and testing. The highest CMM level—level 5—means that a company can ensure predictable, consistent results when it undertakes a software project. Of the 70 level 5 companies in the world, 50 are in India. “Outsourcing in China,” Insidernews, October 3, 2004. http://sherman.linuxhall. org/?q=node/view/216
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Chapter XII
The Role of Prisons in Offshoring Whitney Hollis University of Arizona, USA
Abstract Outsourcing and offshoring are popular (and often controversial) trends in American business, yet not all outsourcing is done in foreign countries; many jobs are being sent to prisons, where inmates can provide low-cost, locally based labor. This trend has extended from a role in manufacturing to whitecollar jobs, like telemarketing. This chapter analyzes this type of outsourcing in terms of the costs and benefits for business and consumers, as well as the social implications.
Overview From a U.S. perspective, there are businesses that can afford outsourcing contracts managed from a distance, but there are also businesses that would like to remain competitive and keep the jobs “on the home front.” One solution is to outsource to prisons in the U.S. Since 1995, several states in the U.S. have embraced this concept. The perceived benefit is that prison outsourcing
is beneficial for the taxpayers, it is an answer to reducing recidivism to promote our social duty to help return criminals to society, and it provides a ready talent pool of inexpensive labor. Popular media have always depicted inmates making license plates or doing some kind of manufacturing. Those things were really happening in many prisons nationwide until 1929, when the Hawes-Cooper Act was put into place banning prison goods from interstate commerce; many of
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these initiatives are underwritten by state governments and were viewed as a way to keep primary state industries protected and profitable. Recently, Oregon, California, Iowa, Oklahoma, Texas, Michigan, Utah, and other states have jumped on the bandwagon, employing prison labor to carry out their low-level jobs. Many of these states provide tax incentives to businesses for utilizing prison labor. According to Jon Swartz of USA Today, “[…] companies seek cheap labor without incurring the wrath of politicians and unions” (2004). However, the unions have a different perspective. Unions see prison outsourcing as a violation of minimum-wage laws and as being unfair to workers in America. To curb the arguments laid out by the unions, correctional authorities claim they pay the workers minimum wage, but the net income to prisoners is reduced as they must pay rent and other miscellaneous bills and taxes. And they argue that if prison outsourcing did not exist, the same amount of jobs would be exported, anyway.
Organization Background As foreign outsourcing has been on the increase, so has correction outsourcing programs. An agency that has furthered the option of correctional outsourcing is The National Correctional Industries Association (NCIA). The NCIA consists of “all 50 state correctional industry agencies, Federal Prison Industries, foreign correctional industry agencies, and numerous city and county jail industry programs” (2007). NCIA has been around since 1941, primarily focusing on the manufacturing industry, but now, this focus is changing. While there are several programs focusing on allowing prisons to participate in providing outsourcing services, one program found in most all federal prisons is the UNICOR Federal Prison Industries. They provide all sorts of services, and have now begun to cater to the call-center industry. Their Web site has a video that explicitly
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shows how operations are conducted, and how the security qualms of the business partners and citizens can be potentially mitigated (http://www. unicor.gov/services/contact_helpdesk/).
Legislative History The Hawes-Cooper Act and the Ashurst-Sumner Act of 1935 banned prison goods from interstate commerce due to earlier instances of abuse of prison labor. In 1979, Chief Justice Warren Burger advocated using the prison system to set up programs that would be beneficial to the economy. The Justice System Improvement Act of 1979 created seven Prison Industry Enhancement (PIE) pilot projects. In 1984, the program was expanded to 50 PIE projects. The Crime Control Act of 1990 (Public Law 101-647) continued the program indefinitely. Correctional departments have to become certified by the Director of the Bureau of Justice Assistance (BJA), U.S. Department of Justice. Arizona Correctional Industries (ACI) is one of the programs certified by the U.S. Department of Justice, and must therefore comply with the Mandatory Criteria for Program Participation: Corrections departments that apply to participate in PIECP must meet all nine of the following criteria: 1.
2.
3.
Eligibility: Authority to involve the private sector in the production and sale of inmatemade goods on the open market. Wages: Authority to pay wages at a rate not less than that paid for work of a similar nature in the locality in which the work is performed. Non-inmate worker displacement: Written assurances that PIECP will not result in the displacement of employed workers; be applied in skills, crafts, or trades in which there is a surplus of available gainful labor in the locality; or significantly impair existing contracts.
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4.
5.
6.
7.
8.
9.
Benefits: Authority to provide inmate workers with benefits comparable to those made available by the federal or state government to similarly situated private-sector employees, including workers’ compensation and, in some circumstances, Social Security. Deductions: Corrections departments may opt to take deductions from inmate worker wages. Permissible deductions are limited to taxes, room and board, family support, and victims’ compensation. If victims’ compensation deductions are taken, written assurances that the deductions will be not less than 5% and not more than 20% of gross wages and that all deductions will not total more than 80% of gross wages. Voluntary participation: Written assurances that inmate participation is voluntary. Consultation with organized labor: Written proof of consultation with organized labor prior toprogram startup. Consultation with local private industry: Written proof of consultation with local private industry prior to program startup. National Environmental Policy Act (NEPA): Written proof of compliance with
NEPA requirements prior to program startup (http://www.ncjrs.gov/html/bja/piecp/bjaprison-industr.html#mandatory) The National Correctional Industries Association also oversees the state correctional partners. The setting for this case is Arizona. The Arizona Department of Corrections is connected with the Arizona Correctional Industries, which contracts prison labor for businesses. The case specifically highlights outsourced prison labor in the telemarketing industry.
Setting the Stage in Arizona Arizona Correctional Industries (ACI) is a program that is undertaken by the Department of Corrections, and the overall operations are supervised by the Director of the State Department of Corrections (Statute 41-1621). The committee and the Director have the power to commission where, and which products will be sold or manufactured and for how much it will cost (According to Statue 41-1629, 41-2636 section F, 41-1624 section D and 41-1628). ACI is politically and fiscally tied to the Arizona State Department of
Figure 12.1. Dollar benefits to Arizona economy by year (Source: 2005 ACI Annual Report, pg. 3)
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Corrections and works with only the state prisons and not the federal prisons. There is a revolving fund that is annually appropriated to underwrite more programs for inmates. Arizona Statute 41-1624 defines the purpose and the allocation of the revolving fund. Any profit contributes to the revolving fund. Companies become contract partners with ACI in order to receive benefits from the state, and it works much like a labor union; it brings all companies together under one umbrella and provides protection for the inmates. The Hawes-Cooper Act was rendered inactive by Statute 41-1622, which now implies that the sale of the goods and services are allowed. In 2004, prison outsourcing created $25.6 million in sales for ACI; in turn, ACI directly and indirectly contributed $48 million to the Arizona economy (ACI, 2005).
Case Description The Arizona State Prison Complex (ASPC)-Perryville is located in Goodyear, Arizona. This facility houses Televerde, which is the ACI Telemarketing business staffed by female inmates. It is a completely privatized call center that conducts business-to-business contracting market intelligence. The facility began as a social service and then grew into a for-profit business. The workforce consists entirely of women who conduct calls to businesses and do not have to disclose that they are prison inmates. The work setting is the same as any other. There are cubicles and computers. Workers must apply and interview for their positions and are allowed to quit. In order for inmates to be considered, they must not have a crime of notoriety on their record and must have six months of good behavior. One of the concerns for using prison labor is the question of trustworthiness of the inmates. With the Arizona Televerde facility being a call center, security of one’s personal information and identity is essential. However, this particular call
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center is one that is geared towards telemarketing to other businesses, not to the local public; as such, no personal information is intended to be swapped. Inmates go through an orientation process and are carefully supervised. In Arizona, a Fortune 500 distribution company contracted with Televerde, aware of the work being performed by the prisoners. Companies that contract with Televerde are requested to visit the facilities and listen in on some calls to see how daily operations run.
The Prison Operations at Televerde: A First Person Case Study Televerde is a business-to-business (B2B) telemarketing company. The company got the idea to utilize prison labor through a friend who was part of a Christian organization that helped the prisoners to obtain workable skills. The company felt that its target is the American market, and it needed employees who had a better understanding of the American market and would be able to involve high-tech businesses and concepts. This author had the opportunity to visit Televerde operations at one of the state prisons in Arizona. It was at a women’s facility out in the middle of nowhere. Two employees of Televerde escorted the author on her visit. There were three different areas where Televerde conducts business, based on the level of the crimes of the women. In order to understand how this impacts the business model, it is pertinent to explain how the prison ranking system works. Yards are how the prisoners are separated, usually by their rating; the most severe crimes and threats in one yard and the less severe in other yards. Two ratings are utilized, each on a scale of 1-5: The first rating is the crime severity, and the second rating is the prisoner’s threat to society; a 1 is usually safe, whereas a 5 is severe. For example, a woman can be ranked 1:5, reflecting that she was convicted of a petty crime, but she is deemed psychologically to be a threat to the
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society. Of course, these rankings are not set in stone. Over time, a woman can demonstrate good behavior and move to other yards. Televerde only hires women who rank 3-2 or 2-3 and cannot be convicted of identity theft. The process to get hired is difficult. Some of the women said that they applied three or more times before they were hired, after going through rigorous interviews with the company and with psychologists. Once they are accepted, they must complete a training course that takes months, and they must pass with flying colors. Walking in the yard to the room where daily operations take place was intimidating. The women outside stared and did not seem happy. Upon entering the building, the women greeted this author with open arms. It was a completely different situation. The work day starts around 5 in the morning and ends at around 7 pm. Then the women go “home” and study for the next day’s work. They are calling businesses to market products and services to other businesses; they are generating leads and cold calling. These women must have an understanding of the products and the business. They use VoIP to conduct their calls and software created by Televerde to track the calls. They create profiles for leads. They channel programs and lead to get forecasts. The prisoner’s create marketing intelligence that is actionable. The women in return are paid minimum wage and receive education in management information systems, marketing, and other business areas. Although they only make minimum wage, 30% of this wage is deducted to pay for victim’s compensation, room and board, and other purposes. When one thinks of a prisoner, one thinks of some hard, cold person; in contrast, the prison escorts were a lively pair. And at the end of the trip, they were just regular people in this author’s eyes. They mentioned that Televerde had put together the TOPS programs that help a woman who is a year from the “gate.” At that time, she will get the chance to be groomed for reality with mock interviews, talk with alumni, learn
budgeting, and attain more life skills. Televerde also has a scholarship programs called TENS: if a woman has achieved her associates degree from Rio Salado Community College while in prison, when she leaves, Televerde will help her to receive her bachelor’s degree. Many of these women dream to work at Televerde when they are out. By the end of the day, it was made known to this author that most of the women working at Televerde used to be inmates, but one would never have guessed. This author had the opportunity to sit in on a call. After the call, this author got the chance to briefly talk with the operator-cum-prisoner about what she thought about her job. She was happy to have a job that will help her later on in life. She said her daughter was proud of her. She was saving up her money to help out her daughter, who will be attending the University of Arizona. Leaving the buildings and walking through the yard, most of the women sat around all day smoking cigarettes. There were other women who came up to some of the workers on a break and would try to get their advice because they wanted to apply and work for Televerde. In this case, all parties realize benefits, from the customer to the rehabilitated and trained prisoner. However, this author cannot guarantee that all businesses are just as moral as Televerde, or that the situations in other prisons are similar.
Challenges and Problems Facing the Organization The Wage Debate The issue of wages has been hotly debated by unions, states, and business. While some companies do pay minimum wage, like the call center at Televerde in Arizona, there are deductions taken out. USA Today reported that at an Oregon facility, inmates made $120-$185 a month for a 40-hour work week, which comes out to 75
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Figure 12.2. Wages earned and deductions taken (Source: 2005 ACI Annual Report, pg. 3)
cents an hour. According to the Federal Bureau of Prisons, reported by USA Today, on average, inmates across the nation receive only 11-36 cents an hour (Swartz, 2004). The inmate employees in the Televerde program do earn a wage. Most of their wage is reduced, but is known to be greater than 50 cents an hour. Their wages help to pay for victim compensation, dependent payments, and other correctional programs like drug and alcohol rehabilitation (Figure 12.2). Televerde does not disclose the real wage cost, but they do disclose their fiscal profits and allocations to ACI because of their partnership. For the full ACI partnership during the fiscal year 2005, more than $48M was contributed by ACI to the Arizona General Fund, and over 403 jobs were active (ACI, 2005). Why would a business want to pay 11-36 cents an hour when the cost is lower in some countries around the globe? This is where the benefits of an English-speaking person may come in handy. Also, the societal aspect needs to be considered. If the prison is privatized (meaning connected with ACI and their business partners), then, in theory, taxpayers would have lower taxes. The prison system was created to not only keep criminals out of society, but also to rehabilitate them for life after prison.
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Opposition: Human Rights Perspective Critics of prison outsourcing and privatization are concerned about humanitarian issues. The focus on these issues is the concern about ethical human rights and inmate rights regarding protection from becoming a labor camp. On the flip side, there are many “Dilbert” followers who would venture to state that the cubicle is just another form of a prison or a cell. The ACLU is one of the main groups that is against prison outsourcing and privatization primarily for prisoners’ rights from labor work programs that are suggestive and could turn into oppressive labor work camps. Jenni Gainsborough, who is the public policy coordinator of the ACLU expressed, “I’m completely opposed to the concept of private prisons. The most extreme sanction the state has against the individual, short obviously of the death penalty, is imprisonment, and that should not be turned over to an organization whose primary concern is the profit of its shareholders”(2003). She feels that privatization will imply caring more for the money and the profit then effective rehabilitation; further, the human rights of the inmates will be compromised. Businesses may not be able to draw the line between
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a healthy worker program and a bottomless pool of slave labor because they may get blinded by the profits and shareholder satisfaction. This is a valid ethical issue that cannot be ignored.
Opposition: Security Issues Other than inhumane practices, the fear of security is another main concern. Utah Correction Industries is the best example. The issue of keeping the integrity of call center programs while operating in a prison environment came into focus in 2000. This one concerns the call center in Utah. In 2000, the call center program in Utah discovered insider inmate swapping of personal information. The program was scrapped. The fear of customer identity theft and the leak of personal information came to fruition, and it became apparent to correctional industries that these white-collar services would need to be monitored and secured. While this case provided foes of correctional outsourcing with a strong case to discourage it, economic pressures and business incentives have assisted in the industry’s continued growth. Now, UNICOR and the other correctional industries claim that no personal information is swapped and that calls are monitored. Many places do not even allow the inmates to bring utensils and/or their keystrokes are limited by the computer. Operations at Televerde in Arizona require the inmates to learn about products and companies. The computers they work on are very limited and controlled. The calling is through a program on the computer where the ladies click on the company, then the specific person. Any information from the call is then quickly typed in a limited word box, where they can record time, date, person called, inmate name, and the information discussed or not. It is a specific software program that the company and inmates use to make their calls. Yes, these women end up with an extensive background in a business and this may be alarming to many. It is uncertain as to which direction the inmates could use the
information. Companies say that they have put in place precautions, creating intranets, monitoring systems for computers, recording and archiving conversations, limiting user keystrokes, but the technology frontier contains loop holes that someone might be able to discover. For some, the risk may be too high to leave in the hands of convicts; or is the information better off in the hands of foreign nationals?
Benefits of U.S. Prison Labor Prison privatization entails that ACI is the contracting/interlocutor “company” that lends the prison facility to the business to conduct their work to hire who they please. Then the company pays the employees’ wages to ACI, who deducts and allocates the money to the state prison. Since inmates receive deductions from their pay to cover expenses discussed in the last section, the money left over is put in savings for when the inmate is released into society. The privatization of prisons means that quality can be improved too. There are many prisons that are not up to par with conditions like beds or space and, therefore, contracting with a company means that they can provide extra space and be able to pay for beds. Also, the contracts enforce that conditions must be up to standards and in many cases, the privatized prisons scored better than prisons that were not. If a detention facility is up to par, it would be accredited by the American Correctional Association (ACA). According to Moore and Segal (2002), a larger percentage of privately owned prisons are accredited by the ACA (44% of privatized prisons vs. only 10% of government-operated facilities). The other benefit is a lower recidivism rate. Recidivism is the rate that the inmates end up returning to the prison. In theory, inmates who are released have a hard time assimilating back into society because they lack skills to work, and are only given $50 at the time of leaving the prison. But ACI and its partners offer training and jobs for
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Figure 12.3. (Source: 2005 ACI Annual Report, pg. 4)
inmates. The Arizona Inmate Program Evaluation of February 2005 found that the 2-year recidivism rate for participants was reduced from 21.1% to 15.8% due to participation in the programs. Figure 12.3 reflects the breakdown of the number of inmates employed. Apart from the three operations of Televerde, there are two other ACI operations supporting the Arizona Motor Vehicle Department (MVD). In fiscal year 2005, 75 inmates assigned to the MVD call centers worked more than 134,213 hours, leading to a savings to the state of $691,197. (ACI, 2005)
Conclusion The outsourcing to prisons in the U.S. is partly a response to global outsourcing trends and partly a mechanism to address the problem of overcrowded prisons. The fear of white collar, low-end service jobs increasing in prisons is alarming. These jobs require computers, and computer technology is not as secure as many would hope it to be. The industries allay consumers’ fears in stating that no personal information is ever swapped, and that their work is being tightly monitored through security technologies. There is also concern that prison labor is still taking jobs; even though the jobs are not going abroad, these jobs are taken
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from those who are actually responsible lawabiding citizens of society. On the business and government side, prison outsourcing is lucrative, even though it may come with a bad stigma; on the other hand, consumers and citizens feel that their security is being compromised. Each point of view on prison outsourcing highlights valid concerns.
Further Research For further research, it would be useful to view other industries that benefit or could benefit from using prison labor, ranging from more labor-intensive jobs to white-collar positions. Further, one could do comparisons from different states. Another avenue is to break down the tax benefits and costs by the facility. One could create a detailed picture of how the costs are incurred, how the benefits are received, and if those benefits and reduced recidivism rates are truly being realized. There is also the concept of gender bias in correctional outsourcing. There are those analysts who feel that women will tend to think of their family first rather than themselves so the money that they earn is well spent, and that women will be more responsible at budgeting. In addition, the type of labor, that is, white collar jobs vs. more labor intensive, may be found to be gender
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biased, where the men will perform the more labor intensive jobs and the women will receive the white collar positions. Prison outsourcing is not limited to the United States. Countries have been using prisoners for years. It would be useful to discuss the differences around the globe and view the international trend that is occurring, and where prison outsourcing will lead. How far will privatization go in prisons and management, and how will prison outsourcing impact international trade treaties and international legislation on issues like human rights.
Swartz, J. (2004). Inmates vs. outsourcing. USA Today, July 7, 2004. Retrieved June 1, 2006, from http://www.usatoday.com/money/ economy/employment/2004-07-06-call-center_x.htm?POE=click-refer
References
Berg, J. (2000). Private prisons: International experiences and South African prospects. University of Cape Town.
Arizona Correctional Industries. (2005). Annual Report (pp. 1-11). Retrieved June 1, 2006, from http://www.aci.az.gov/annual/2005annual.pdf Department of Justice. (2004). National Criminal Justice Reference Service. Bureau of Justice Assistance Program Brief. Retrieved May 1, 2007, from http://www.ncjrs.gov/html/bja/piecp/bjaprison-industr.html#mandatory Gainsborough, J. (2003). The truth about private prisons. Alertnet. Retrieved June 2, 2007, from http://www.alternet.org/story/17392 Krasny, R. (2006). Study sees increase in U.S. outsourcing. The Houston Chronicle, November 6, 2006, pg. 6. Moore, A., & Segal, G. (2002). Weighing the watchmen: Evaluating the cost and benfits of outsourcing correctional services. Retrieved June 1, 2007, from http://www.rppi.org/ps290.pdf National Correctional Industries Association. (2007). Retrieved June 1, 2007, from http://www. nationalcia.org/ Pens, D. (1996). U.S.: Out-celling the competition. North Coast Xpress. Retrieved May 12, 2007, from http://www.corpwatch.org/article.php?id=864
Further reading Alabama Department of Corrections. (2005). Monthly statistical report. Retrieved from http:// www.doc.state.al.us/docs/Monthlyrpts/200305.pdf
Bureau of Justice Statistics. (2000). Sourcebook of criminal justice statistics. Washington, DC: U.S. Department of Justice. Chang, T., & Thompkins, D. (2002). Corporations go to prisons: The expansion of corporate power in the correctional industry. Labor Studies Journal, 27(1), 45-69 Connecticut Department of Corrections. (2003). York CI programs and services. Retrieved from http://www.doc.state.ct.us/report/compendiumYork.pdf Davis, A., & Shaylor, C. (2001). Race, gender, and the prison industrial complex: California and beyond. Meridians: Feminism, Race, Transnationalism, 2(1), 1-25. Freeman, C. (1993). Designing women: Corporate: discipline and Barbados’ offshore pink-collar sector. Cultural Anthropology, 8(2), 169-186. Gilmore, R. W. (1999). Globalization and the U.S. prison growth: From military Keynesianism to post-Keynesian militarism. Race & Class, 40(2-3), 171-188
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Gondles, J. A. (1999). Prison industries: A new look at an old idea. Corrections Today, 61(6), 6. Ingley, G. S., & Cochran, M. (1999). Ruinous or fair competition? Corrections Today, 61(6), 82. Kansas Correctional Inudstries. (2005). Data entry. Retrieved from http://www.kci.dc.state. ks.us/standard/services/dataentry.html New Jersey DEPTCOR. (2003). Accomplishments. Retrieved from http://www.state.nj.us/deptcor/enterprise_highlights.html New Mexico Correctional Industries. (2003). Telemarketing, data entry, and mail fulfillment. Retrieved from http:corrections.state.nm.us/industries/products/telemarket.htm Oklahoma Correctional Industries. (2003). Mabel Bassett Correctional Center. Retrieved from http://www.state.ok.us/~osi/pmabelb.htm Oregon Corrections Entreprises. (2002). Inmates working for Oregon: Oregon corrections enterprises 2001-2002 annual report. Retrieved from http://www.insideoregon.com/who_we_are/ 2002annualreport_web.pdf Parenti, C. (2003). Privatized problems: For-profit incarceration in trouble. In A. Coyle, A. Campbell, & R. Neufeld (Eds.), Capitalist punishment: Prison privatization and human rights. Atlanta/ London: Clarity/Zed. Reynolds, M., & Rostad, K. (2001). Creating factories behind bars: Brief analysis No.354. Texas/Washington, DC: National Center for Policy Analysis. Retrieved from http://www.ncpa. org/pub/ba/ba354
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Sexton, G. (1995). Work in American prisons: Joint ventures with the private sector. Washington, DC: U.S. Department of Justice. Retrieved from http://www.ncjrs.org/pdffiles/workampr.pdf Tennessee Department of Corrections. (2003). Riverbend Maximum Security Institution. Retrieved from www.state.tn.us/coorections/institutions/rmsi.html UNICOR. (2003a). Call center & help desk support. Federal Prison Industries, Inc. Retrieved from http://www.unicor.gov/services/callcenter. htm Van Zyl Smit, D., & Frieder, D. (Eds.). (1999). Prison labour: Salvation or slavery? International Perspectives. Aldershot: Ashgate. Washington State Department of Corrections. (2003). Washington Corrections Center for Women. Retrieved from http://doc.wa.gov/facilities/wccwdescription.htm Weiss, R. (2001). Political economy of prison labor reprivatization in the postindustrial United States. Criminology, 39, 253-91 Western, B., King, J., & Weiman, D. (2001). Labor market consequences of incarceration. Crime and Delinquency, 47, 410-427. Wilson, M. (1998). Information networks: The global offshore labor force. In G. Sussman & J. A. Lent (Eds.), Global productions: Labor in the making of the information society. NJ: Hampton Press.
Section V
Collaboration and the 24-Hour Knowledge Factory
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Chapter XIII
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory Satwik Seshasai IBM, USA Massachusetts Institute of Technology, USA Amar Gupta University of Arizona, USA
Abstract The term 24-Hour Knowledge Factory connotes a globally distributed work environment in which teammates work on a project around the clock. The 24-Hour Knowledge Factory is a special case of a globally distributed team in which the different teams work on a sequential basis that has been clearly defined in advance. Whereas a manufactured item was the end product in the case of the factory which emerged as a consequence of the industrial revolution, knowledge-based services and knowledge-based products are the end deliverables in the case of the current information revolution; hence, the term 24Hour Knowledge Factory. Work can be decomposed by task style or by organizational style, and allows for greater specialization of workers. A case study from IBM details surprising differences between colocated and distributed teams, and leads to a future state analysis for organizations seeking to study or implement the 24-Hour Knowledge Factory.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
Introduction of Concept The term 24-Hour Knowledge Factory connotes a globally distributed work environment in which members of the global team work on a project around the clock; each member of the team works the normal workday hours that pertain to his or her time zone. At the end of such a workday, a fellow team member, located in a different time zone, continues the same task. This concept flows from the fundamental belief that, in most cases, a person can work most effectively during the normal daytime work period (roughly from 9 am to 5 pm). While one can temporarily work during the night, such a mode of operation is not convenient or optimal over an extended period of time. Further, by having three sets of individuals perform work over a 24-hour period, the objective is to drastically reduce the time needed to develop information systems and to facilitate effective knowledge-based processes to occur. Software development involves the creation of a product that is produced primarily through the transmission of knowledge between members of the development team. The figure below illustrates a distributed factory with software design operations in three countries around the world. In this particular delivery model, each geographic
location is responsible for a separate task, and the overall efficiency of the project is improved since each location perceives that progress is made “overnight” when workers at that location are asleep. Additional models, discussed in the following sections, are characterized by different distributions of tasks depending on the appropriate needs for information management. In a “24-hour software development environment” (Gupta & Seshasai, 2007) that encompasses three or more development centers located around the world, the distributed team is envisaged to concentrate on the same problem and to perform the same function (whether it be development of code or testing of subsystem) on a successive basis, with each collaborating center retaining ownership of the endeavor for 8-hour periods in every 24-hour cycle. Many industries, including the software industry, are characterized by a development cycle that relies heavily on sequential performance of specific functions, such as development, testing, and verification. In a traditional software development environment, where all parties are located in the same geographic area, a code developer typically waits until a fully functional portion of the product is available before passing it on to an engineer to test it. However, with the potential for receiving testing feedback overnight, the devel-
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Figure 13.1. A distributed factory with software design operations in three countries around the world
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The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
oper now has the unprecedented opportunity to build portions of the product on an incremental and more daily basis.
Evolution From Factory to Knowledge Factory The notion of the 24-Hour Knowledge Factory can be traced back to the industrial revolution. Since the installed equipment was scarce and costly, different sets of employees were scheduled to work in successive shifts so that the manufacturing facilities could be used on a round-the-clock basis. The use of the 8-hour shift system evolved over time. This involved decomposition of the manual tasks involved in fabricating an agricultural implement or a handgun into a series of tasks that could be performed relatively independently of each other with the assistance of different machines. Initially, each worker was directed to work 12 to 16 hours a day so that each machine could be used for an extended period of time. Then, the notion of having two shifts evolved. Based on new legislation on both sides of the Atlantic, the work hours were gradually reduced. The introduction of the shift system yielded benefits in terms of higher productivity of each machine, reduced production times, and lower prices to customers. However, it also created social and health issues by requiring the person to be work in an urban setting, usually away from other members of the family, and at odd hours and changing work schedules determined by the idiosyncrasies of the manager in charge of assigning workers to different shifts. With the advent of electronic computers and the diminishing costs for telecommunications, one developed the notion of 24-hour call centers. Depending on the time of the call, it is automatically directed to a call center that is active at that time. Using a cluster of three to four call centers located in time zones 6 to 8 hours apart from the time zone of the neighboring call center, one can ensure that all employees of these geographically distributed call centers are working during the
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daytime in their respective countries. The notion of multiple support centers was subsequently adapted for supporting global communications networks over time. Now it has become feasible for one to use a geographically distributed workforce of highly trained professionals to complete an endeavor in a much shorter timeframe as compared to a scenario in which all personnel are based at one location, irrespective of where that location is. Whereas a manufactured item was the end product in the case of the 24-hour factory, which emerged as a consequence of the industrial revolution, knowledge-based services and knowledgebased products are the end deliverables in the case of the current information revolution; hence, the term 24-Hour Knowledge Factory. The use of the term factory emphasizes: The use of multiple sets of workers The availability of a set of base technologies to operate on the knowledge and to transfer the knowledge from one worker to another 3. The shift-type nature of operations 4. The underlying idea of decomposing a big task into a series of components that can be tackled on a sequential basis. 1. 2.
24-Hour Knowledge Factory Versus Globally Distributed Teams The term globally distributed teams implies teams of people, in different parts of the world, working on the same problem. In most cases, but certainly not all, the teams may be working on different parts of the same problem, such as one working on the user interface and another working on the data analysis part. The 24-Hour Knowledge Factory is a special case of a globally distributed team in which the different teams work on a sequential basis that has been clearly defined in advance. For example, by involving three teams of specialized microchip design engineers located at carefully
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
selected places around the world, a semiconductor chip design firm may create a virtual 24-Hour Knowledge Factory that utilizes the best talent in three continents, as well as an efficient design process that offers a faster turnaround time than conventional design approaches. One could argue that the faster turnaround time could be attained by having three teams working in a sequence at the same location. This single location scenario would require one team to work at odd hours of the night; some persons call the latter type of shift as the “graveyard shift”. Further, not all the high-talent designers are willing to move from their respective countries to a single location. The creation of globally distributed teams that transcend geographic boundaries offers the potential to change the face of many industries. The 24-Hour Knowledge Factory concept places emphasis on leveraging the temporal boundaries for a company’s benefit. In the 1980s, when one discussed the notion with representatives of leading banks in the United States and Switzerland in the context of information systems, these representatives were taken aback by the idea. At that time, people around the world deemed the time difference between fellow workers to be a major negative—they thought the time difference would hinder their ability to perform the work and add significant
overheads, time delays, and costs. Now, the perception has switched around—for many projects, the time difference is viewed as a strategic plus; it is this time difference that enables the creation of the virtual 24-Hour Knowledge Factories. In software development, Treinen and Miller-Frost (2006) have studied global teams and noted that time zones are more significant than physical separation, and these time differences can be a competitive differentiator for firms who take advantage of them.
Structure of Work and Decomposition into Components Prior to the industrial revolution, a person would be engaged in developing an item from start to finish. If a hammer had to be fabricated, the person would hold responsibility for cutting the wood, trimming the wood, polishing it; the concerned person would also be responsible for heating the metal and bending it to the right shape. In every sense of the word, the end product was a piece of art, manifesting the values of the artisan who created it from scratch. The advent of machines changed the entire operation. Multiple persons, in fact sets of persons spread over two or three shifts, would perform microtasks on each item. The items themselves
Figure 13.2. 24-Hour Knowledge Factory concept applies primarily to semi-structured professional
degree of structure of work
call centers
structured work
product design; legal analysis; financial analysis;
work of chief executives and heads of countries and states
reading of x-rays; creation of is systems
semi-structured work
unstructured work
-Hour Knowledge Factory Concept Relevant Here
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got standardized over time, thereby losing the customization aspect. The finished product was one taken off the assembly line, resembling almost entirely the item that preceded it on the production line, as well as the item that followed it. The concept of shifts was suitable for certain types of tasks, and inappropriate for other types of tasks. The fabrication of generic items like agricultural implements and military goods was facilitated by the availability and use of machines on an around the clock basis. But the shift concept was inimical to creation of many types of fine arts. If an artist worked for 8 hours, then an associate worked on the painting for another 8 hours, and a second associate worked on it for a third shift of 8 hours, then the master painter may deem the painting to be totally ruined and beyond redemption. (Note that there are instances where the multiple worker approach did work in the context of paintings of international repute. Paul Gauguin, the French painter, employed hordes of assistants in Tahiti to paint the background of several of his legendary paintings.) Based on the above analogy, the 24-Hour Knowledge Factory paradigm is appropriate for situations where the professional endeavor can be broken down into components, different individuals can potentially work on such components with minimal support from their peers, and the work in progress can be transferred at minimal cost from one collaborating center to another. Can the same 24-Hour Knowledge Factory paradigm be applied to manufacturing scenarios? Unfortunately, we cannot transport partially finished manufactured goods in split seconds from one place to another. But we can transmit the information related to manufacturing applications, such as that pertaining to design, engineering, quality assurance, and sales of individual parts, subassemblies, and finished products. Such information allows geographically distributed team members to contribute to the operations of a manufacturing plant, even when they are not located in the same country. The same applies to information needed
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by accountants, architects, business managers, computer programmers, financial analysts, medical practitioners, product designers, and many other professionals. The paradigm is appropriate in all situations where the underlying knowledge can be digitized; further, it is most relevant for semistructured professional work.
Potential for Greater Flexibility and Specialization The 24-Hour Knowledge Factory paradigm mitigates five major constraints of the conventional factory environment. First, it overcomes the need to work at odd hours of the day. All individuals need to work during day time in their specific country. The firm Beredium International has experts working in different time zones in the European Union and in Mauritius, so as to provide full-time accounting support to its clients without requiring that employees work in time slots that are not natural to their diurnal rhythms. Second, individuals can work from home. Prior to the industrial revolution, individuals worked from their homes and provided goods to buyers in the neighborhood. The industrial revolution moved the workplace from the home to the factory; and over time, one could sell goods in a broader marketplace. The 24-Hour Knowledge Factory paradigm can provide the flexibility for the individual to work from home, from the beach, from the airplane, and still have his or her professional services benefit consumers on the other side of the globe. Accordingly, we are undoing one of the major constraints imposed upon society by the industrial revolution. Third, the industrial revolution discarded the notion of specialized artisans in favor of assembly lines producing generic goods; the evolving knowledge factories can bring the artisan back to center stage, emphasizing customization over componentized, and individuality over group behavior. The new set of services can be tailored to reflect the individual skills of the worker, and
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
to use them to create customized products and services. For example, one can now use the Internet to order a custom bicycle be manufactured to individual specifications and be truly one of a kind. Broadening this example, we can envision a new generation of service workers who will help to design, manufacture, and market customized products utilizing the most cost-effective options at each stage. As one begins to access and use less expensive labor in places around the world, one can create custom products and services at lower costs. Fourth, the new paradigm provides much greater potential for individuals to progress in their respective fields of expertise. Workers can gradually move up the value chain and provide a growing number of higher value services. Fifth, conventional factories employed workers from very similar backgrounds and national origins. In the 24-hour decentralized development process, professionals from different cultures are concurrently engaged on all tasks, and can provide their cultural input on a continuing basis into all tasks at all stages of the process. This paradigm works better than existing mechanisms for understanding requirements from different cultures, thereby producing end services and products that command greater appeal in the global economy.
Potential Impact of 24-Hour Knowledge Factory Paradigm Overall, the emerging 24-Hour Knowledge Factory model will allow us to better integrate the contributions of key players from around the world (Gupta, Seshasai, Mukherji, & Ganguly, 2007). The example of software development is used in this chapter because this type of activity relies primarily on the transfer and creation of knowledge, with minimal infrastructure requirements. Berger (2006) has discussed the role of improvements in task modularity and rapid knowledge transfers in enabling globally dispersed teams to work
together to achieve a common task. The 24-Hour Knowledge Factory represents the evolution of this paradigm to the point where a fully integrated global work model allows constant engagement on tasks, dramatically influencing the manner in which companies design, develop, implement, test, and maintain their diverse repertoire of information system assets. The efficacy of the above types of knowledgesharing and global collaboration endeavors is being analyzed through the establishment of research teams spread across multiple continents. For example, researchers at the Wroclaw University of Technology in Poland read a working paper on the 24-Hour Knowledge Factory paradigm, contacted colleagues at the University of Technology in Sydney, Australia; then, they jointly approached the University of Arizona to establish the research project called the 24/7 Virtual Student Exchange (VSX) Teaching and Learning model (Chaczko, Klempous, Nikodem, & Rozenblit, 2006). Such geographically dispersed research teams provide one mechanism for studying the broad range of research issues. Instances of semistructured work arise in virtually all types of professional endeavors that involve mental work. The scope is diverse, and includes professional work from medical, logistics, product design, finance, accounting, and legal arenas. Further, the work does not have to be office based.
Key Elements and Key Decisions The concept of 24-Hour Knowledge Factory possesses some overlap with the concept of offshore outsourcing; however, neither is a subset of the other. Agrawal, Farrell, and Remes (2003) described “round-the-clock shifts” offshore, where some firms even pay higher wages for offshore workers to work odd hours. Their research showed that companies can reduce costs 30% to 44% for
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many types of work, including R&D, by performing round-the-clock shifts at the same location. Kaka (2003) presented a spectrum of six models for offshore partners: supplemental staff, turnkey projects, assistance in building centers, buildoperate-transfer, assets, and joint ventures. The 24-Hour Knowledge Factory model can be viewed as the next logical step in this progression as it involves a focus on knowledge and closer collaboration among the constituent work teams. The inherent nature of the 24-Hour Knowledge Factory requires closer attention to the issues of task dependencies, organizational structures, team coordination and optimization, decision rationale and history, and transition between shifts. Consider the notion of “cyclic decentralization” or “sequential responsibility,” where each collaborating center holds the control and coordination responsibility for exactly 8 hours. The defense forces have traditionally used the notion of sequential responsibility in terms of scheduling individuals at guard posts. Similarly, hospitals use similar concepts with scheduling of doctors and nurses. These examples from diverse sectors provide evidence that one can handle complex operations using shift type operations. However, the task dependencies and the management structures of defense forces and hospitals differ very significantly from each other, and from those in other domains of relevance.
Task Dependencies Depending on the knowledge domain and the type of activities envisaged to be processed by a 24-Hour Knowledge Factory, one can visualize varying degrees of task dependencies. Three pertinent scenarios, depicted in Figure 3, are analyzed for their suitability for different operating environments. It is important to note that these three scenarios are not meant to be discrete–in fact, many real-life knowledge factories will employ a hybrid scenario that incorporates aspects of each. However, for the sake of understanding the structural determinants of decision making in the 24-Hour Knowledge Factory, it is useful to decompose into these three scenarios.
Autonomous Scenario In this case, shown in Figure 13.3(a), individuals work relatively independently and do not rely on others for advice in making their decisions. A large number of employees perform work, under a single supervisor, with virtually no need for peer-to-peer interaction among these employees. An example of this scenario is a software support center where customers can call an individual support representative and receive knowledge from that one individual, who, in turn, is supported by a computer-based infrastructure that is
Figure 13.3. Decision-making dependencies for individual work: three scenarios
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continuously updated based on customer queries and experiences. The same concept could apply for support centers that provide assistance on simple legal or taxation matters. The autonomous scenario applies primarily to situations with high degree of inherent structure.
each collaborating center maintain control for 8 hours, and then pass the responsibility to a peer center. This places a requirement for creating new IS infrastructures that can provide better abilities for rapid knowledge transfer between these centers.
Semi-Autonomous Scenario
Organizational Hierarchies
In the case depicted in Figure 13.3(b), individuals still work independently, but occasionally need to consult others. An example of this is a software maintenance engineering team assigned to develop incremental releases to an existing software product. Such a team can work somewhat independently because the changes to the code are primarily isolated bug fixes, but may occasionally need to consult experts, such as the original developers of the code. Another example of this scenario is the reading of X-rays and other radiological information. Some countries allow such medical advice to be provided from abroad; others do not. In the latter case, a professional based in the patient’s country (or even state) may need to formally endorse the medical opinion rendered by a medical doctor in another country.
While considering appropriate decision support systems for the 24-Hour Knowledge Factory environment, one must also consider the axis that relates to the nature of the organization. In a flat organization, all decision makers, regardless of task or geography, can be deemed to belong to a single organization. In other cases, additional layers of hierarchy exist within the overall organization. Based on the degree of importance played by the geography or the task, one can visualize the three cases depicted in Figure 13.4 as the mechanism to handle decision-support knowledge through either the geographic location or the task group.
Tightly Interdependent Scenario In the scenario shown in Figure 13.3(c), all the individuals need to frequently interact with each other in order to complete the task. When a new software product is being developed, the decisions made by one team member may have impact on many other team members, and may also require the inputs of many other team members. The IS field has witnessed repeated rounds of debates on centralization versus decentralization of IS tasks, functions, and infrastructure; frequently, in cases where the work was decentralized, the different tasks were assigned to different centers who retained ownership and responsibility for a significant period. However, in the case of the 24-Hour Knowledge Factory, the intent is to have
Flat Organizational Model Although the flat organization may seem simple, it is the most complex model from the viewpoint of the 24-Hour Knowledge Factory because individuals must consult with the maximum number of other individuals without the benefit of levels of hierarchy to aggregate the various inputs and outputs of their decisions. Consider the scenario where designers of the software system are located in United States, China, and Germany, and testers of the system are located in China and Australia. The stakeholders for the system may be located in other countries and time zones. Designers in United States might need to consult testers in China for performance analysis, who may in turn need to consult stakeholders in France for performance measures. In order for the 24-Hour Knowledge Factory practice to succeed in such an organization, one will need to redefine the internal process for making decisions.
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The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
Figure 13.4. Organizational models for heavily interdependent decision-making teams.
Geography Specific Organizational Model When the existing organization is characterized by hierarchy based on geographic considerations, it is easy to apply the 24-Hour Knowledge Factory paradigm. In such cases, the organization is headed in each country by an individual who is empowered to make major decisions at the local level. As such, many of the decisions can be made at the center level. For example, the Asian office of an automobile company may be empowered to make all decisions related in Asia, including ones related to marketing and advertising. Individuals from this center can then interact with their counterparts in Europe and America, using the 24-Hour Knowledge Factory concept, to create a new marketing strategy with the understanding that the final decisions will be made by the respective management in each continent. This model allows creativity and productivity to be shared across geographies but still adapted to meet the unique needs of various geographies.
Task-Specific Organizational Model In a task-oriented organization, all decisions related to a particular task are made in one department of the organization, irrespective of the physical location of persons of this department. The 24-Hour Knowledge Factory concept is especially geared to suit this type of organizations.
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Multinational companies like IBM generally use this type of organizational model. Applications involving complex information systems development, creation of financial plans, development of advertising plans, development of new products can all be handled effectively in this case. We believe that an increasing number of companies will adopt this organizational structure over time. The challenge to us in the IS community is to develop IS infrastructures that can support diverse applications in a manner that can transcend both geographic and temporal boundaries.
Team Coordination and Optimization The use of multiple collaborating centers spread across multiple continents is becoming prevalent at several computer companies. A controlled experiment was conducted, at IBM, to compare the performance of a team working exclusively at one place and another team that involved workers at one location in the United States and a second location in India. The two software development teams studied at IBM were virtually identical in all structural respects. Each team had seven core developers, of similarly varying experience and responsibility; they were organized on a task-oriented basis, in terms of the above hierarchy. Both teams were managed by the same development manager and were observed closely for a period of 52 weeks.
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
The results of this controlled experiment are interesting. In the colocated scenario, knowledge was held only at one location; but in the distributed scenario, with tasks being interdependent and shared between locations on a regular basis, knowledge was disseminated as a natural part of the process, thereby leading to diversification of knowledge resources. Further, the time taken for resolution of tasks was reduced by nearly 50 % in the latter case. There was an unintended process improvement: with the introduction of the 24-hour development model, the capture of the decision rationale and history became a natural part of the development process, and the tendency of software engineers to avoid or delay knowledge dissemination tasks was overcome. On the flip side, the loss of informal communication was cited as the most significant hurdle. In order to partially mitigate this problem, all the members of the distributed team had an initial face-to-face meeting. The software industry is taking the lead in adopting the 24-Hour Knowledge Factory model with resources that are distributed, both in spatial and temporal terms. The mobile industry firm, WDSGlobal, utilized Extreme Programming methodology to enable programmers to contribute to the same lines of code in tandem, in a globally distributed, round-the-clock software development project (Yap, 2005). At the outset, the entire team met face to face to get to know and trust each other. Further, explicit pairings were made within the team to build trust. A key conclusion was the need to maintain teams of equal size at each location; otherwise, the location with the largest team will take over the design. They also realized that priorities were changing too quickly, so they decided that managers should reprioritize tasks only once a week in order to make the team most productive. Motorola is another company that has utilized a similar approach to achieve higher levels of productivity from their software division. A project at Motorola used developers in six countries to develop the same piece of software, with
each site maintaining local work shifts. Work was performed on the project, somewhere in the world, for at least 21.5 hours per day (Battin et al., 2001). Over 500,000 lines of code were developed with minimal synchronous interaction among the different sites.
Demand Management and Long-term Productivity A 24-hour knowledge-based model allows for greater management of changing customer demand and time to market by leveraging lower labor costs, providing greater flexibility to reallocate and reassign resources, and enabling end users and customers to access crucial resources. A good example of the improved demand management is in the area of radiology, where radiologists based in other continents can read X-rays overnight and provide much better care, especially in an industry where the labor supply in the United States is limited. As offshore knowledge workers gain experience and move up the learning curve, they can help to provide for 24-hour availability of high-value resources. One example of this phenomenon is a company that employs home-based workers in India to perform medical transcription. As these workers move up the value chain, their home-based work environment continues to allow them to be readily accessible. Accordingly, these workers can work longer hours, as necessary, concurrently with family obligations at home, thereby serving as “agile” knowledge workers, in the knowledge factory, in real time. When moving toward a 24-Hour Knowledge Factory model, factors such as the comparative skill level, the ability to grow in size, quality management, and the use of emerging communications technologies need to be incorporated into the IS infrastructure that is established to serve as the backbone for such a factory. The key here is to help transform, not transfer, the work. As the tasks are transformed, jobs will need to be redefined. One appropriate analogy is the “law
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of the horse” that relates to the impact on horsecarriage manufacturers just after the automobile was invented. Initially, the workers building horse-driven carriages saw their jobs vanishing; however, the overall impact on the job market was positive based on the introduction of the automobile; the advent of the disruptive technology forced the horse carriage manufacturers to adapt. Similarly, the advent of the 24-Hour Knowledge Factory paradigm will require pioneers adopting this paradigm to devote significant time, at the beginning of the adoption process, to gathering of requirements, organizing stakeholder workshops, and setting up communication norms, in order to derive major productivity benefits in the longrun.
Information Resources Analysis Methods: Case Study Currently, few firms use the global delivery model described in this chapter for purposes of new software development (Terdiman & Young, 2003). Some firms have adopted a similar version, with workers at two geographic locations (rather than three). The firms that employed such a model have achieved major benefits. Use of information resources analysis methods provide highly precise indicators of team interactions based on the coding of archival data derived from e-mail, telephone, meetings, and other interactions. The methods developed hold great promise for further studies of 24-Hour Knowledge Factory teams as well as a feedback tool that could be highly valuable for these teams. Mukherji and Ganguly (2004) cited experiences with off shoring simple and complex software projects to various geographic locations. In one example, they developed a tactical, arms-length relationship with a software vendor in India, and this relationship allowed them to utilize the Indian provider for relatively simple tasks only. In the context of our models discussed above, this example would suggest an autonomous task
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structure with a geographic hierarchy, in which 24-hour development was not used, and thus the value of the Indian provider did not increase as time went by. In another example cited by Mukherji and Ganguly, a strategic relationship was built with a software team in Israel, whereby complex tasks were shared between sites in the United States and Israel (Gupta, Seshasai, Mukherji, & Ganguly, 2007). In this example, the strategic relationship allowed for skills that were available at both geographic locations to be utilized simultaneously and tasks to be completed in a much more efficient fashion. This example, in the models discussed above, conforms to the heavily interdependent task structure, with a task-specific hierarchy. Since the emphasis was on the tasks, the knowledge was able to be transferred between the collaborating groups in the two countries. As the relationship between the two groups progressed, the tasks performed by the Israeli team moved higher on the value chain. Ferdows (1997) cited examples of organizations that have invested in a more strategic relationship with an offshore unit to achieve much higher value from the offshore teams. However, most of these strategic relationships involve a sharing of knowledge—the true objective of the 24-Hour Knowledge Factory is to share not only the knowledge but the tasks as well.
Information Resource Analysis for the Socio-Technical Aspects One of the authors of this chapter possesses significant experience working with a large multinational firm with a significant offshore presence for new product software development. In one division of the firm, new product development is organized in the task-specific hierarchy, with small software development teams of 6 to 15 people, each charged with the development of a specific product. The teams consist of members from various geo-
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
graphic locations, and it is common for a task to be shared between multiple team members from different locations. In interviews conducted with 10 members of this team, located in the United States and India, the team has cited that having members located in various geographic locations has resulted in a variety of benefits, and a few downsides. These pros and cons are discussed in the following paragraphs. Quantitative data from these two teams was collected over a 1-year period in 2004. The development teams’ main project deliverable is on a 1-year timeframe, so this period should cover every major point in the project life cycle. Within this year, the teams also spend a considerable amount of time on short-term tasks such as attending to customer deployment issues and fixing bugs for maintenance releases; thus, the 1-year timeframe also provides an opportunity to gain insight on knowledge sharing for all scopes and varieties of tasks. Within this 1-year timeframe, data were gathered from the sources listed below. These sources were selected to provide insight into the knowledge sharing from technical, organizational, social, and process dimensions. Statistical correlations were drawn between various quantitative factors to propose links between these different dimensions.
Personal Interviews Hour-long personal interviews were conducted with each of the developers on each team. While the focus of these interviews was primarily to gain qualitative insight, certain quantitative questions were asked to provide a general idea of the developers’ own views of their knowledge-sharing requirements. The pieces of data collected are as follows, with explanations provided as needed:
• • • • • •
•
• •
Software Problem Reports Each development team keeps track of fixes requested or made to the code base via Software Problem Reports (SPRs). The SPR contains information on the problem being reported, as well as the history of knowledge provided by various developers in resolving the issue and information regarding the actual fix to the issue. SPRs are stored in a central database for each team. For this study, a software tool was written to perform the data collection. This tool analyzed SPRs fixed over the 1-year period of study, and collected the data described below, for each developer, on a weekly basis: •
• •
Informal interactions per week (Informal interactions are defined as interactions which do not commence with an intention of discussing business.)
Main developers interacted with informally Main developers interacted with formally Time spent informally—In person Time spent informally—Instant messaging Time spent informally—Phone Tactical decisions made informally (Tactical decisions are defined as decisions minor in scope, with minimal knowledge sharing requirements, and minimal impact on other developers’ work.) Strategic decisions made informally (Strategic decisions are defined as decisions major in scope, with significant knowledge sharing requirements, and long-term impact on other developers’ work.) Strategic decisions speeded up informally Tactical decisions speeded up informally
Main developers overlapped with (For a given SPR’s primary developer, a listing of the other developers who provided input into the SPR.) Average delay between developer inputs (For a given SPR, the average time between one developer’s input and another developer’s input.)
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•
•
Ratio of collaborative to individual SPRs (A collaborative SPR is defined as one which includes input from more than one developer.) Average time to resolution (The average time it takes for an SPR to move from being approved by the management team to be fixed to actually being logged as fixed.)
Weekly Meetings The weekly meetings of each team were analyzed to provide insight into the formal task allocation and knowledge sharing on a group-wide basis for each team. The Collocated Team held one teamwide meeting per week, while the Distributed Team held one weekly meeting for the United States–based team members and one weekly coordination meeting between the development leads from the United States and India. Each of these three weekly meetings was analyzed for the entire year. Manual review of three meetings per week (one for colocated team, one for United States team of US-IN, one for US-IN joint session) was done to collect the following data, with respect to each developer:
making the change, and a comment regarding the particular change. The comments often site particular SPRs if there was an SPR that drove the particular change to be made. The goal of collecting data from the source control system is that it provides a clear depiction of the technical system, to complement the social and organizational systems described by the other forms of data being collected. The data collected provides a representation of the technical dependencies between developers on the teams and the rate of technical collaboration within the teams. The following data were collected, with respect to each developer, on a weekly basis: •
•
•
• • • • • • • •
Main developers interacted with Tactical tasks assigned Strategic tasks assigned Tactical status requests Strategic status requests Developer input requested Developer-to-developer information requests
Source Code Control System Each of the two teams uses a source control system to log the modifications made to each element of the source code for the team’s product. The source control system stores the date, time, developer
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•
•
Main Developers Interacted With (In modules for which multiple developers check in code, the rate of shared check-ins with each of the other developers will be tabulated.) Delay Between Check-Ins (The average time difference between modifications to a particular module.) Reciprocal Check-Ins (The rate of check-ins for which one developer performs a checkin, which is followed in time by another developer performing a check-in to the same module.) If SPR cited, Avg. Developer Input on SPR (If the comments in a source control check-in refer to an SPR, the SPR will be consulted to determine the number of updates posted to the SPR.) Avg. Time Since Last Check-In (This provides an idea of the amount of code that is actively being modified.) Average Modules Checked In Per Build (Periodically, the source code is built in to an executable version of the product. The frequency of this ranges from once or twice daily in the testing and fixing stages of the project life cycle to once every week in the design and implementation stages of the project life cycle.)
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
E-Mail Exchanges A software tool was written to analyze e-mail sent to all members of the team. A “thread” refers to the entire set of messages written in response to an initial electronic broadcast or request for information. This data provided some insight into the use of broadcast messages to share knowledge on the teams. The following data were collected with respect to each developer on a weekly basis: • • • • • •
Main developers interacted with Threads contributed to Average delay between responses for initiated threads Number of threads initiated Average length of initiated threads Average number of developers per thread initiated
Diversification of Knowledge Resources With any team, the first step in bringing on new members is transferring knowledge between team members. In the offshore model, as tasks are completed, knowledge is transferred and stored within the various global sites. In the autonomous task model, a specific piece of knowledge about a specific task is only held in the one location in which the task is completed, unless a method of knowledge dissemination is established. In the 24-Hour Knowledge Factory, with tasks being interdependent, and shared between locations on a nightly basis, knowledge is disseminated as a natural part of the process, without any extra effort. The engineers who were interviewed cited this diversification of knowledge resources as being vital to their being able to assign any task to any location, on an as-needed basis. Thus, if a particular task had to be done as quickly as possible, the manager of the team could assign the task to the location that was entering its daytime hours. For example, if a bug was found in the software
code at 5 pm in the United States, the manager could assign the bug to be fixed by the Indian team without a need for significant knowledge transfer to take place. This knowledge diversification will only exist in the 24-Hour Knowledge Factory model, with tasks being shared by global team members.
Value Chain Movement By engaging the offshore software team in all tasks, in daily communication with the onshore software team, the tasks completed offshore have been able to move up the value chain much faster than if a contract–vendor relationship was used. The interviews described a progression of higher value tasks. The offshore teams were treated as new members of the team, and introduced into the cycle with the simpler tasks such as fixing problems in the software. However, as the team members became more knowledgeable, it was possible to move them up the value chain, without a significant investment in training or knowledge dissemination.
Time to Resolution for Tasks The interviews confirmed that once the offshore team achieved a satisfactory level of knowledge, many software tasks were completed in a much shorter time with sharing between onshore and offshore team members. Team members adapted to a one to one pairing between onshore and offshore members, and this limited and consistent partnership made it possible to pass tasks nightly with minimal time investment in knowledge transfer. Thus, a task such as fixing a bug, which may take a U.S. developer 4 days to complete, could now be completed in 2 days, with a U.S. and Indian developer working concurrently. Such an improvement in time to resolve was important as it greatly reduced the time to market for the product and allowed new features to be incorporated quickly into a software product.
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Earlier Reporting of Issues One of the major uncertainties in new product development of software is the untimely reporting of a bug late in the product cycle, which can delay the release to market of the product. The software team that was interviewed used a testing team in China to work with developers in the United States to test pieces of the code overnight as the code is being developed. With the 24-hour model, a U.S. engineer was able to complete an incremental improvement to his or her piece of the code during the day, then pass it to a Chinese test engineer with test instructions, and then return the next day with results that helped focus the efforts of the U.S. engineer and expose issues much earlier than if testing had been done later.
Unintended Process Improvements The software team cited numerous process improvements brought about by the need to share information with a geographically and temporally distributed team. Databases were used to track information such as design decisions, review comments, and testing results. The team members agreed that when the team consisted of colocated team members working at the same time, much of the knowledge was distributed informally, and thus the knowledge capture component appeared to be a significant additional burden. With the introduction of the 24-hour development model, the decision rationale and history capture methods became a natural part of the process, and the natural tendency of software engineers to avoid the knowledge dissemination tasks was overcome.
Cultural Understanding Incorporated Within Software The software team cited improvements made to the software through team members’ intimate knowledge of their own cultures and the usage patterns of their own cultures. For example, a
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Chinese tester was able to point out that Chinese users sitting in cubicles would not tolerate a “beep” sound when they make an error while using the software; in the Chinese culture, users may have more of an interest in “saving face” (Hu & Grove, 1999). Another engineer described a situation where Japanese developers were able to help adapt to building a user interface which searched for users by titles rather than names, which was a requirement for selling to Japanese enterprises. The 24-hour aspect of the development process is key here because the developers from different cultures are concurrently engaged on all tasks and thus can provide their cultural input into all tasks at all stages of the process. Although software firms have many mechanisms for understanding requirements from different cultures, there is no substitute for the engineer building the system from the start with the cultural knowledge incorporated.
Downsides The first major downside was the loss of informal communication. Much of the software development process involves informal design meetings and reviews of design decisions. The engineers interviewed stated that often they would engage in an informal discussion with a fellow engineer which would lead to an unintended exposition of a major piece of knowledge which would have a significant impact on the project. It was often the case that engineers were not immediately aware of the task history of their fellow engineers, and such informal communication would lead to a realization that the knowledge required to resolve a current issue could be provided by a fellow engineer. The engineers interviewed consistently stated the use of communication technologies as a replacement for informal and in-person interaction removed a considerable amount of the knowledge exchange.
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
Overcoming this downside, in the context of the taxonomies presented in this chapter, would require a stronger understanding of the knowledge required in the information management framework and a better understanding of how tasks relate, in the context of the task dependency taxonomy. Once this understanding is developed, the hierarchy defined in the taxonomy for organizational hierarchies has to facilitate the communication between the right members of the process, so that the knowledge exchanges that are lost in the offshore model can be recovered.
Future State Analysis The future of 24-Hour Knowledge Factories is dependant on the lessening of barriers that have been described in this chapter and a greater understanding of the potential benefits of such a model. For software firms to move towards this model, the following steps must be taken: 1. Assess the firm’s software projects with respect to the task and hierarchy taxonomies presented above. Determining how interdependent the tasks and hierarchies are will determine how best to move forward in developing a global delivery model which maintains knowledge flow throughout the organization. 2. Assess the firm’s decision rational and history system with respect to the information management framework. Determining whether the right information is properly acquired from the appropriate people and disseminated to the appropriate people— with as minimal burden as possible—will be vital to maintaining a 24-Hour Knowledge Factory. 3. Redefine the systems uncovered in Steps 1 and 2 to take advantage of the 24-hour offshore model. It is important to realize that the decision to build a 24-Hour Knowledge Factory is not simply based on a current
state analysis of the firm’s systems, but a dynamic redefinition of systems to match the global delivery model which can yield the best results for the firm. 4. Work towards reducing the barriers exposed in the system dynamics model that may prevent the smooth flow of knowledge required for the 24-Hour Knowledge Factory. Such barriers may include communication technologies, economic and infrastructural support systems, training systems, organizational culture, and geopolitical risk management. 5. Build the 24-Hour Knowledge Factory and achieve great results! Note that even if the firm is not ready today to enter into the 24hour global delivery system, it is important to begin the process of investigating and assessing the firm’s own characteristics with respect to the taxonomies we have provided; the key point is that the 24-Hour Knowledge Factory can be seen as an ideal endpoint on the spectrum of interdependent tasks and organizations, but firms can place themselves at any point on the spectrum and still succeed. A number of researchers have looked at various issues of relevance to the 24-Hour Knowledge Factory. While some of this research provides is useful in analyzing the 24-Hour Knowledge Factory paradigm from various vantage points, these researchers rarely treat the global IS delivery system as a knowledge factory, where knowledge is the key component that is produced and traded—this is the research direction that this chapter is encouraging. While software is being used as a prime example of this model, the model itself applies to any domain in which knowledge is the core component of production. In building this 24-Hour Knowledge Factory model, a number of known concepts can serve as valuable building blocks. For example, prior research on optimal plant location for global manu-
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facturing can be applied to the knowledge-manufacturing domain. Similarly, ongoing research on software management practices can be adapted for use in a globally and temporally distributed framework. Further, the growing notion of sourcing work offshore can provide the foundation for discussing the “hybrid” model—where work is shared between onshore and offshore locations. Several areas require further research in order to fully understand, implement, and benefit from the 24-Hour Knowledge Factory model. The key issues are as follows: 1. 2. 3. 4. 5.
Collaboration across geographic and temporal boundaries Splitting tasks into well defined components Assembling tasks into a work product Reinventing the work product based on new opportunities Continuous feedback, adaptation and refinement.
While previous research has addressed the above issues, this research needs to be reoriented and expanded to meet the needs of the 24-Hour Knowledge Factory environment, as described in the following subsections
Collaboration Across Geographic and Temporal Boundaries In order to surmount spatial, temporal, and other kinds of boundaries, Gupta (2004) advocated a four-faceted knowledge-based approach that places emphasis on the following: •
Knowledge acquisition, or tapping traditional systems to provide accurate and comprehensive material for the new knowledge-based systems Knowledge discovery, or automated mining of numerical, textual, pictorial, audio, video, and other types of
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information, to capture underlying knowledge, either on a one-time basis or on a continuous basis Knowledge management to deal with different types of heterogeneities that invariably exist when inputs have to cross-over borders of different types (national, organizational, departmental, and other) Knowledge dissemination to extract, customize, and direct knowledge to appropriate departments and users, based on their individual needs.
In the case of the 24-Hour Knowledge Factory, collaboration needs to occur on a continuous basis, with an additional surge of information being shared at every 8-hour interval. As such, further research is required to assess the specific requirements for collaboration in the 24-hour model, to build IS tools that will meet these requirements, and to incorporate techniques for knowledge manipulation and enhancement. Research in the areas of knowledge acquisition, knowledge discovery, knowledge management, and knowledge dissemination should also give emphasis to the fact that the collaborating individuals have minimal overlap in terms of their respective workdays, and the knowledge processing aspects should not add undue overhead on the concerned individuals.
Splitting Tasks Into Well-Defined Components In our case of 24-Hour Knowledge Factories, one needs to define how to decompose information system projects and other types of professional endeavors into a series of tasks that can be individually performed by a professional, without having to know most of the idiosyncrasies of other tasks. Is it practical to make this decomposition, when the concerned persons are located thousands of miles from each other? Berger (2006) described multiple evolutions of technology that have seen
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
the splitting of tasks as the catalyst for new work models and new technologies. For example, the IBM System 360 represented the disaggregating of the mainframe hardware from the software logic, thereby allowing separate workers to add value to each component separately and without knowledge of each other’s work. Similar models can be identified within the software industry—operating systems allow software programs to be produced without knowledge of the underlying operating system; object-oriented programming is built on the notion of separation of tasks into self-defined objects that do not need to share their implementation with other objects in order to be used. On a broader level, the field of “component-based software” has attempted to address this need by decomposing a software endeavor into a series of components. How can this concept be extended to other white-collar professionals in business, medicine, or transportation? Can we develop a generic ISbased infrastructure that can be applied to diverse industries and applications, or do we have to adapt the new paradigm to suit the requirements of specific project, company, or industry? While the concept of decomposing major endeavors into a series of discrete tasks has been embraced by part of the information systems communities and by sections of few other communities, we need to broaden this vision to include many diverse types of professional activities. IS can potentially provide the tools and the mechanisms to achieve this objective, and we need to address this opportunity from a sustained research perspective.
Assembling Tasks Into a Work Product Further research is required to determine models for assembling the products of individually completed tasks into an aggregated work product that is marketable as a product or service. The literature review covers a set of principles that were useful for the manufacturing industry in terms of creating
an assembly line and distributing the assembly line over multiple plants at multiple locations. The goal in the manufacturing industry was to take a set of individually created but standard physical parts and reassemble them into a complete product. In the 24-Hour Knowledge Factory model, the individual piece components are not necessarily going to be standardized. As discussed above, the model provides the ability to allow individual artisans to produce unique pieces of work. Furthermore, the work artifacts are produced on a daily basis and need to be assembled in a very short timeframe at the beginning of the work day in order for continued work to occur. Returning to the software industry examples presented earlier, the assembly of tasks into work products is a concept that has been present in software for years. Once software was separated from hardware in the IBM System 360, it became possible to produce offerings that combined various pieces of hardware and software together as a bundled offering without the designers of the key components knowing in advance that the specific combinations were to be produced. Similarly, the field of software—especially open source software—is able to pull components from different workers and plug them together without the original developers having planned for such cases of specific use. One factor working in favor of assembly is that the artifacts being produced are knowledge-based rather than physical in nature. Thus, the logistics of transferring and reconnecting the knowledgebased work artifacts are easier to mitigate than in the case when physical parts need to be transported and reassembled. A second factor that works in favor of assembly is that the tasks will be defined in terms of standard inputs and outputs, so that the worker does not need to know the inner workings of the knowledge product during the process of assembly. Returning to the example of component-based software, if individual software developers produce individual units of code in separate time zones and geographies, the as-
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sembly process is easy, provided the developers are using standard software interfaces to define the functions and methods being created. Unlike physical parts and subsystems on assembly line, the software components can be combined in a variety of forms that do not need to be prescribed at the time of creation. Research in this area is needed to adapt concepts and principles from the manufacturing industry and to apply them to the knowledge arena. As physical assets are replaced with knowledgebased assets, the frequency of reassembly is much higher, and the final products must possess the potential to incorporate varying sets of componentized products outside of a purely linear assembly process. The evolving IS infrastructure should leverage previous research, such as the vision that led to the concepts of operating systems and machine independent programming languages, to help conceive of new ways to combine the fundamental components of work in different professions to provide new services and capabilities using the same skills.
Reinventing Work Product Based on New Opportunities One of the exciting possibilities with the 24-Hour Knowledge Factory is to create new work products and services that are made feasible through the coordinated deployment of a geographically and temporally distributed workforce. This chapter has previously alluded to the example of specialized artisans being able to produce and market custom work at attractive prices, thereby undoing the strong focus on generic products that characterized the post–industrial revolution era. Significant research needs to be performed to determine how the componentized tasks described in key issues 2 and 3 can be delineated to the end customer, in a manner that would enable the customer to re-
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quest the desired work product based on available components. For example, a 24-Hour Knowledge Factory in the software industry may involve a development team in a foreign country, which has an understanding of the local business culture. By having the foreign country’s development team review the individual pieces of the work-in-progress on a daily basis, one could refine the software to address subtle cultural differences at a level of granularity that would not be feasible at the high-level design phase. This type of “automatic” redefinition of the work product could expand the potential market in which the product would be able to sell; other types of professional endeavors need to embrace this concept, too. Another example of work product redefinition is in terms of taking advantage of the temporal distribution and the continuous engagement on tasks. If a 24-hour model were used to satisfy a client request for a particular software deliverable, daily input could be provided by the client on a working prototype of the final product. Work produced in other time zones, when the client was sleeping, would be presented to the client in the morning, and a local team would be available to receive synchronous feedback from the client on the daily deliverable. This input could be incorporated directly into the process by the local team and communicated in the daily knowledge transfers to the other teams, thereby providing feedback on a daily basis. Although this type of daily feedback may be possible if the development team was localized but simply in a different time zone, the 24-hour model can allow for the powerful combination of synchronous and asynchronous engagements that could result in customized work products that are delivered on a daily basis rather than on a weekly or monthly basis. Further research is needed to analyze the efficacy of this approach for various types of knowledge-based endeavors in different industry segments, and the corresponding needs for IS in each case.
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
Continuous Feedback, Adaptation, and Refinement While the area of continuous feedback, adaptation and refinement bears some overlap with the discussion in the prior section of daily feedback from a client, the focus here is on internal improvement to the processes by which knowledge-based work is conducted. The 24-Hour Knowledge Factory presents a need for continuous transfers to occur and opens a new area of research for supporting concurrent and continuous activities related to: feedback from stakeholders; adaptation of the product, service, or endeavor; and refinement of domain-specific decisions (Gupta, et al., 2007). The models available today do not allow for significant time to be spent on collecting the information, discussing the information, and acting upon the information. Processes used within the 24-Hour Knowledge Factory model must automatically process feedback and be capable of self-adaptation and refinement, with minimal involvement from individual workers. Instead of a generic solution for all industries becoming available, it may be necessary to develop multiple approaches to cater to the idiosyncrasies of different industries and applications. This requires additional research to be performed, especially in terms of conceiving new IS approaches to create IS infrastructures that will serve as the backbone for the 24-Hour Knowledge Factories for different sectors of the global economy.
Conclusion The 24-Hour Knowledge Factory model is an emerging model that requires focused research to meet the rapidly changing needs of information systems practice across a broad range of knowledge-based industries. The concept employs a global delivery model in which members of a globally dispersed team work on information systems
or other knowledge-driven endeavor around the clock; each member of the team works during the normal workday hours that pertain to his or her time zone. At the end of such a workday, a fellow team member located in a different time zone continues the same task. The 24-Hour Knowledge Factory paradigm holds the potential for significantly reducing the elapsed time and total costs of IS and domain knowledge-based endeavors. In order to accomplish this objective, one needs to undertake sustained research on a broad set of technical and non-technical issues that have been delineated in this chapter. Further, such research is likely to provide good potential for the creation of research endeavors that involve colleagues in three or more continents around the world. The 24-Hour Knowledge Factory will ultimately allow individuals to work anywhere in the world, either in an office environment or in a home environment. Accordingly, these workers can work longer hours, as and when necessary, concurrently with family obligations at home, thereby serving as “agile” knowledge workers, in the knowledge factory, in real time (Malhotra, 2004). When moving toward a 24-Hour Knowledg Factory model, factors such as the comparative skill level, the ability to grow in size, quality management, and the use of emerging communications technologies need to be incorporated into the IS infrastructure that is established to serve as the backbone for such factory. The key here is to help transform, not transfer, the work. As the tasks are transformed, jobs will need to be redefined. When the automobile was invented, workers building horse-driven carriages initially saw their jobs vanishing; however, the overall impact on the job market was positive; the advent of the disruptive technology forced the horse-carriage manufacturers to adapt. The same will happen over time as new IS approaches allow semistructured professional work to be conducted in a much more effective manner. One needs to make investments now, in order to realize major productivity benefits in the long-run (Swadia, 2004). 245
The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
In order to ultimately create an integrated archipelago of knowledge-based assets, as well as to address the individual needs of an increasingly diverse set of users, one needs to provide effective “on–off ramps” to the emerging information highways by drastically enhancing the ability to engage human resources across the globe in a seamless manner. Continued exploration of such issues will lead to a new optimal balance in the service arena; this could be similar to the balance attained in the manufacturing arena. In the end scenario, the success of companies, even nations, will be determined largely by their ability to coordinate and manage such collaborative endeavors on an agile and global basis.
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The Role of Information Resource Management in Enabling the 24-Hour Knowledge Factory
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Venkatraman, N. (1997, Spring). Beyond outsourcing: Managing IT resources as a value chain. Sloan Management Review, 38(3), 51-64. Venkatraman, N. (2004, Spring). Offshoring without guilt. Sloan Management Review, 45(3). 14-16. Venkatraman, N., & Subramaniam, M. (2002). Theorizing the future of strategy: Questions for shaping strategy research in the knowledge economy. In The handbook of strategy and management (pp. 461-474). Sage. Wang-Xin, & Xiong-Guangleng. (2001). Supporting design reuse based on integrated design rationale. 2001 IEEE International Conference on Systems, Man and Cybernetics. e-Systems and e-Man for Cybernetics in Cyberspace (Vol. 5). Piscataway, NJ: IEEE. Wu, J., Doong, H., Lee, C., Hsia, T., & Liang, T. (2004, January). A methodology for designing form-based decision support systems. Decision Support Systems, 36(3), 313-335. Yap, M. (2005). Follow the sun: Distributed extreme programming development.In Proceedings of the 2005 Agile Conference, 218-224. Young, J. (1985, Spring). Global competition—The new reality. California Management Review, 3, 11-25.
This work was previously published in Information Resources Management Journal, Vol. 20, Issue 4, edited by M. KhosrowPour, pp. 105-127, copyright 2007 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XIV
Outsourcing and Multi-Party Business Collaborations Modeling Lai Xu Utrecht University, The Netherlands
Abstract To remain competitive, enterprises have to integrate their business processes with their customers, suppliers, and business partners. Increasing collaboration includes not only a global multi-national enterprise, but also an organization with its relationship to and business processes with its business partners. Standards and technologies permit business partners to exchange information, collaborate, and carry out business transactions in a pervasive Web environment. There is however still very limited research activity on modeling multi-party business collaboration underlying semantics. In this chapter, we demonstrate that an in-house business process has been gradually outsourced to third parties and analyze how task delegations cause commitments between multiple business parties. Finally, we provide process semantics for modeling multi-party collaborations.
INTRODUCTION Outsourcing has been a worldwide phenomenon for the past four decades (Gereffi & Sturgeon, 2004). Growth of outsourcing is driven by a number of business forces such as competition escalation, organizational reengineering, and new technology trends. Over the past decade, the number and quality of suppliers offering
price-competitive and high-quality services has increased significantly. The organization is able to focus on the company’s main skills. In addition, large sizes of organizations are no longer a necessary advantage in production of products or services, and neither is small size—quality, flexibility, agility, and the ability to meet diverse consumer demands count for more (Drucker, 1992). Firms now respond to
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Outsourcing and Multi-Party Business Collaborations Modeling
change by outsourcing when they face heightened competition pushes. Traditionally, after the part of business services is assigned, the initial organization can hardly monitor or get to control of the outsource services. Even a minor change of service is not easy. The advent of global digital networks, the Internet, the World Wide Web, and more recently, Web services, has drastically lowered the cost of coordination between firms and improved the possibilities for organizations and individuals to communicate in an effective and standard manner. New environment, newer technology, and rapid technological change provides an avenue for reducing human and equipment resources that do not fit with a company’s strategic direction for meeting the latest needs with up-to-date resources at competitive rates by outsourcing those business processes. Furthermore, the current technologies are also allowed to get control of outsource business processes. Rather than outsourcing an entire business process to a single supplier, multi-souring--using more than one supplier--is used. A classic example is Alcatel. Alcatel has outsourced supply chain management and R&D functions to Wipro, and its SAP and ERP environment work to Infosys (Pinto & Harms, 2005). Business process multi-outsourcing causes business collaboration. As business collaboration increases between different enterprises, the need for semantics also increases as a mediator between the structure and content of the different knowledge bases. There will be a need, not just for semantics to mediate the structure and content, but also for the services themselves. Semantics of multi-party business collaboration has been recognized as a major problem for a long time, but relatively little fundamental research has been devoted it. From the semantic perspective, we model the way organizations cooperate in a multi-party involved situation. A high-level view of the collaboration is provided, in terms of the parties involved, the roles they perform and
the way they are related, also in terms of business functions they fulfill and the interactions between those. In the rest of this section, we argue the reasons why multi-party business collaboration needs to be modeled. In the rest of this chapter, we provide the definitions of outsourcing, business transactions, and business collaborations. The following section starts by elaborating how an in-house business process has been gradually outsourced by using a multi-party business collaboration case. Moreover, we explain the issues in multi-party business collaboration modeling. We furthermore define all concepts needed for modeling multi-party business collaborations. We first introduce our meta-model of multi-party business collaboration language, which defines the attributes and relationships of the modeling concepts. Then, multi-party collaboration language is given with a concrete graphical syntax. We also evaluate related work in this area. The chapter concludes with a summary and directions for further research.
The Benefits of Multi-Party Business Collaboration Modeling Outsourcing business processes is highly complex. They consist of several organizations interconnected through networks and working together using sophisticated computer applications. When trying to understand, reorganize, or develop systems to support multi-party business collaborations, one is confronted with that complexity. As in any modeling activity, modeling multi-party business collaboration can help to deal with this (Rechtin & Maier, 1997; Wolstenholme, 1990). There are many possible reasons to create a model of multi-party business collaboration. The goal of multi-party business collaboration modeling may be •
To understand the functioning of an existing multi-party business collaboration.
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•
•
•
To provide a starting point for analysis of requirements of design and for the redesign of an outsourcing business process. To offer a starting point for the implementation of computer applications to support multi-party business collaboration. To serve as a basis for analysis, for example, answer “what-if” questions, to evaluate the responsibilities between involved parties, or simulate an inter-organizational business process before implementing it.
The benefits of using models to support these objectives, rather than a textual description, are as follows (Biemans, Lankhorst, Teeuw, & van de Wetering, 2001; Booch, Rumbaugh, & Jacobson, 1999): •
•
•
•
Models help us to visualize a system as it is or as we want it to be. It creates a common frame of reference for those who have to understand a design and facilitate the communication between clients, business analysts, designers, and engineers. Models permit us to specify the structure or behavior of multi-party business collaboration by representing only their essentials and abstracting from what we consider irrelevant. Abstraction can be done in two ways: by abstracting from details or by abstracting from aspects. Models give us a template that guides us in constructing a system. Properties of models can be thus analyzed. This can be used to assess the expected performance of business collaboration or check conformance to a set of business rules. Models document the decisions we have made, motivate changes, or point alternatives.
Modeling is definitely true that the larger and more complex the system, the more important modeling becomes. Involving multi-party busi-
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ness collaboration is a complex system. To be able to model this system, we have to understand concepts and issues in multi-party business collaboration, which will be discussed in the following sections.
TERMINOLOGY In this section, we will discuss terms like outsourcing, transaction, transaction properties, business transaction, and business collaboration. Finally, we provide our definition of multi-party business collaborations. Outsourcing is a generic term of farming out certain company activities or processes, usually performed by company employees, to external contractors specializing in such activities or processes. It is used in most branches of industry and services worldwide. Transactions are a fundamental concept in building reliable distributed applications. A transaction is a mechanism to insure all the participants in an application achieve a mutually agreed outcome. Traditionally, transactions have held the following properties collectively referred to as ACID (Haerder & Reuter, 1983): •
• •
•
Atomicity: If successful, then all the operations happen, and if unsuccessful, then none of the operations happen. Consistency: The application performs valid state transitions at completion. Isolation: The effects of the operations are not shared outside the transaction until it completes successfully. Durability: Once a transaction successfully completes, the changes survive failure.
According to the International Organization for Standardization (ISO), a business transaction is “a predefined set of activities or processes of organization to accomplish an explicitly shared business goal” (ISO/IEC, 1997). A business trans-
Outsourcing and Multi-Party Business Collaborations Modeling
action may involve any number of participants, it may be instant or last for years, and it can have various degrees of complexity. Following the ebXML business process specification schema (ebXML, 2001), the concepts of business transaction and business collaboration are defined as follows, •
•
A business transaction involves two parties and is an atomic unit of work that can result in either a success or a failure. A business collaboration can involve any number of parties and is a combination of choreographed business transaction, defining the ordering and transition between them.
According to the previous ebXML definitions of business transaction and collaboration, It implicates that a collaboration is a number of two-party transactions. This assumption is not reasonable. For example, if there is a broadcast message or an activity benefit to multiple parties, this assumption can not hold anymore. In the next section, we will analyze multi-party business collaborations that involve more than two autonomous parties that are coordinated and lead to the accomplishment of some result. Looking at such a collaboration one cannot just see it as a number of two-party transactions.
OUTSOURCE AND MULTI-PARTY BUSINESS COLLABORATIONS We provide a car insurance case for explaining how a car insurance business is gradually outsourced and in which collaborations are involved afterward. This case is an abstract version of a car insurance scenario involving AGF Irish Life Holdings Plc. It was taken from the CrossFlow project (Browne & Kellett, 1999). At the start time, a car insurance company probably only involves a group of garages to
assess car damages and to repair damaged cars for an insurant who has bought car insurance from the car insurance company. The insurance company deals with the rest of the issues. More precisely, after the occurrence of car damage, a process starts including many interactions among the insurant, a garage, and the insurance company (see Figure 14.1(a)). After some time, the insurance company decides to outsource its phone service to a call center. The business process is consequently changed (along the lines of Figure 14.1(b)). The call center is responsible for registering the insurant information, suggesting an appropriate garage (most times a close by garage is assigned), and notifying the insurance company about the insurant’s claim. Except the phone service, the insurance company still needs to handle the rest of the services for the insurant. It could be an alternative to outsource the inspection of damaged vehicles to an association of assessors. In this business model (see Figure 14.1(c)), the assessors conduct the physical inspection of damaged vehicles and agree upon repair figures with the garages. After the call center, the garages, and the assessors finish their obligations, the insurance company performs the rest of the services. Due to the increasing amount of different insurance businesses, the insurance company might finally decide to outsource the daily service to a day-to-day handling company. The day-to-day handling company coordinates and manages the operation on a day-to-day level on behalf of the insurance company (see Figure 14.1(d)). The detailed obligations of the day-to-day handling company are provided in Figure 14.2. After receiving the claim from the insurance company, the day-to-day handling company will agree upon repair costs if an assessor is not required for small damages; otherwise, an assessor will be assigned. After finishing repairs, the garage will issue an invoice to the day-to-day handling company, which in turn will check the invoice against the original estimate.
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Figure 14.1. Car insurance business processes
Insurance Company
Insurant*
Garage*
Figure 14.1 demonstrates how a business process is collaborated by more business parties in different circumstances. It also shows some essential characters of multi-party collaborations. One of them is that it is critical to understand when and who did, is doing, or will do what in a multiple parties involved business process.
(a) Initial business model
ISSUES IN MULTI-PARTY BUSINESS COLLABORATION MODELING
Call Center Insurance Company
Insurant*
Garage*
(b) Outsourcing the call center
Call Center
Insurance Company
Garage*
Assessor *
Insurant*
(c) Outsourcing damage assessment
Call Center Day to Day Handling Company Insurant*
Insurance Company
Assessor* Garage*
(d) Outsourcing day to day handling
The day-to-day handling company returns all invoices to the insurance company monthly. As a result, the workload of the insurance company is significantly reduced. Changes of the business models do not necessarily go through from Figure 14.1(a) to (b), then from (b) to (c), and finally from (c) to (d). Changes can happen, for example, directly from (a) to (d).
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A distinction between a bilateral business process and multi-party business collaboration is the way of interactions. In a multi-party collaboration, many business activities, which involved different parties, can be parallel performed. The order of interactions is no longer sequential. Therefore, to use absolute orders to specify the collaboration, in which many bilateral collaborations are specified in this way, is not suitable for specifying multiparty collaborations. In addition, because different parties can operate different activities at the same time, it is difficult to find all violators responsible for even an unsatisfied performance or a mis-performance. Therefore, modeling multi-party business collaborations is different with a bilateral collaboration modeling. Because in total only two parties involved in a collaboration modelingIn a bilateral collaboration it is not important to recognize who does what. In a multi-party collaboration, it is however an important concern. There are many potential violations in the case as outlined in Xu and Jeusfeld (2004) and Xu, Jeusfeld, and Grefen (2005). For example, after sending invoices to the day-to-day handling company, the garage does not get money back from the insurance company. It could be caused by •
The day-to-day handling company: Because the day-to-day handling company did not forward the invoices to the insurance company (see Figure 14.3 mark 1).
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.2. The Process diagram of car insurance case garage Receive car
Estimate repair cost
Issue Invoice
Repair car
insurant Claim damage
Gather information
Receive information
Validate date
Assign garage
call center
assessor
Send car
Inspect car
Notify insurance company
Obtain information
Notify day to day handling company
Contact garage
Assign assessor
Agree repair
Check Invoice
Estimated cost < 00
day to day handling company Obtain claim form
Send claim form to Insurant
Check claim form
Amend estimate
Reconcile information
Finalize claim
insurance company Receive claim form
Return claim form
insurant
•
•
The insurant: Because the insurant did not return the completed claim form to the insurance company (see Figure 14.3 mark 2). The insurance company: Because the insurance company forgot to send the claim form to the insurant (see Figure 14.3 mark 3) or simply because the insurance company did not pay the garage in time (see Figure 14.3 mark 4).
Therefore, a model of parties’ responsibilities is needed. In multi-party business collaboration, one violation can be caused by more than one party, which motivates us to model multi-party business collaboration from different perspectives.
CONCEPTS FOR MODELING MULTI-PARTY BUSINESS COLLABORATION Many business applications can involve multiparty business collaboration like supply chains, electronic markets, online auctions, virtual enterprises, and multi-supplier business process outsource. The central concept of modeling multi-party business collaboration is that multi-
party business collaboration is not to model a number of bilateral business collaborations. In some simple cases, a chain relationship between multiple parties for example, it is possible to break down a multi-party business collaboration into a number of bilateral business transactions. However, in complicated multi-party collaborations, this conversion results information of relations being lost or hidden. Consequently, this option to split the multi-party collaborations up into several bilateral transactions won’t work, especially when something goes wrong during automation of multi-party business collaboration. To find all violators is a big challenge. During a bilateral collaboration execution process, it is easier to discover the responsible party for an existing violation. In multi-party business collaboration, an existing violation can be a result of a set of directly or indirectly involved parties (some examples are provided from the previous section). This raises the issue of finding all responsible parties for an unsatisfied or mis-performance in the execution of multi-party business collaboration. Those concepts should be reflected to our modeling of multi-party business collaborations. The use of modeling has a rich history in all the engineering disciplines. One of four basic
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Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.3. The violation of car insurance case garage Receive car
Estimate repair cost
Repair car
Issue Invoice
insurant Claim damage
Gather information
Receive information
Validate date
Assign garage
call center
assessor
Send car
Inspect car
Notify insurance company
Obtain information
Notify day to day handling company
Contact garage
Assign asses
Agree repair
Check Invoice
Estimated cost < 00
day to day handling company Obtain claim form
Send claim form to Insurant
Check claim form
Amend estimate
Reconcile information
Finalize claim
insurance company
Receive claim form
Return claim form
insurant
principles of modeling is that no single model is sufficient (Booch et al., 1999). Every nontrivial system is best approached through a small set of nearly independent models. Following this basic principle, we distinguish three aspects that are relevant for modeling multi-party business collaboration. • •
•
In terms of its structure, which are the parties involved and how are they interconnected. In terms of the commitments associated with those parties, which responsibility do they commit to each other and which roles may the parties play within a commitment. In terms of its processes, what actions are performed by which parties after which properties are satisfied according to per-defined rules and which output can be expected, etc.
Parties and Channels In order to survive, companies are forced to constantly revise their business processes. Due to the decision of multi-supplier business process outsources, involved parties and interconnection are modeled as parties and channels. Depending
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on the chosen scope of the model, parties may represent individual people, organizational units such as departments, or an entire organization. Furthermore, a party represents an active organizational entity. Parties can be assigned a name to distinguish them. Parties may be connected by channels through which they interact. For example, parties may be linked by Internet, telephone, or truck. Usually channels can connect two parties, but multi-access channels can also be envisioned, for example, a broadcast channel. Channels can further be specified as bi-directional, uni-directional channels. A channel thus represents an interconnection between parties for the exchange of objects or information. Channels may be named by the medium (e.g., Internet, Post, EDI, etc.).
Commitments and Roles To model responsibilities between multi-parties, we provide speech act theory and its extension. Applying those theories, we provide our definition of commitments and roles. Part of Austin’s work on speech act theory (Austin, 1975) is the observation that utterances are not implied propositions that are true or false,
Outsourcing and Multi-Party Business Collaborations Modeling
but attempts on the part of the speaker that succeed or fail. Perfomatives, acts, or actions are organized as speech acts and non-speech acts. An individual speech act is either a solicit, which explains an attempt to achieve mutual belief with the addressee that the sender wants the addressee to perform an act relative to the sender’s wanting it done, or an assert, which expresses an attempt to achieve mutual belief with the addressee that the asserted statement is true. The model of speech acts and repartee developed by Longacre recognizes two kinds of relations among successive utterances: replay and resolution in Longacre (1976), and another two kinds of relations: resolves and completes by Van Dyke (1996). In the model of speech acts and repartee, every utterance in a conversation except for the first, must “respond,” “reply,” “resolve,” or “complete” to another, otherwise there would be no conversation. Analyzing relations between utterances, some characters can be split (Dooley, 1976). In the business process, domain physical actions and messages convey information between participants. An initial proposal can be triggered by a certain action and later on be finished by another action. During multi-party business collaboration, several proposals are initiated by different business parties. Each of them is followed and eventually finished by some actions. Actions are thus sorted into different commitments. A commitment is a guarantee by one party toward another party that some action occurs, provided that some “trigger,” “involve,” or “finish” action happens, and all involved parties fulfill their side of the transactions (Xu, 2004; Xu et al., 2004; Xu & Jeusfeld, 2003). To finish a commitment, more than one party must finish relevant actions. A commitment is one party toward a guarantee to another party. It allows more than one proposal in a commitment. From this point of view, the concept of our commitment is different from the definition of a commitment in papers (Ervin, 2002; Verdic-
chio & Colombetti, 2002), where a commitment only refers to two parties, a debtor and a creditor (Verdicchio et al., 2002), or a vendor and customer (Ervin, 2002). The notion of commitment in this chapter is not related to beliefs, desires, or intentions. In the research of Cohen and Levesque (1995), commitments are related to establishing common beliefs about a certain state of the world. All parties involving multi-party business collaboration fulfill different roles in different commitments. One role cannot be part of another role. However, it is possible for an actor to fulfill multiple roles in business collaboration. Each role is specified by using different names. Some examples, such as how to identify commitments, which party plays which role is going to show.
Interaction and Properties of Actions Multi-party interaction models are composed of actions, commitments, properties of party, and connectors. An action is the atomic unit of behavior. The orders between actions are causal, conjunctive “splits,” disconjunctive “splits,” conjunctive “joins,” and disconjunctive “joins.” Each party has a set of predetermined properties. The party’s properties consist of three parts, which are inputs, outputs, and rules. The inputs and outputs of properties are domain related. The input of the property specifies a list of the domain elements, which will be formulated as pro-conditions. The rules of property are specified as the set of rules using predicate logic. The rules of properties provide a logic formula to specify the pro-conditions of fulfilling the action and also some domain elements as a consequence of performing the actions. The output of the property specified those domain objects, which are the results of the executing action. When the party attempts to execute an action, it first checks whether the input of the property is satisfied, and subsequently generates the output of the property according the rules.
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METAMODEL OF MULTI-PARTY BUSINESS COLLABORATION MODELING LANGUAGE (MBCML)
Multi-Party Collaboration Structure Metamodel Parties involved and channels connected all parties of business collaboration are interrelated in Figure 14.5. How the parties are linked by the channels are presenting in a collaboration structure model. A party may contain other parties. A channel connects two or more parties, and as an option, attributes like medium and direction can be indicated.
In this section, we define the metamodel for MBCML. A concrete syntax is proposed in the next section. MBCML is used to define multiparty business collaboration models (MBCMs). A MBCM defines the cooperation of a number of organizations to involve a common business process. In order to capture all relevant aspects of collaboration, a variety of diagrams can be used, each offering a different view on the model. We distinguish three different diagram types, one for each conceptual domain, which has been defined respectively. The notation used for representing the metamodel of MBCM is the unified modeling language (UML) (Booch et al., 1999). An overview of the basic modeling concepts and their relationships are given as a metamodel in Figure 14.4. A multi-party collaboration consists of role, party, channel, commitment, and actions. Parties perform different roles in a commitment and fulfill different commitments. The roles perform actions. A channel connects two or more parties. A commitment aggregates many actions.
Multi-Party Collaboration Commitment Metamodel Commitments and roles construct a commitment model. All concepts involved in the commitment model are roles, actions, commitments, commitment segments and connectors. The relationship between those concepts are provided in Figure 14.6. A party guarantees another party to perform a commitment to another party. A party acts different roles in different commitments. A commitment is a set of actions and is made up of one or more commitment segments. An action contains zero or more connectors that interconnect these commitment segments to make up the commitment. A role (roles) performs (perform) an action within a commitment.
Figure 14.4. Metamodel for multi-party collaboration multi-party collaboration
* channel
*
fulfills
2..n party
*
1
ac ts
258
es olv inv
* * * perform role 2..n
* commitment * * * action
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.5. Metamodel for multi-party collaboration structure 2..n
channel
party
*
The connectors are used to introduce relationships between commitments or commitment segments. There are four notations for specifying the connectors. The connectors can be specialized to “and-join” connector, “or-join” connector, “and-split” connector, and “or-split” connector. Commitments can be linked by causality, or-split, and-split, or-join, and and-join as Figure 14.7. Besides, the connectors may contain other connectors to specify more complex relationships. The causality relation is represented by an arrow from one node to another node. The “or-split” relation is represented by an empty-diamond, which means that a commitment from a role triggers exactly one of multiple commitments from other roles (see Figure 14.7(a)). The “and-split” relation is expressed by a solid-diamond, which means that a commitment from a role triggers other multiple commitments (see Figure 14.7 (b)). The “or-join” relation is denoted by an empty-box, which means
that one of multiple commitments triggers another commitment (see Figure 14.7(c)). The “and-join” relation is shown by a solid-box, which means that multiple commitments together trigger a commitment (see Figure 14.7(d)). A multi-party business collaboration consists of a set of commitments. A collaborating party can thus be involved in different commitments playing different roles and an action may be involved in more than one commitment.
Multi-Party Collaboration Interaction Metamodel The part of the metamodel concerning interactions is refined in Figure 14.8. Interaction model consists of actions, connectors, parties, properties of parties. The property of a party includes inputs, rules, and outputs. Each party has a set of per-determined properties namely inputs, outputs, and rules. After the input property of a party is satisfied, the role of the party performs the action(s) and the result of actions will provide some output. Besides, the actions can be also linked by the connectors, which are provided in Figure 14.7. Those connectors represent the occurrence relationship of the actions.
Figure 14.6. Metamodel for multi-party collaboration commitment fulfill
commitment
acts
l ve i nv o
*
role
perform ..n
*
e lud in c
action
* commitment segment
to from
from from
toto
party
connector
join
and-join
...*
or-join
split
and-split
or -split
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Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.7. Connector representation
a
a
b
b c or-split (choice) (a)
c
c
a
a
c
b
b
and-split (parallelism)
or-join (disjunction)
and-join (conjunction)
(b)
(c)
(d)
Figure 14.8. Metamodel for multi-party collaboration interaction property *
fulfill
party ct s a
input rule
* *
role
commitment
* * *
e ol v inv
perform ..n
action
output
to
connector
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join
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MULTI-PARTY COLLABORATION MODELING LANGUAGE In the business domain, we need to provide detailed and precise descriptions of multi-party business collaborations. In order to represent construct in the business domain, a language for modeling multi-party collaborations should be sufficiently expressive to represent a multi-party collaboration in terms of its structure, commitments and interactions. We separate views to represent a structural model, a commitment model and a interaction model in the following sections respectively.
Collaboration Structure Model Collaborated parties involved and channels in a business process are modeled in collaboration structure model. Figure 14.9 shows the collabora-
260
or-join
split
and-split
or-split
tion structure model for the six parties involved in a car insurance case. It depicts how the insurance company and its cooperators are interconnected. It is an important model for future mapping to a specific implementation suits/toolkit. For example, the insurance company and its insurant can be connected by Internet such as Web and e-mail, by post office so they could send a letter to each other, by telephone network like they could use fax or phone call to contact each other, or by a bank system, which means they can transfer money. It is not always necessary to have all communication channels. It is up to the custom requirements. However, for each communication channel, it does require different implementation. Modeling collaboration structure is useful to identify the parties involved in business collaboration. It also provides a further step to clarify the responsibilities of parties.
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.9. Collaboration structure model Internet (e.g. email, web), Post (e.g. letter), PSTN (e.g. fax, phone call), Banking system PSTN (phone call)
Internet (email, shared database)
Call Center
Internet
Insurant*
) TN all PS ne c ho p , x
(fa
Visiting Garage*
Commitment Model To model commitments between multiple parties, we use concepts of commitments. The approach of how to determine the commitments in business collaboration, which have introduced in Commitments and Roles. We use the six parties involved in the car insurance case (see Figure 14.2) to explain how to determine the commitments. For example, an insurant phones a call center for a claim. Action A_phoneClaim triggered a conversation between the insurant and the call center to deal with the claim. Actions A_sendInfo and A_assignGarage follow, and action A_notifyClaim finishes the conversation. Actions A_phoneClaim, A_sendInfo, A_assignGarage and A_notifyClaim are sorted within a commitment, which records obligations of the call center to deal with the insurant claim. Action A_phoneClaim is a trigger of a conversation; actions A_sendInfo and A_assignGarage are the actions as “involved”; and action A_notifyClaim is an action to “finish” the conversation. Furthermore, six commitments of the care insurance case are identified according to the theory introduced in Commitments and Roles. According to Table 14.1, there are six commitments, detailed in Table 14.2. In commitment C_dailyService, actions A_ agreeRepairCar and A_forwardInvoice are both
Visiting
Day to (email, Day shared Handling database) Company PSTN (fax, phone call)
Insurance Company
Assessor* PSTN, Banking system
marked as “finished.” Action A_agreeRepairCar finishes a proposal by action A_notifyClaim and action A_forwardInvoice finishes a proposal by action A_sendInvoice. It is difficult to represent commitments graphically. In our commitment model, a party is represented as a rectangle with a name. A node denotes a role, which should stay in a rectangle. A commitment is indicated by a set of nodes (or commitment connectors) and a set of arrows. Figure 14.10 depicts the six parties and six commitments of the case in Figure 14.9. For example, in party “insurance company,” the solid-diamond connects commitments C_phoneService, C_claimForm and C_dailyService. It means that after commitment C_phoneService is fulfilled, both commitments C_claimForm and C_dailyService are triggered. A solid-box is also in party “insurance company,” it connects commitments C_dailyService, C_claimForm and C_payRepairCost. It means that commitment C_payRepairCost will be performed after commitments C_dailyService and C_claimForm. In the commitment model, we present the position of each commitment in terms of which parties and roles are involved, and which commitments are triggered, chose, and paralleled by other commitments. In the commitment model, we provide an overview of each party’s responsibilities. This is very important for both the business
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Outsourcing and Multi-Party Business Collaborations Modeling
Table 14.1. Commitments, actions, and action abbreviations Classification of Actions and Commitments Commitment
Labels Trigger
Involved
Finish
A_phoneClaim C_phoneService (PS)
PS.1 A_sendInfo
PS.2
A_assignGarage
PS.3 A_nitifyClaim
A_sendCar
RS.1 A_estimateRepairCost
C_repairService (RS)
RS.2
A_agreeRepairCar
RS.3, DS.7 A_repairCar
A_notifyClaim C_claimForm (CF)
CF.2 A_returnClaimForm
A_forwardClaim
DS.2
A_contactGarage
DS.3
A_sendRepairCost
DS.4
A_assignAssessor
DS.5, IC.1
A_sendNewRepairCost
DS.6, IC.3 A_agreeRepairCar
A_repairCar
DS.9 A_forwardInvoice
A_assignAssessor
DS.10, PR.1 IC.1, DS.4
A_inspectCar
IC.2 A_sendNewRepariCost
IC.3, DS.5
A_forwardInvoices
PR.1, DS.10
A_returnClaimForm
PR.2, CF.3 A_payRepairCost
262
DS.7, RS.3 DS.8, RS.4
A_sendInvoices
C_payRepairCost (PR)
CF.3, PR.2 DS.1, PS.4, CF.1
A_notifyClaim
C_inspectCar (IC)
RS.4, DS.8 CF.1, PS.4
A_sendClaimForm
C_dailyService (DS)
PS.4, CF.1, DS.1
PR.3
Outsourcing and Multi-Party Business Collaborations Modeling
Table 14.2.
C_phoneService =
{(A_phoneClaim, tr), (A_sendInfo, in), (A_assignGarage, in), (A_ notifyClaim,fi)}
C_repairService =
{(A_sendCar, tr), (A_estimateRepariCost, in), (A_agreeRepairCar, tr), (A_reparicar, fi)}
C_claimForm =
{(A_notifyClaim, tr), (A_sendClaimForm, in), (A_returnClaimForm, fi)}
C_dailyService =
{(A_notifyClaim, tr), (A_forwardClaim, in), (A_contactGarage, in), (A_sendRepairCost, in), (A_assignAssessor, in), (A_sendNewRepairCost, in), (A_agreeRepairCar, fi), (A_repairCar, tr), (A_sendInvoices, in), (A_forwardInvoices, fi)}
C_inspectCar =
{(A_assignAssessor, tr), (A_inspectCar, in), (A_sendNewRepairCost, fi)}
C_payRepairCost =
{(A_forwardInvoices, tr), (A_returnClaimForm, tr), (A_payRepairCost, fi)}
side and the IT side as it helps creating a common understanding. In the next section, the behavior of the parties is modeled.
Modeling Behaviors of the Parties In interaction collaboration modeling, behavior is modeled as inter- or intra-organizational business processes. The vertical dimension is the time axis; time proceeds down the page. Each party is represented by a vertical column. An action is the atomic unit of behavior. The causal ordering between actions is modeled by conjunctive and disconjunctive “splits” and “joins.” Each party’s behavior is determined by three parameters as found from the business collaboration. The inputs and outputs of a party are domain related. The rules of a party in our model are specified using predicate logic. The input parameter specifies the actions that this party expects to be involved in as object, while the output parameter specifies results of the action. When a party attempts to execute an action, it first checks whether the current input can trigger this action and subsequently generates the output, which may be checked against the possible output. In Figure 14.12, an action is noted as a table-box (see Figure 14.11), where the first column shows the
action label, which makes it possible to determine the commitment from this action label by looking it up in Table 14.1; the rest of the column shows the parameters involved in this action. The diagram includes a multi-step interaction between participants. It clearly shows which parties will communicate with other parties for which matters. From the insurant’s perspective, he only has contact with the call center, the assigned garage, and the insurance company. From the insurance company’s view, it receives and forwards the claim to the day-to-day handling company, sends the claim form to the policyholder, and finally pays the repair costs to the garage. Each party parameter is also included in the diagram. According to the party properties, each party can determine which actions should or may occur. For example (see Figure 14.11) after having received an input from the party property “Records2,” the insurance company will perform actions A_sendClaimForm (as CF2) and A_forwardClaim (as DS2) according to rules “Records2 → CF2” and “Records2 → DS2 ” respectively that are joined by “and-join” connector. After finishing action A_sendClaimForm (as CF2), “Clam from” is sent. After performing action A_forwardClaim, “Records3” is recorded.
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Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.10. Commitments of multi-party collaboration model
As time passes (from top to down) and satisfying the party parameters, each participant takes actions while the business process is moving forward. A complex multi-party business process is divided into multiple commitments. Furthermore, business process steps are represented as the actions exchanged between the parties. In this section, we present multi-party business collaborations from three aspects. At the collaboration structure model, we provide a view how business parties are connected. Different connects can determine different ways to collaborate. At the commitment model, the responsibilities of all Figure 14.11. Examples of actions and their parameters
264
involved parties are presented. Furthermore, the behavior model provides more details of commitment fulfillment.
RELATED WORK Much work is available concerning representation of computer processes. Processes for computer systems are commonly represented using flow charts, data flow diagrams, state transition diagrams (which define finite state machines, push down machines, or even Turing machines), Petri Nets, and specialization. A flow chart represents a process as a series of steps, with arrows between them, which represents an order in which the steps are to be performed. Some of the steps are decision points, so depending on the circumstances, different sets of steps might be performed. A data flow diagram is similar but represents how modules of a system are interconnected to perform the steps of a process focusing on the ordering relationships imposed by the fact that data produced by some modules is used by other modules. A state transition diagram represents a process in terms of the possible states of the system. The
pr 2, c f3
r s1
ps2
ps1
Output
C l aim Fro mfi
C l aim For m- ->PR /C F; PR /CF -->Cl ai mFo rm fi
C l aim For m
In put
Ru le
C ar dam ged
as sig nedG as sig nedG ^R S - ->C ar dam ged
R ecor ds
PS -->R ecor ds
C lai m
PS -->C lai m
Insurant
Output
Ru le
In put
Outp ut
R ul e
Inpu t
Outp ut
R ul e
Inpu t
ps 4, c f1, d s1 R ul e
Inp ut
Output
R ec ords -->PS ; PS - ->a ssi gnedG a ssi gnedG
R ec ords
R ecor ds ^a ssi gnedG ^PS /C F/D S --> Re cord s R ecor ds
R ecor ds ,assi gne dG
R ule
Input
Output
ps 3
Call Center
ps 4
d s9
r s4 , d s8
d s4
r s2
Ou tpu t
R ul e
Inpu t
R ul e Ou tpu t
Input
Output
Ru le
In put
Outp ut
Paym ent
DS - ->Invo ice Inv oic e
ag reeR ep air - ->R S /D S; R S /DS -->Ca rfixe d C ar fi xed
ag reeR ep air
esti matedR C '^DS -->DS ; D S -->estim atedR C esti matedR C
esti matedR C '
Inp ut R ul e
estim atedR C '
C arda mag ed -->RS ; R S -->estim atedR C '
C arda mag ed
Outp ut
R ul e
Inpu t
Garage
ps 3
Output
R ul e
Input
ds2
cf2
R ecor ds
R ecor ds - ->D S ; D S-- >R ecor ds
R ecor ds
C la im Form
R ecor ds - ->C F; C F -->C la im Form
R ecor ds
Cl ai mFo rm fi ^Invoi ce -->PR ; PR - ->Pa yme nt Paym ent
Cl ai mFo rm fi ,Invo ice
Output
R ul e
In put
Output
R ul e
In put
Insurance Company
R ec ords -->DS
R ec ords
Ru le Output
Invoi ce Invoi ce -->D S0 /PR ; D S 0/ PR -->Inv oic e Invoi ce
ag reeR ep air
N ew R C-- >D S /R S ; D S/ RS -->agre eR epai r
N ew R C
esti matedR C -->DS /IC ; D S /IC -->assi gne dA ass ign edA
RC= 5 00 esti matedR C
In put
Output
Ru le
In put
Outp ut
R ul e
Inp ut
a ted
Output
R ule
Input
es t im
d s10 , pr 1
ds 7, rs 3
ds 5, ic1
d s3
D ay to day handling company
ic 3, d s6
ic 2
Outp ut
R ul e
Inpu t
Output
Input R ule
N ew RC
IC / D S-- >N ew RC
a ssi gnedA a ssi gnedA -- >IC
Assessor
Outsourcing and Multi-Party Business Collaborations Modeling
Figure 14.12. Interactions between parties
estima ted RC<0 0 New RC =estim ate dRC
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Outsourcing and Multi-Party Business Collaborations Modeling
steps taken in the process are the transitions that move the system from one state to another. The most powerful representation, which included a state transition diagram is a Turing machine, which can be used to describe any computer executing any computer program written in any computer programming language. A Petri net is similar to a finite state machine, but allows multiple states to be marked simultaneously. Transitions between states may be synchronized, since multiple states have to be marked at the same time for a particular transition to occur. There are few works concerning multi-party business collaborations. We provide the limitation of UML and Petri Nets for multi-party business collaboration modeling, as well as other models such as ebXML BPSS, Web services choreography, and SAP C-business scenarios. The UML has been used in enterprise and business process modeling (Eriksson & Penker, 2000; Jacobson, Ericsson, & Jacobson, 1995; Marshall, 1999). According to Steen, Lankhorst, and van de Wetering (2002), the UML is not suitable for modeling business. The UML does not support all the concepts needed for business collaborations. Modeling business collaborations is mainly concerned with what happens at the business level and how it is organized. First, the UML does not support expressing responsibilities. In the business world, parties permit the commitments to each other to execute a business activity. In our approach, the commitment model represents collaborations between business parties and provides the relations of the commitments. Second, for business party behavior, business processes are normally not confined to single actions. Therefore, state diagrams (also for Petri Net) are not really useful here. Most business collaborators do not reason about processes in terms of states but rather in terms of the activities performed and results produced. Although UML can be extended with stereotypes and profiles, the stereotyping mechanism just makes it possible to introduce new subtypes of existing concepts
266
and profiles cannot introduce new concepts either (Henderson-Sellers, 2001). Using the Petri Nets to specify a multi-party business collaboration process, the amount of states of the Petri Net can be significantly increased. Especially, because the multi-party business collaboration process focuses on when and who did, is doing or will do what. A Petri Net representation can be too trivial, even by using state-based workflow patterns (van der Aalst, ter Hofstede, & Barros, 2003) because of a big amount of possible combinations of multiparty’s behavior. Two models for ebXML BPSS multi-party collaboration and Web services choreography are presented in Dubray (2002) and Webber (2004) respectively. Other research (Haugen, 2002) on multi-party collaboration tries to break down a multi-party collaboration into a number of bilateral relations. A principle cause behind this is that current e-commerce environments only support bilateral executions. In some simple cases, the approach to support multi-party collaboration execution in current e-commerce environments is to assume the whole business process runs correctly according to a number of bilateral relations. However, in complicated multi-party collaborations this conversion results in information of relations being lost or hidden. Consequently, this option to split the multi-party collaborations up into several two-party relations will not work for these complex multi-party collaborations (Dubray, 2002; Haugen, 2002). SAP’s collaborative business scenarios describe inter-enterprise business processes from three different perspectives (SAP, 2000), namely business view, interaction view, and component view. The purpose of the business view is showing the business advantages of implementing a collaborative business scenario. Business relations per se are out of the scope of our research through. The interaction view describes the process design and detailed dependency relationship between the different activities and responsibilities of
Outsourcing and Multi-Party Business Collaborations Modeling
the participants. It is too simple to describe the relationship like the action relations with conjunctive and disconjunctive “splits” and “joins.” The component view describes the logical application components needed to support the business process. Different channels in a collaboration structure model can determine different ways to implement a multi-party collaboration. Commitment model and interaction model provide enough details of interactions between multi-parties. Those three collaboration models can easily map into a component level model by using specifically software implementation packages.
business process. In the collaboration structure model, we provided a view of how business parties are linked. Different links can determine different ways of collaboration. In the commitment model, the responsibilities of all involved parties are presented. Finally, the behavior model provides details of commitment fulfillment. Further research has to map our multi-party business collaboration model to specific implementations like SAP or Baan’s ERP systems. This would allow the semantics of the Web of collaborating parties to be validated. This chapter introduced the approach and current development toward the stated goals.
CONCLUSION REFERENCES We have looked at a multiple supplier business process outsource case. In the current business process outsource case, the outsourcing initiator should be able to get control for the whole business process, and its cooperators should also be able monitor the business process. Moreover, in the modern business world, we see that explicit structural collaboration between organizations is becoming more and more important. This is reflected in the emergence of tightly coupled supply chains, the service outsourcing paradigm, complex co-makerships, etc. Collaboration is not limited by geographical proximity, but is of an increasingly international character. As a result explicit multi-party business collaboration is becoming global. The need for a multi-party collaboration model for a business process is thus becoming evident. Our modeling approach can be applied in those cases. Nevertheless, most of the past initiatives have addressed only partial aspects of the problem, failing to understand and properly support the various business entities and their inter-relationships in complex and fast evolving business environments. In this chapter, we have presented multi-party business collaboration models from three perspectives for supporting monitoring multi-party
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This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 77-96, copyright 2007 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XV
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Composite Personae and Evolving Collaboration Technologies Nathan Denny University of Arizona, USA Shivram Mani University of Arizona, USA Ravi Sheshu Nadella University of Arizona, USA Manish Swaminathan University of Arizona, USA Jamie Samdal University of Arizona, USA
Abstract Inspired by round-the-clock manufacturing, the 24-Hour Knowledge Factory endeavors to transform the production of software and other intangibles into a process of continuous development. While the concept of offshore software development is well established, few enterprises are currently able to develop the same code artifacts around the clock. We discuss the benefits of applying the 24-Hour Knowledge Factory to software development. We also present a representative scenario highlighting the problems of asynchronous communication in current offshore software development practices. Further, we introduce the notion of composite persona as a potential collaboration model within the 24-Hour Knowledge Factory and explain its ability to mitigate problems arising from communicating across cultures, languages, and time zones. Finally, we present a suite of new collaboration tools and techniques that are being developed specifically for use by composite personae in the 24-Hour Knowledge Factory. Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
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INTRODUCTION Inspired by the paradigm of round-the-clock manufacturing, the concept of 24-Hour Knowledge Factory endeavors to transform the production of intellectual property and intangibles into a process of continuous development (Gupta & Seshasai, 2007). More specifically, we envision a 24-Hour Knowledge Factory as an enterprise composed of multiple sites that are evenly distributed around the globe. As the sun sets on one site, it rises on another; like an ongoing relay race chasing the sun, the day’s work is handed off from the closing site to the opening site. The benefits of implementing a software development enterprise as a 24-Hour Knowledge Factory are several. We expect to realize gains from significant compression in development schedules, faster turnaround time for localization and customization of existing products, and bug fixes and critical security patches released with greater celerity. However, we also admit that the challenges of establishing a 24-Hour Knowledge Factory are significant. More specifically, we anticipate technical challenges arising from asynchronous communication, which will likely be exacerbated by cultural and linguistic differences (Seshasai & Gupta, 2007). Non-technical challenges may grow from political and legal circumstances, and from difficulties in managing and operating in such a nontraditional business environment. In this chapter, we discuss the current state of offshored and globalized software development and some of the underlying difficulties. Next, we introduce the concept of the composite persona. Finally, we discuss evolving collaboration technologies that support the concept of composite personae in the context of hybrid offshoring.
GLOBAL SOFTWARE DEVELOPMENT Software development projects that involve multiple international sites have been a reality since the 1960s (Carmel, 1999, p. 17). However, those early efforts were relatively rare compared to the near ubiquity of contemporary global software development (GSD) (Gupta, 2007). By the year 2000, 200 of the Fortune 500 companies relied upon global software development teams or outsourced development to firms that use them (NASSCOM, 2000). Our vision for the 24-Hour Knowledge Factory for software development is not synonymous with currently accepted GSD methods. Rather, the 24-Hour Knowledge Factory is a special case of GSD that has several unique properties while inheriting most of the problems of GSD. Subsequently, we present a brief survey of contemporary GSD methods to better define the problem of software development in the 24-Hour Knowledge Factory.
Convention and Practice Engineering is the process of designing systems to solve problems. The activity of software engineering produces software systems to solve problems. Like nearly all engineering disciplines, software engineering advocates that large problems be recursively decomposed into smaller sub-problems and their corresponding sub-system solutions. Decomposition proceeds recursively until the problem-solution pair is tractable in both understanding the sub-problem and the resulting complexity of the sub-system. In modern parlance, the ultimate result of decomposition is a set of modules and classes (expressed in an object-oriented language such as Smalltalk, C++, or Java), where each class can be more-or-less completely understood by one person.
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These modules and classes are then assigned to developers who then own that artifact throughout the process of coding, unit testing, and possibly even maintenance. Each module or class has one owner, and only that individual may alter that artifact. Ownership confers the benefits of accountability for defects and preserves the continuity of the actual state of the artifact with the expected state of the artifact. Although a few software practices advocate otherwise, single ownership is the most generally accepted practice (Nordberg, 2003). Ideally, sub-problems can be solved in complete isolation from lateral, sibling sub-problems. This allows for sub-systems to be viewed as black boxes: entities that have defined behavior and state, and whose inner workings are not visible to those outside of its development. With respect to coding and implementing, black boxes confer autonomy on the developer and permit development to proceed concurrently. If the problem was initially well defined, with complete knowledge of the domain of interest, and there is little change in the environment in which the software is to be deployed, then there should be little lateral communication between implementers of subsystems. It is, most unfortunately, a rare case where these perfect conditions exist. More typical is the case where, during the process of development, the problem is more complex than what was originally believed or conditions external to the project have changed. Either case causes alteration to the requirements which were used to produce the original design. Software, like a machine, requires that all of its components operate in harmony. Changes in the requirements and subsequent behavior of one subsystem propagate to those sub-systems with which it interacts, creating a rippling wave of secondary changes in those sub-systems, and so on. The result of this phenomenon is a need for lateral communication between sub-system developers. In the context of GSD, lateral communication
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between sites often introduces delays, costs, and risks. As an illustration, consider the following fictional, yet representative, scenario.
A Typical Scenario in GSD Yankee Software, Inc. is developing a new clientserver application for clinical use by physicians in hospitals and other high-tech treatment centers. The new software is to be marketed internationally and must conform to local laws and standards. After thoroughly studying the problem, consulting many potential customers, the architects at Yankee Software develop a design and subsequently produce the models and documents that will be used by the programmers to implement the software. In order to reduce coding costs and leverage significant experience and talent with coding for highly reliable networking software, Yankee Software is partnering with Muscovite Technologies in Russia. Yankee Software will develop the end user client, workflow engine, and validating rules, while Muscovite Technologies will develop the database, cache, and network server system. After the design phase and an initial kick-off meeting where both parties sign off on the design, coding begins. The designers had anticipated several risks; key among these known risks was the vulnerability of the validating rules. These rules localize the software for operation in the various legal and standards frameworks in which each potential customer must operate. During development, this risk becomes realized in a change in record keeping standards in the United Kingdom’s National Health Service. The change is significant enough to necessitate an adjustment in both validating rules and database structure. At this stage of the project, such a change will be quite costly in terms of redesign and coding. However, the market potential for the NHS is second only to the domestic U.S. market, and Yankee Software
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does not want to lose such an opportunity. Consequently, the requirements are altered and parts of the system undergo redesign. Several weeks later, Kathy, a programmer for Yankee Software in San Jose (California, USA) comes across an ambiguous condition in the specification for the software. It appears to her that there is a conflict in how the server handles errors. The prior documentation, before the NHS redesign, and the posterior documentation issued after the redesign disagree in several cases. Since the affected server component has already been coded, Kathy decided to contact the owner of that code. Following is an outline of the (fictional) discussion that these two developers might have. (Note that Moscow is 11 hours ahead of San Jose.) On Day 1, Kathy discovers the ambiguity. She consults with a few co-workers at her site in San Jose and decides to e-mail the owner of the component, a developer named Feodor in Moscow, Russia. Kathy puts further development of her component on hold and continues with other work. When Feodor logs in to read his e-mail at the beginning of Day 2, he sees the message from Kathy asking for clarification. The problem is complex, English is Feodor’s second or perhaps even third language, and Kathy’ writing style is not very expressive. Feodor is confused as to the exact meaning of Kathy’ query and sends a reply asking for more details and further clarification. Later in Day 2, after Feodor has signed off, Kathy logs in and reads Feodor’s reply. She takes a few minutes to think of a better way of explaining what she had found and what she was asking, citing the specific sections of the documents in conflict and including a fragment of the code. She sends the improved, clarifying question to Feodor. It is Day 3 and Feodor logs in to find Kathy’s question easier to understand. Feodor believes he understands the problem and takes a few minutes to compose the reply. Later that same day, Kathy reads Feodor’s response and believes that she understands Feodor’s answer. However, Feodor
accidentally replied with a double-negative, and since this potential defect may be harmful to their market in the UK, Kathy composes another question for Feodor to verify his answer. On Day 4, Feodor logs in to read his e-mail. He shakes his head for a moment, amused at his own mistake and writes a response agreeing with Kathy’s statement and verifying his own prior e-mail. After the sun has set in Moscow, Kathy reads Feodor’s response and alters the client-side code that she is developing to be in harmony with the server-side code that Feodor has already written. In the preceding story, Kathy and Feodor, separated by an 11-hour time zone difference and speaking across languages and cultures, spent four days solving a problem. Had the two developers been co-located, this problem would likely have been solved within a few hours.
COMPOSITE PERSONAE The pressure to collaborate has increased with the use of offshoring, in which developers need to be addressed at different locations, according to Booch and Brown (2003). About 70% of a software engineer’s time is spent on collaborative activities (Vessey & Sravanapudi, 1995). As demonstrated above, this need for communication can confound software development when the distributed teams span multiple cultures, languages, and time zones. As a mechanism to correct for asynchronous communication lag and ambiguity introduced by cultural and linguistic differences, we introduce the notion of composite persona. A composite persona (CP) is a highly cohesive micro-team that, like a corporation, has simultaneous properties of both individual and collective natures. That is, a composite persona to an external observer has a unique name and acts as a singular entity, even though it is the composition of several individuals.
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With respect to CPs, each site is a mirror of the other, having exactly the same CPs as each other site. (Note that this does not imply that each site has the same number of staff, as one developer may belong to more than one CP.) As the world turns and sites turn on and turn off, each CP remains active, but the “driver” of each CP changes with each site. Using CPs, development proceeds in the same manner as in a more traditional, local process. Problems are decomposed into modules and classes as they are when only single developers are assumed. However, when modules and classes are assigned ownership, the owner of each artifact is no longer an individual developer but rather a CP. Similarly, in the process of conflict resolution, discussion, and debate, each CP contributes as a single entity. In the following subsection, we present three scenarios that exemplify what we anticipate will be common interactions within a CP and between CPs.
A Composite Personae Scenario For the purposes of illustration, we assume three development sites: Tucson (USA), Wroclaw (Poland), and Sydney (Australia). We will focus on two CPs: CP Mercury and CP Minerva. CP Mercury will be composed of Tom (USA), Grzegorz (Poland), and Molly (Australia). CP Minerva is staffed by Rachel (USA), Sylwester (Poland), and Jack (Australia). Furthermore, our scenario will take place in early November. Tucson is at GMT-7, while Wroclaw is at GMT+1. November is in Austral Summer. When the residents of Sydney set their clocks ahead at the end of October, they are at GMT+11.
Forward Communication and Handoff The most basic operation in the context of CPs is the handoff, depicted in Figure 15.1. This occurs
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at the change of every shift, when the current driver signs off and the new driver, as the next site turns on, signs on and takes over responsibility for the CP. Our prototype handoff procedure is inspired by the daily stand-up meeting used in the Scrum agile process (Schwaber & Beedle, 2002). Scrum daily stand-up meetings, for co-located developers, are done first thing in the morning. All attending are asked to briefly summarize what they accomplished the previous workday, what problems they encountered, and what they expect to accomplish today. We think this to be a very succinct set of questions to be used as a basis for the handoff from one driver to the next. Following is brief story that demonstrates a handoff. It is nearly 15:35 GMT, 25 minutes before Grzegorz’s shift ends at his office in Wroclaw. He looks up at the clock and decides to wrap up his work for the handoff to Tom. Grzegorz opens up the handoff tool and begins filling in template forms and following a scripted workflow. At 15:50 GMT, Grzegorz completes the last of the handoff forms and officially ends his workday. At 15:55 GMT, Tom signs on and becomes the driver for CP Mercury. He takes several minutes Figure 15.1. Handoff
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to read what Grzegorz accomplished and finds that Gzegorz has found what he thinks is a bug in a class owned by CP Minerva. He recommends to Tom that he query CP Minerva and continue working on a couple of troublesome methods of a class owned by CP Mercury. Tom agrees and sets about his day, accordingly. At 22:05 GMT, Tom gets an instant message from Molly. It is just after 9:00 a.m. DST in Sydney and she is beginning her day. She and Tom chat online to divide up the work recommended by Grzegorz. Tom is still driving CP Mercury and has checkout priority for any code artifacts owned by CP Mercury. At 23:30 GMT, Tom walks through his handoff report and submits it at 23:50 GMT. Since there are still a few minutes of overlap, he sends an instant message to Molly. She sends an instant message back to Tom informing him that his handoff report is understood and wishes him a good evening. At 23:57 GMT, Tom signs off and Molly becomes the driver for CP Mercury. The hand-off process transfers knowledge from the driver signing off to the driver signing on. This transfer is unidirectional from past to present and forms the forward dimension in the two-dimensional communications that are possible with CPs.
Resolving a Simple Problem with Lateral Communication Many simple problems can be resolved by realtime communication between drivers. In co-located software development, these small problems are often resolved by a phone call or a quick chat over a cup of coffee. There is no appropriate analog in GSD, where even simple problems can result in significant delay as rounds of conversation ensue over e-mail (Herbsleb, Mockus, Finholt, & Grinter, 2003). Even when developers work off-hours to make real-time contact with other sites, the communication channels available carry less information than co-located face-to-face interaction. Consider the following example from Figure 15.2: At 21:10 GMT, Tom, driving for CP Mercury, gets an instant message from Rachel. Rachel is currently driving CP Minerva. One of the components owned by CP Minerva is using a component owned by CP Mercury. Rachel asks Tom for an example of how to use a certain feature of CP Mercury’s component. Tom thinks about it for a moment and then sends a reply with a code fragment for her to study. She thanks Tom for the example.
Figure 15.2. Lateral communication
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This form of communication is lateral between CPs and is orthogonal to the forward communication dimension. The third communication pattern is established when information is flowing along both dimensions.
Resolving a Complex Problem Using Both Communication Dimensions For the purpose of clarification, we will define a complex problem as a problem that involves two or more CPs and cannot be solved within a single working shift. This problem must therefore be handed off from one driver to the next. A complex problem that can be handled completely internal to the CP can be resolved in much the same way as development. (Writing code is somewhat equivalent to solving a long and complicated problem.) At 13:10 GMT, Grzegorz reads an e-mail sent to CP Mercury about a test that had failed and indicating a fault in a component owned by CP Mercury. Fortunately, the message contained a trace of the code that created the fault as well as the parameters of the test. Grzegorz finds that the problem seems to arise only in test cases where the component owned by CP Mercury is used by a component owned by CP Minerva. Grzegorz contacts Sylwester via instant messenger and they begin the work of tracking down the bug. At the end of their shift, each of them completes their respective sign-off procedures and ends the day hoping that Tom and Rachel will be able to find the solution. Tom and Rachel sign in within a few minutes of each other. Tom, seeing that Rachel is also at work, sends her an instant message, and they agree to continue working on the problem. Each takes a few minutes to catch up on the notes from their counterparts. Grzegorz and Sylwester have done most of the work, and it does not take much longer before Tom and Rachel find the source of the fault and have it corrected.
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Benefits of CPs in the 24-Hour Knowledge Factory We anticipate several benefits of applying the composite personae strategy in the context of the 24-Hour Knowledge Factory.
Smooth Transition The process of decomposition, design, and assigning ownership is essentially the same whether development is done by individuals or by CPs. The introduction of CPs augments the body of engineering knowledge and does not deprecate anything. Furthermore, during migration from current practices to one that incorporates CPs, an enterprise is able to mix and match as needed. Some artifacts may be owned by individuals, others by CPs.
Increased Trust Trust is notoriously difficult to establish in GSD projects (Handy, 1995; McDonough, Kahn, & Barczak, 2001) but essential for success (Sarker et. al., 2001). Humans in collective efforts work best in teams where each member of the team shares the common goal of the team, and members trust the intentions and efforts of each other member. Here we are looking for the jelled team described by DeMarco and Lister (1987). As group size increases and the frequency and expressiveness of communication decreases, trust within the team suffers greatly (Carmel & Bird, 1997). CPs are very small, typically comprising of three or four individuals, and trust is easier to establish between these few members than it would be within a larger group. Although most communication will be done asynchronously, communication between members of CPs will be frequent and informative. While asynchronous communication is much less expressive than synchronous communication (Sproull & Kiesler,
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1991), we expect that such persistent, frequent communication will lead to greater trust than is common in contemporary GSD projects (Jarvenpaa, Knoll, & Leidner, 1998; Javenpaa & Leidner, 1999; Maznevski & Chudoba, 2001).
Convergence At this conceptual stage of our development of the CP, we believe that communicating the changes made by each driver to the other members will require less costly communication than associated with current global software development practices. We expect that after working on the same artifact for some time, the knowledge held individually by each member of a CP will converge. That is, we expect that developers within the same CP will, after some warm-up period, have essentially the same concept of the problem domain, solution options, and the utility space of those options. For a given question about some code artifact, each member of the CP that owns the artifact is likely to give very similar answers. Consequently, between members of a CP, communicating the purpose of incremental changes and the overall state of the artifact will become increasingly efficient as their mutually shared experience grows with time. Here we can draw upon the experience of Extreme Programming (XP), from which our CPs are inspired (Beck, 1998, 1999). XP advocates collective ownership of code, allowing anyone in the project to alter any artifact. This is made possible by creating mutual experience and shared knowledge through pair programming: the process of having two people work on the same artifact, simultaneously, using the same workspace. While XP is not without controversy, especially for larger projects and distributed development, we believe our CP method to be an especially useful balance for the 24-Hour Knowledge Factory. CPs prevent surprises and preserve accountability as per the single ownership model, yet enable many other collective ownership benefits that are discussed here.
24-Hour Access to Owner The practice of single ownership of code artifacts works well when all development is done in the same time zone. However, for sites that have very little or no overlap in work schedules, the single ownership model becomes a hindrance. For instance, in the coding phase of the linear development model, bug fixes are typically routed through the owner of the artifact. In this way, the owning programmer is knowledgeable of any changes made to the artifact and understands how those changes alter the behavior of the artifact. If we assume only one owner and three nonoverlapping development sites, then 16 of the 24 work hours in a day are done by centers which do not have direct, synchronous communication with the owner. Necessary changes must wait until the owner’s site turns on, creating a bottleneck for related work in the other two centers. Accordingly, by our method of assigning ownership to CPs, each piece of code artifact can be modified at almost any time.
Higher Truck Number So-called from the imagined worst-case scenario where a project member gets struck by a runaway truck, the truck number of a project is an amusing but useful metric for expressing vulnerability to the loss of critical talent. The collective code ownership model and consequent degree of redundancy of knowledge about any given artifact increases the truck number of the project and decreases development risks introduced by the possibility of losing critical talent and specialized knowledge (Nordberg, 2003). With three-member CPs, a CP could lose a single member and the enterprise will still retain two people that have intimate knowledge of the artifacts owned by that CP. While productivity may decrease for the period that the CP remains understaffed, the project survives. When a new member is brought into the CP, the new member
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has the project artifacts and notes from the previous developer; in addition, (s)he has direct and frequent access to the two remaining members in the CP. This feature may be particularly important when including labor from nations where worker turnover is high. Indeed, some recent observations imply that high employee turnover in offshore companies often is a significant risk in contemporary offshoring strategies (Carmel & Agarwal, 2002; Lewin & Peters, 2006; Offshoring Times, 2006). This makes the higher truck number inherent to CPs to be a major advantage over current offshore development practices.
Localizing Lateral Communication In a case study done by Herbsleb et al. (2003), little difference was found in the number of lateral communication delays incurred by a local development project and a GSD project. However, the GSD project experienced longer delays. In this particular study, the mean delay time for the locally developed project was 0.9 days, while the mean delay time for the GSD project was 2.4 days. Our own work on studying communication in technical USENET conversations (Denny, 2007) suggests an average delay of between two and five days. With each CP represented at each site, lateral communication is now mostly local. Consider a question by CP Minerva about a code artifact owned by CP Mercury. If the Tucson site is on, then Tom will be answering a question by someone else co-located at his site. If Tucson is off and Sydney is on, the Australian driver for CP Minerva will be asking Molly instead. Further, since each site is relatively mono-cultural (with respect to the entire enterprise), lateral communication will be nearly free of ambiguity introduced by differing linguistic and cultural norms. That is not to say that communication will be completely unambiguous, but the prevailing ambiguity will be resolved more easily by synchronous conversation between the drivers of the CPs engaging in active, spontaneous dialog. 278
We have not completely done away with asynchronous communication, but have instead moved into a different realm. Each member of a CP must have nearly equivalent knowledge of the artifacts owned by the CP. If the current driver modifies a code artifact owned by his CP, then the next driver must be familiar with that alteration. So within the CP there will be significant communication, almost all of which will be asynchronous in nature.
EVOLVING COLLABORATION TECHNOLOGIES DeSanctis and Gallupe (1987) described a space and time classification framework in a 2x2 matrix (see Figure 15.3) that classifies tools based on the temporal characteristics of activities and location of the teams. The 24-Hour Knowledge Factory paradigm fits into the 4th quadrant. More sophisticated tools than available asynchronous communication tools are needed to tap and effectively transfer tacit knowledge. In distributed collaboration software development, tools that seamlessly enable communication without loss of tacit knowledge are critical. The communication methods that were successful in multi-site transfer of knowledge, particularly when dealing with remote or global teams, included teleconferencing, videoconferencing, chat, e-mail, and document exchange. While some of these methods are not necessarily effective for most of each shift in the 24-Hour Knowledge Factory system (those involving real-time communication), they might be particularly important during the handoff between each shift in order to convey a large amount of information in a short amount of time. Synchronous handoff is shown to be successful in the following tools. Microsoft’s NetMeeting (2006) facilitates the social interaction required for sharing tacit knowledge. IBM’s Workplace Collaboration Services
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Figure 15.3. Tool matrix
provides a full range of integrated communication and collaboration tools (IBM, 2005). Integrated development environments (IDEs) such as Eclipse are useful collaborative software development tools. Collaber is a collaboration framework that is built on Eclipse Software and includes features such as task management and group discussion. Eclipse goes a step further by its integration of Jazz (Cheng, Hupfer, Ross, & Patterson, 2003), an awareness tool that allows developers to initiate and archive synchronous communication from the IDE in the code context. In all these distributed collaboration environments including the tools mentioned above, the developers rarely have a time overlap and hence synchronous communication tools are of no avail. The tools required for a 24-Hour Knowledge Factory using the CP model necessitate not only distributed remote collaboration, but are also limited to an asynchronous mode. Wiki (Cunningham, 2001) is a Web-based collaborative tool to use the strength of collective intelligence. MASE (Chau & Maurer, 2004) extends the wiki concept into the realm of agile software processes, and can be used for knowledge sharing by both colocated and distributed teams. The limitations with such tools are that users have to explicitly store documents and there is little to no context from
which decisions can be analyzed by succeeding shifts. Furthermore, there is a strict dependency on the exact terminology in order to relate different content in the repository, which is a weak data mapping model. Distributed document management is also critical in a collaborative development environment. There are many configuration management systems such as CVS (Berliner, 1990), IBM’s ClearCase (Allen et al., 1995), and Subversion (Collins-Sussman, 2002). These do a good job in defining mechanisms for managing different versions of their work products. In such tools, the developers tend to get inundated with notification/ updates of the various control events. Allowing the developers to configure their artifacts of interest is of good value as it reduces the information overload on the developer. Software tools such as CVS Watch (Berliner, 1990) allow the developers to define their artifacts of interest for which they get automatically notified on any access or modification. WorkSmart.net (2007) is a hosted asynchronous collaboration service that provides the ability to configure a set of events whenever any action is taken. For example, an event may be triggered when a new folder is created, a document is deleted, or a new version of a document has been checked in.
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Most of the commercial collaboration tools that have been built are either add-ons to existing tools or those that integrate several existing tools tuned to a synchronous mode. These tools rely significantly on user-initiated annotation and documentation, and do not address the project handoff from one user to another in an efficient manner. The free flow of information and assistance is vital to the 24-Hour Knowledge Factory environment. All of these needs have created an environment that requires innovative and more useful processes and tools.
Grant, 1968; Humphrey, 1995). Due to a variety of factors, we can know a priori neither the subtask allocation within the CP nor the exact productivity of each member on any given task. Therefore, in CPro each developer gives his or her own estimates for all of the subtasks within a task. A schedule caster then executes a Monte Carlo simulation on the possibilities for productivity and project evolution. The result is a probabilistic schedule that project managers can use to estimate the delivery date of project artifacts within a specified degree of confidence.
CPro: Composite Personae Software Process
Knowledge Transfer and Defect Control
Software processes typically aim to improve quality and productivity. Quality and productivity are measured in terms of cost, effort, delivery schedules, and defects. However, many of these processes like PSP (Humphrey, 1995) assume single ownership of code. Extreme Programming (XP) (Nagappan & Williams, 2003) supports multiple ownership of code and assumes horizontal decomposition of work, with more than one developer sitting together working on the same task. This is no longer the case where CPs are collaborating in the 24-Hour Knowledge Factory. This work model poses many more challenges in terms of estimation, work allocation, knowledge transfer, and defect control. To overcome these problems and to facilitate offshoring in the 24Hour Knowledge Factory model, we have come up with a software process that we call CPro.
Planning When an overall schedule of the CP to complete a task needs to be obtained, one developer cannot estimate for the whole CP. This is because more than one developer present in the CP share the same task, and productivity can vary greatly from one programmer to the other. This has long been observed to be quite wide (Sackman, Erickson, &
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Defect reduction is one of the primary goals of any software process that aims at improving quality and productivity. In the CP model, since tasks are vertically decomposed among drivers of the CP, each driver changes the state of the task. In the absence of a structured handoff procedure, defects may also occur due to lack of understanding of the current state of the task. Therefore, many of the current defect-reduction techniques cannot be utilized as is. CPro makes use of the existing project artifacts as implicit handoff documents. This by itself not only conveys the work done in the previous shift, but also provides input to the current driver in the form of a project artifact. When the current driver reads the artifact to continue the work, he would be equipped with the knowledge of the job done by the driver in the previous shift. While reading the artifact, the developer in the current shift would in effect review the artifact and could give suggestions and other feedback. To achieve this, we suggest the use of TestDriven Development (Williams, Maximilien, & Vouk, 2003). Test cases for some methods are written by one driver, which would act as a unit test document for that method. This also would serve as a handoff document. In this way, the current driver who codes on the method receives input from the previous driver in the form of unit test
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casesthe effect of this being that any discrepancies in understanding the design are clarified at this stage. Test cases must be machine interpretable and consequently lack the ambiguity of natural language. The developer in the second shift would then code the method defending the unit test cases, and the CP peer in the next shift would review the code. In this way, all three members of the CP would be aware of the code artifact in good detail, and extra communication in the form of status e-mail or documents are avoided.
MultiMind Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a shared language and mental models. MultiMind is a novel collaboration tool under development and experimentation which aims to provide a semantically rich environment for developers collaborating using the CP method. MultiMind aims to improve upon DICE (Sriram, 2002) and other collaborative engineering tools. Our initial implementation efforts have focused on providing a proof of concept for the 24-Hour Knowledge Factory model. Based on feedback from the initial users, we plan to judge
the efficacy of the model and tune our development efforts accordingly. MultiMind is founded on the following technologies.
Software Processes MultiMind is process-aware and guides the CP members along the CPro process. In addition to CPro, MultiMind also incorporates concepts from XP and Scrum. The tool automates some of the Scrum process, keeping developer intervention to a minimum. More specifically, the responsibility of creating work summaries has been offloaded from the developers to the embedded project management system. A templated scrum-style system is incorporated which, on sign-out, gathers quick statements about the anticipated future state of open tasks. On sign-in, during the subsequent shift, a scrum report is automatically generated by synthesizing information from the previous scrum entry and the state of various archived project artifacts. Figure 15.6 depicts the usage of Scrum and CPro processes during handoff.
Lifestream Objects and events relevant to the project are posted and logged into a monotonically increas-
Figure 15.4. Handoff process in MultiMind
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ing persistent database along with a time stamp. This database, sometimes called a Lifestream (Freeman & Gelernter 1996), allows human users and intelligent agents to create a local or comprehensive view of the state of the project at any given time. This capability is central to justify decisions made by one user to a different user that is trying to understand why a particular decision was made and the original acting user cannot be contacted in real time. In an effort to facilitate the driver’s understanding of the current state of the task, we have designed a study tool which draws inspiration from Activity theory. This is, of sorts, a decision support system in reverse: a decision justification system that justifies the decisions made by the previous workers. The integrated project knowledge base (Lifestream) is mined for relevant knowledge objects (project artifacts, speech acts, events) that were consumed by the previous worker during the course of his action. The aim is thus, to supply the driver with only relevant and condensed knowledge objects.
Speech Acts Theory Speech Acts (Austin, 1963; Searle, 1975), used in linguistics, are acts of communication. The Speech Act theory systematically classifies communication messages into various acts, thereby establishing a common ontological base by which agents can communicate and understand each other. Both knowledge query manipulation language (KQML), developed by DARPA (Finin et al., 1993), and agent communication language (ACL), developed by FIPA (O’Brien & Nicol, 1998), rely on the Speech Act theory for their protocol for communication between software agents in knowledge-based systems. In the CP model, Speech Acts assist in synthesizing relevant information based on the high-level semantic nature of communication events. Existing asynchronous communication mechanisms that use free text lack significant
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semantic structure, making it impractical for a tool to classify the communication type or do meaningful analysis. In the MultiMind tool, the communication entity is embedded as a conversation panel and it appears in the context of every project artifact. The conversation panel provides the facility to post messages based on a communication act, and these messages are logged to the Lifestream.
Vocal Annotations in Program Source Code The best scenario for transferring code from one programmer to the next is to have the first programmer sit with the next programmer to go over the code line by line, and have him or her explain what the program does and why it was designed and implemented the way is was (Chiueh, Wu, & Lam 2000). This is not likely in the 24-Hour Knowledge Factory. In the absence of appropriate documentation, maintenance of the code becomes a nightmare and grows worse over time (Miller, Johnson, Ning, Quilici, & Devanbu, 1992). Dekleva (1992) cites in these surveys that lack of documentation is one of the biggest problems people who maintain the code have to face. She takes the survey one step further and uses the Delphi technique to ask system maintainers what their largest obstacles are. The Delphi technique consists of three rounds of surveys where the consensus increases with each survey round. In all three rounds that were conducted, system documentation was in the top four issues seen by system maintainers, and it ended up tied for third when the survey was over. Raskin (2005) explains the need for the thorough use of internal code documentation, not only for improving code understandability but also improving reusability and productivity. Literate programming, introduced by Knuth (1984), is a methodology that combines the programming language with documentation language. The most well-known languages of literate programming
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are TeX, Cweb, and METAFONT (by Knuth himself). The most apparent drawback is that it necessitates a competent writing ability to be an effective literate programmer. Fletcher (1997) describes how dictation becomes a more relaxed process since the user can now concentrate on the content of what is being dictated instead of the process of getting the text into the computer. Combining code documentation and voice recognition may be a good way to use an established technology to solve a problem that is continuing to grow in the software industry. The prototype developed takes audio comments, translates them to text, and displays the text comments in the code. It also has the feature that the audio comments can be played back so if the translation is incorrect or not comprehended by the next programmer, he can playback the audio comment and hear exactly what was said.
Eclipse Extensions While e-mail is a commonly used asynchronous communication method, the knowledge-sharing requirements of the 24-Hour Knowledge Factory make any one-to-one communication methods a poor choice for project communication. However, in order to convince software developers to move away from this method of communication, a convenient alternative that makes information available to the entire team must be provided. Project communication is not always technical in nature. Often, target dates, requirements decisions, priorities, and even team member schedules must be shared such that an entire team, regardless of where they are located, must be able to quickly assimilate. The solution under development proposes integrating tools into a common development environment. The Jazz project at IBM (Cheng, Hupfer, Ross, & Patterson, 2003) is a recent initiative that begins to address these concerns by providing a framework for distributed collaboration that is also process-aware and combines technical and
managerial tasks into the development environment. This framework is built as an extension to the Eclipse Development Environment and provides many tools that are ideal for supporting the 24-Hour Knowledge Factory. What Jazz does not provide is an alternative to e-mail that functions as a team-based project communication method. One solution may be discussion forums. Forums allow informal communication to be stored in a structured format that is accessible by all team members. Therefore, work is being done to study the existing functionality of the Jazz platform that would work well in the 24-Hour Knowledge Factory and to create appropriate plug-ins that integrate discussion forums into the Jazz platform.
CONCLUSION As long-term strategic offshore partnerships evolve into the 24-Hour Knowledge Factory, new methods of work must be employed (Gupta, Seshasai, Mukherji, & Ganguly, 2007). Here, we have introduced the Composite Persona, a long-lived micro-team that has simultaneous individual and collective characteristics. CPs have the potential to resolve much of the difficulty in contemporary offshore development by mitigating the cultural, linguistic, and time zone differences between partners. Modern groupware technologies cannot fully realize the possibilities made available by the 24-Hour Knowledge Factory and the CP method. Here, we have presented a new software process (CPro) customized for use by developers organized into CPs. MultiMind, our new groupware tool and framework, builds upon a variety of novel technologies to aid software developers that employ CPro, and automates many management and process functions in order to reduce the need for explicit cooperation between the collaborating developers. Furthermore, we are experimenting with speech recognition technology as it can be
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applied to vocal annotation of project artifacts in distributed and international development. On the near horizon, we are also preparing extensions to the popular Eclipse integrated-development environment that will provide a smooth path for moving from contemporary offshore development methods into the 24-Hour Knowledge Factory. Beyond technology, we have created an international partnership. With aid from the University of Technology–Sydney and the University of Wroclaw, we can test theory and tools and move closer to the 24-Hour Knowledge Factory.
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This work was previously published in Information Resources Management Journal, Vol. 21, Issue 1, edited by M. KhosrowPour, pp. 89-104, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XVI
Agile Software Processes for the 24-Hour Knowledge Factory Environment Nathan Denny University of Arizona, USA Igor Crk University of Arizona, USA Ravi Sheshu Nadella University of Arizona, USA
Abstract The growing adoption of outsourcing and offshoring concepts is presenting new opportunities for distributed software development. Inspired by the paradigm of round-the-clock manufacturing, the concept of the 24-Hour Knowledge Factory (24HrKF) attempts to make similar transformations in the arena of IS: specifically to transform the production of software and allied intangibles to benefit from the notion of continuous development by establishing multiple collaborating sites at strategically selected locations around the globe. As the sun sets on one site, it rises on another site with the day’s work being handed off from the closing site to the opening site. In order to enable such hand offs to occur in an effective manner, new agile and distributed software processes are needed, as delineated in this chapter.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Agile Software Processes for the 24-Hour Knowledge Factory Environment
INTRODUCTION The industrial revolution led to the concepts of assembly lines, shifts for factory workers, and round-the-clock manufacturing. Advances in IS now enable us to envision the non-stop creation of new intellectual property using shifts of workers located in different countries. More specifically, a 24-Hour Knowledge Factory (24HrKF) is envisioned as an enterprise composed of three or more sites distributed around the globe in a manner that at least one site is operational at any point of time (Gupta & Seshasai, 2004). As the sun sets on one site, it rises on another with the work in progress being handed off from the closing site to the opening site. Earlier articles on the 24-HrKF have broadly classified professional work as being ill-structured, semi-structured, or totally structured (Gupta & Seshasai, 2007; Seshasai & Gupta, 2007). CEOs, presidents, and other heads of organizations usually deal with ill-structured work, the pattern of which cannot be predicted in advance. This type of work cannot be easily decomposed into subtasks that a shadow-CEO or a partner-CEO, located in a different part of the world, can complete during the next shift. At the other end, work in industries like call centers is well-structured and can be readily picked up by a colleague coming in to work for the next shift and located in another part of the world. In between these two extremes, there are many examples of semi-structured work where the overall endeavor can be broken into subtasks and a person in the next shift can continue to work on the incomplete task from the previous shift. Software development, in specific, and many IP-based industries in general, fall into this intermediate category. In the conventional model of software development, tasks are usually divided on a horizontal basis among teams in different geographies; that is, one team in one part of geography developing one module, and another team in other part of the geography developing the other module. In this
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model, if one part of the project gets delayed, the developers working on this part end up having to devote extra hours, typically by working late into the night. Colleagues working on other parts of the project are unable to render help, because they are only familiar with their respective parts of the project. In the 24HrKF paradigm, this problem can be overcome by the vertical division of tasks between developers in different geographies. The latter goal can be met only with sustained research of relevant underlying issues, and the development of new agile and distributed software processes that are specially geared for use in the 24HrKF environment. For example, new methodologies are needed to streamline the hand off between the developer in one shift and the developer in the next shift in order to communicate details of the task in progress, as well as pending issues, in a very rapid and efficient manner in order to reduce the time spent in the hand off to the minimum possible. Further, new task allocation processes need to be developed to address the reality that the developers will possess different skill sets and dissimilar levels of productivity. Such issues are being researched by a team involving individuals from academia and industry. The research group at the University of Arizona is working closely with colleagues in universities in Australia and Poland under the aegis of a collaborative agreement signed in 2005. The research team at the University of Arizona has designed a process “CPro” that addresses several of the operational issues related to the 24HrKF environment. The core of CPro is a model of cooperative work called the composite persona (CP). A CP is a highly cohesive team of developers that are distributed across the globe. When the problem is decomposed, it is decomposed horizontally as is conventional. However, subcomponent development is now assigned to a CP rather than an individual. The members of the CP work on the vertically decomposed subcomponent in series, each successive shift improving upon the work of the previous shift. Based on the CPro process, a
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tool, Multimind, has been designed, developed, implemented, and tested.
DISTRIBUTED AND AGILE SOFTWARE DEVELOPMENT Agile processes are relatively new to the field of software development and have recently accumulated both popularity among developers and a portfolio of significant, successful applications. “Agilists,” as practitioners of agile software processes call themselves, are loosely united under the statements of the agile manifesto (Fowler & Highsmith, 2001). This manifesto asks subscribers to place emphasis on processes that are practical, adaptable, and produce artifacts that have value for stake holders. Agile software processes are a class of processes rather than a single, specific technique. While agile processes are sometimes criticized as being reactionary to current software engineering dogma, they are not necessarily orthogonal to traditional “Tayloristic” software development. More specifically, traditional software engineering endeavors to establish highly defined, functionally specialized roles and encode almost all knowledge about the software under development into explicit, formal documents. In contrast, agile processes, although they are numerous and differ between them in fine details, favor informal communication between peers in a relatively small, loosely structured, and almost exclusively colocated group. Most well-known agile processes require a representative of the stakeholders to be either co-located with the development team, or at the very least a frequent visitor with direct interaction with the development team. While agile practitioners do not completely shun formal documents, they subscribe to the “just barely enough” guideline for when and how much formal documentation to include. Much emphasis is placed on source code and artifacts that deliver immediate and evolving value to stakeholders. Popular agile methods that have a well-earned
reputation for efficacy include extreme programming (XP), scrum, the “crystal” methods, dynamic system development method (DSDM), lean development, and adaptive software development (ASD). Highsmith (2002) presents a summary of agile methods that may be of interest to those new to the study of software processes. We first review current generation of agile software processes. Following that, we discuss some of the relevant literature on distributed software development. We conclude this section with examples of distributed software development projects which employed agile software processes.
Agile Software Processes XP (Beck, 1999) is the most prominent of agile software development methodologies. It provides managers and developers with a prescribed set of practices and principles within the activities of coding, testing, listening, and designing. The practices include fine scale feedback (such as pair programming or test-driven development), continuous integration and improvement (via short iterations), a shared understanding of the project (through collective code ownership and coding standards), and a development pace that is sustainable by the developers. The principles of XP state that feedback is most useful if done rapidly, with the help of unit testing, and that each problem ought to be treated as if its solution is simple, which is generally the case when incremental changes are encouraged. Scrum (DeGrace & Stahl, 1998; Takeuchi & Nonaka 1986), named after a formation in rugby that effectively restarts the game by physically engaging the competing teams, refers to an agile software development management method. It suggests that small, cross-functional teams can maintain project integrity and productivity through brief daily progress updates and productive sprints through relatively short periods of stability. The basis for the process lies in the assumption that software development is an 289
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empirical process. That is, software development problems are poorly defined and customer expectations are an ever-moving target, and thus frequent feedback and control interventions are needed to keep the project on track. These feedback and control interventions are realized in scrum sessions, or brief meetings, which at a basic level attempt to answer the questions of what has been done since the last scrum, what will be done before the next scrum, and what are the obstacles that are to be surmounted in the meantime. Additionally, the daily scrum sessions provide a means for circulating knowledge about the current state of the project. DSDM (Coleman & Verbrugge 1998) is an agile method that incorporates continuous user involvement with iterative development and the incremental approach. DSDM is composed of three phases: (1) pre-project, (2) project life-cycle, and (3) post-project. The pre-project phase identifies candidate projects, realizes funding, and ensures commitment. The life-cycle phase is composed of five stages: (1) feasibility study, (2) business study, (3) functional model iteration, (4) design and build iteration, and (5) implementation. The feasibility study addresses the business needs that would be met by the project, the compatibility of the project with DSDM, and identifies the risks involved. The business study extends the feasibility study by addressing the required budget and desired quality of the project. The functional model iteration stage involves: identifying the functionalities that are to be implemented in the prototype, the schedule for prototype development, developing the prototype, and reviewing the correctness of the prototype. The design and build iteration incorporates the functional components into one system. Finally, the implementation stage delivers the system and documentation to the user. The post-project phase is essentially a maintenance phase, during which enhancements and fixes are made to ensure that the system is operating efficiently. Enhancements and fixes are likewise created according to DSDM.
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Crystal clear (Cockburn, 2004) is a lightweight agile methodology for small teams of developers. This development management method is intended for teams of 6-8 co-located developers working on non-critical projects. This method relies on frequent deliveries of usable code to users, reflective improvement, and on communication channels that are inherent to co-located teams. This lightweight methodology is not applicable to distributed teams, since it requires co-location for communicating project state. Lean software development (Poppendieck & Poppendieck, 2003) is an adaptation of lean manufacturing techniques of the Toyota production system to software development. It consists of seven principles that guide its deployment: (1) eliminating waste, (2) amplifying learning, (3) deciding as late as possible, (4) delivering as fast as possible, (5) empowering the team, (6) building integrity, and (7) seeing the whole. The elimination of “waste” is the elimination of anything that does not add value to the customer. Waste include unnecessary code or functionality, delays in the development process, poorly defined requirements, and slow internal communication. Amplifying learning involves continuous testing and short iteration cycles with frequent customer feedback. In deciding as late as possible, this agile project management method recognizes that, due to uncertainties inherent in software development, delaying critical decisions allows for project adaptation in the meantime. Due to a heavy reliance on feedback, this methodology encourages shorter iterations that are an attempt to keep the team focused on the customer’s current needs and keep the development on target. Team empowerment is simply stated as finding good people and letting them do their job. The building integrity principle addresses the value of a two-way information flow between the developers and customer. Through face-to-face communication with the customer, the team can more easily conceptualize and maintain the system’s maintainability and efficiency. Finally,
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seeing the whole addresses the tendency for propagating defects in large software projects. When projects are decomposed into smaller tasks, the risk is that individual developers cannot see “the forest for the trees” and therefore may propagate certain defects that would otherwise have been contained had the developer been able to better conceptualize the interaction of a component with the overall system. “Think big, act small, fail fast; learn rapidly” is a slogan that embodies the philosophy of the seven principles of lean development. ASD (Highsmith, 2000) attempts to maintain continuous adaptation to the state of the project through a repeating cycle of speculate, collaborate, and learn phases. Since the basic waterfall cycle is characterized by an inherent linearity and limited feedback, improvements were made possible through the spiral model. Similarly, the adaptive model retains the cyclical nature of the spiral model, but assumes that the state of the project is emergent rather than deterministic. The speculate phase assumes that planning is a paradox and outcomes are unpredictable. The stated principle of this phase is that developers are likely wrong about the project’s objectives and customers’ requirements are likely wrong as well. The collaborate phase assumes that project management is occurring in a complex environment. It involves identifying the project components that are predictable and establishing an environment for development. The learn phase focuses on ascertaining value from the products built in the collaborate phase, examples include focus groups, technical reviews, and beta testing.
Distributed Software Development “Follow the sun” methods similar in spirit to the 24HrkF have been attempted by others. Carmel (1999, pp. 27-32) describes one such project at IBM. In this early project, IBM established several offshore centers in a hub-and-spoke model where the Seattle office acted as the hub. Each offshored
site was staffed by a phalanx, a mix of skill sets that were replicated across each spoke. Work would be handed out by the Seattle hub and each spoke would accomplish the given task and send the results back to Seattle. This hub-and-spoke model necessitates specialization of the Seattle site. With only one site offering the specialized service, the Seattle site quickly became overwhelmed. The original goal of daily code drops could not be maintained. Treinen and Miller-Frost (2006) give details of two more recent case studies at IBM. Their first case study describes a significant software project involving development sites in the United States and Australia. Here, two geographies were being used to follow the sun development rather than our proposed three (or more). This project was deemed to be highly successful and reaffirms much of what the literature has advocated for initial face-to-face meetings, synchronous meetings across time zones, and building trust. Our work differs in that we assume no costly faceto-face meetings and our proposed method was developed to be effective with only asynchronous communication. The second case study involved the three distinct projects involving sites in the United States and India. These three projects were generally considered a failure. Treinen and Miller-Frost (2006) supply several lessons learned that are echoed in other studies, particularly problems with continuity, misunderstanding, and the lag time between cycles of conversation. Cultural differences are also cited as problematic, especially with respect to various assumptions that were held in lieu of well-specified requirements and planning.
Distributed Agile Software Development Perhaps the most relevant study in respect to the 24HrKF, Follow the Sun: Distributed Extreme Programming Development (Yap, 2005) describes
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a globally distributed, round-the-clock software development project. Here, a programming team was distributed across three sites (U.S., UK, and Asia) and they used collective ownership of code. One of the three sites already had knowledge of XP. The two remaining sites were coached on XP practices prior to the collaboration. These two sites believed that the first site had an advantage due to its previous knowledge with XP. The three sites also met in person, which they felt helped the program start by building confidence in the members of other sites. The team used virtual network computing (VNC) and video conferencing to facilitate communication. The hand off of project artifacts initially consisted of a daily work summary, but later grew to include knowledge learned and new objectives. This three-site system encountered problems in the form of confusion caused by cultural differences and also increased wait time due to downloading through their version control software from distant locations. They learned that each location needs an equal-sized team to prevent the largest team from taking over the design. They also realized that priorities were changing too quickly so they determined that the managers could only re-prioritize things once a week to make the teams more productive. Xiaohu, Bin, Zhijun, and Maddineni (2004) discusses the situation where development teams were dispersed globally, though it seemed that each global unit was still responsible for its own module of the project. The teams did not need to discuss development decisions with each other unless they were related to interfacing or would affect another team. They used the XP method, but because of the global dispersal of teams, they lacked the benefits of customer co-location and participation. They thought the inability to get rapid customer feedback when the customer was in a different location adversely impacted the development of the product and the development time. These issues could easily impact development in a 24HrKF setting because customers in one location would thus not be able to interact
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with all sites. In the 24HrKF environment, a customer that is not global would have an 8 hour window for their working day, which could at most overlap with two of the three sites. This would cause at least one site to lack rapid interaction with the customer, and thus incur the problems seen previously. Sepulveda (2003) discusses a company that moved from a traditional software development setting to a setting reliant on virtual teaming. In particular, pair programming was used heavily to ensure that the remote team members were as integrated with the code as were the local team members. This was accomplished with the use of shared workspaces and telephone calls. The key results of this case were that the move to pair programming and agile development enabled the team to cut out a large amount of bureaucratic documentation, but the remote members did not fit cohesively into the team as well as the local members due to lack of face-to-face experiences. In order to mitigate the team building problems, the remote members traveled to the main site to interact with the other team members. This faceto-face interaction did have results in terms of trust and ability to work together, but because all remote members were within the United States this interaction is easier than relocating global team members. The multi-site nature of remote work and the lack of face-to-face interaction are why this case is particularly relevant to the 24HrKF environment.
CPRO The purpose of any software process is to improve the quality of the final product and increase the productivity of the participating developers. Software processes are implemented as sets of rules and procedures that guide the flow of knowledge as the development project evolves. Software processes that have many rigid rules and procedures are known as “high ceremony.”
Agile Software Processes for the 24-Hour Knowledge Factory Environment
Tayloristic processes, relying on the separation of work into tasks that are assigned to separate functional roles, are typically high-ceremony. Software processes that have few rules and procedures and allow for flexibility in application of those rules and procedures are considered to be “low ceremony” and agile. In the context of the 24HrKF with development being done by composite personae, a high-ceremony process between the members of the CP will consume too much time in each shift. Furthermore, with members of the CP experiencing convergence by shared experience, intermediate work products that are typical of high-ceremony processes will likely impart little benefit to the developers. As discussed by Rifkin (2001), it is critical that a software process must match the overall development strategy. The self-optimizing goals of the personal software process (PSP) (Humphrey 1995), as well as its lightweight, low-ceremony rules and procedures, make it a very attractive candidate for use by composite personae. However, PSP more or less follows the conventional single ownership model of development and cannot be directly employed by CPs in a 24HrKF. CPro, our proposed software process for composite personae, is inspired by PSP and its principles.
Tasks, Phases, and Actions In the following discussion, a task is a high-level unit of work that is composed of one or more phases. In software development, a task may be the implementation of a class or perhaps a method of a class. Tasks are decomposed into a sequence of phases. In CPro a software artifact will typically progress through the five phases: (1) designing, (2) design reviewing, (3) coding, (4) code reviewing, and (5) testing. These phases are typical, but CPro does not necessitate any rigid adherence to phases. As such, one project may use these five phases and another project, which may be more
sensitive to risk, may add another testing phase for a total of six phases per task. Similarly, not all tasks must step through the same phases. Dependencies naturally exist between phases of the same task. For example, for those tasks that include both design and design review phases, the design phase must precede the design review phase. Dependencies may also exist externally, between phases of different tasks. Such a dependency may exist when one method A invokes another method B. Since A cannot be fully tested without B being functional, a dependency link would exist between A and B.
Scheduling Software projects are notorious for missing established marks for delivery dates. This is to some degree understandable as software projects are fraught with unknowns both internal to the project and external. When tasks are further decomposed along the vertical dimension with CP drivers working sequentially on the same artifact, more variance is introduced into an already highly nondeterministic system. However, good schedules are a part of software quality. When software is not delivered when expected, resources allocated by the stakeholder are idle and not efficiently allocated. This is often manifested in opportunity costs but can also be seen more tangibly when, for example, new hardware is idly waiting for delayed software. Estimating productivity: For all but the most experienced developers have difficulty in predicting their own productivity. This difficulty persists when attempting to estimate the productivity of others. Even slight differences in skills and experience can create large variances in productivity (Humphrey 1995; Sackman, Erickson, & Grant, 1968). Consequently, we cannot ask one developer to estimate the productivity of the whole CP, nor can we ask a developer to accurately estimate the productivity of his CP or her peers.
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Figure 16.1. Actual work (note handoffs between phase boundaries)
For obtaining productivity estimates, CPro asks each developer in the CP to provide a cursory estimate for each task-phase of the artifacts assigned to the CP. These estimates are given along two dimensions: size and complexity. A single measure of estimated productivity can be computed by a weighted vector from the origin of the two axes. Schedule casting: Once estimates are made, a Monte Carlo simulation is used for schedule casting. Schedule casting incorporates the developers’ estimates and considers many possible future taskphase allocations. The result is a completion date that is given as a probabilistic distribution rather than a single date. Thus, a project manager can respond to stakeholder queries using a confidence interval rather than a defined date. The delivery confidence can then be used by the stakeholder as part of an overall risk-management and resourceallocation strategy. Our schedule casting simulation is similar in some respects to a software process simulation described by Hanakawa et al. (2002). In our case, the simulation draws productivity from a continuous distribution shaped by the developer’s estimate and prior records of estimates and actuals. Taskphases are also continuous variables, allowing for many task phases, such as design and coding, to be handed off in an incomplete state. Figure 16.1 illustrates a possible simulation run where tasks are handed off in an incomplete state. Learning: Like its inspiration, PSP, CPro keeps a record of developers’ estimates and actuals. This information is used to update the
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probability distributions used by the schedule caster for simulating productivity. CPro requires a mechanism for learning from this information as such, but is flexible as to the method to be employed. The problem of learning is somewhat confounded when, in actual development, a task-phase passes shift boundaries. When a task-phase is completed, one or more developers may have contributed to the completion. Given the total time required to complete the task and the partial times invested by each developer, updating the productivity distributions becomes more complex than if the task had been completed by only one developer. Currently, we are exploring two mechanisms to incorporate such feedback. The first uses Bayesian probability with joint distributions. The second method uses case-based reasoning where cases are constructed by prior estimates and actuals.
Knowledge Transfer Knowledge transfer and sharing between CP peers improves the long-term productivity and value of the CP. Thus, it is essential that any CPspecific software process incorporate knowledge sharing as a core feature. In CPro, defect reduction strategies are used simultaneously for both the immediate purpose of quality control and the long term gain from propagating knowledge within the CP. Artifact review: Artifact reviews, such as design reviews and code reviews, are a simple
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and low-cost way of catching many defects. In performing a review, a developer must read and understand the artifact under review. In the process of doing so, the reviewer acquires knowledge of the rationale behind a design or the inner workings of program source code. Reviews should be considered a mandatory task-phase and should succeed any task-phases that produce project artifacts. Test-driven development: Test-driven development (Williams, Maximilien, & Vouk, 2003) advocates the use of automated unit testing for defect reduction and quality control. In this method, test cases are written to stress code artifacts. Before an artifact is developed a minimal set of test cases must be constructed. As the artifact iterates through the code-test-debug cycle, each new class of defect must be recorded in a new test case. Test cases become a documented record of the CP’s collective understanding of the problem domain and utility space of potential program solutions. Heuristic assignment: At any given point in the evolution of the project, multiple actions may be available for the current driver. For instance, a driver could have the option of coding a method, adding a test case, or reviewing the code produced by the previous driver for another method. CPro includes a set of heuristics for recommending a course of action. In this set of heuristics, CPro must balance the immediate value of productivity with the longterm value of knowledge sharing. For instance, if possible, reviews must be performed by a peer that did not produce the artifact under review. In this way, the review acts as both a quality control and knowledge-sharing mechanism. Likewise, CPro must consider the set of open task-phases and the estimated productivity of each developer and attempt to match each task-phase with the developer that claims to be the most productive on this task. With high variance, the ability to forecast is very limited. Tools, like MultiMind that realize CPro can use a limited form of lookahead scheduling to do some local optimization of recommended work assignments.
MULTIMIND Suchan and Hayzak (2001) recommended that a semantically rich database be used in creating a shared language and mental models. Multimind, a collaboration tool under development and experimentation, aims to provide a semantically rich environment for developers collaborating using the CP method. MultiMind improves upon DICE (Sriram, 2002) and other proposed collaborative engineering approaches. Our initial implementation efforts have focused on providing a “proof of concept” for the 24HrKF model. Based on feedback from the initial users, we plan to judge the efficacy of the model and tune our development efforts. A high-level architectural view of MultiMind is given in Figure 16.2. MultiMind is founded on the technologies delineated in the following subsections.
Lifestream Objects and events relevant to the project are posted and logged into a chronologically ordered persistent database. This database, sometimes called a Lifestream (Freeman & Gelernter 1996), incorporates an algebra that can be coupled to the semantics of project artifacts and knowledge events to enable substantial automation of both mundane tasks and higher-level functions. In the MultiMind tool, the Lifestream is used to archive project artifacts and provide configuration management services in much the same fashion as IBM’s ClearCase (Allen et al., 1995), the Concurrent Versioning System (CVS) (Berliner, 1990) or the newer Subversion (SVN) (Collins-Sussman, 2002) revision control system. However, MultiMind also observes and logs knowledge events into the LifeStream. When a developer reads a message, posts a message, executes a search or reads a Web page, MultiMind logs this activity into the LifeStream. MultiMind can therefore correlate knowledge events with the discrete evolutions of the project artifacts.
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Activity Theory Activity theory founded by Soviet psychologist Vygotsky is an approach in psychology and social sciences. This theory provides a mechanism for reasoning about the purposeful interactions of active subjects with the objective world. A basic tenet of activity theory is that a notion of consciousness is central to activity. These interactions are the subject’s interaction with external tools and other knowledge objects. Activity theory is used in the development of complex and intelligent human-machine interfaces (Nardi, 1995). One such notable work is the User-Monitoring Environment for Activities (UMEA) system (Kaptelinin, 2003). UMEA is a tool for automatically organizing data objects into relevant projects, reducing the cognitive load on the user. MultiMind is advised by activity theory in much the same way with the same goal of making a significant reduction on the cognitive load of the CP members.
Speech Act Theory Speech acts (Austin, 1963; Searle 1975) are acts of communication, primarily used in linguistics.
Figure 16.2. Architecture of MultiMind
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Its theory categorizes communication messages into different acts of a common framework for reasoning about communication and meaning. This theory has also been employed by knowledge query manipulation language (KQML), developed by DARPA (Finin et al., 1993) and by agent communication language (ACL), developed by FIPA (O’Brien & Nicol, 1998). The use of this theory in the context of Multimind is limited to action items within the scope of a project and does not otherwise dictate communication or impose structural limitations as in the case of the ActionWorkFlow loop between customer and performer (Flores, 1982). In MultiMind, all project artifact interface elements are augmented with an embedded discussion tool. This tool uses speech act theory to tag communications as to their high-level goal. When a developer creates a new message, he/she may choose from either “inquiry” or “inform.” The former is a directive speech act, which requests action on the part of other developers. In this case, an inquiry is a request for information about the artifact to which it is associated. The latter is an informational message that is associated to the artifact and does not elicit any immediate action from other developers.
Agile Software Processes for the 24-Hour Knowledge Factory Environment
Figure 16.3. Speech acts used in MultiMind
When a developer responds to an already existing inquiry, he/she may choose from “response” or “inquiry.” A response is a definitive answer to the posted inquiry. Choosing inquiry has the effect of asking a counter question, typically when the original question was ambiguous and further clarification is needed for an accurate response. There are five high level speech acts, of which MultiMind currently recognizes only three: (1) assertive, (2) directive, and (3) commissive. The declarative and expressive speech acts may be incorporated when the tool matures, but do not increase functionality in the current system. In Figure 16.3, we illustrate the relationship of the subset of speech acts used in MultiMind.
Process Awareness MultiMind’s architecture was developed to realize the CPro software process and as such is a process aware development tool. Intermediate CPro artifacts such as design review documents and code review documents are integrated not only into the workflow but into the user interface elements as well. In Figure 16.4, we depict a code review checklist embedded with a view of the code.
With respect to the scheduling aspects of CPro, the design for MultiMind incorporates tools for collecting schedule estimates from each developer, logging time in development, and updating estimates as the project progresses. Schedule casting can be invoked automatically when an actual is logged or when an estimate is updated. The casting can then be pushed to anyone subscribing to such information, thus keeping project managers informed of progress. MultiMind’s implementation of the CPro scheduling heuristics are discussed in more detail later on.
Scrum In the case study of Treinen and Miller-Frost (2006), both cases advocate some degree of agility, specifically citing the need for iterative development. More specifically, they advocate the use of scrum methods for project management. While scrum is typically instituted in the context of larger teams, we believe the scrum method to be adaptable for use in the hand-off procedure between CP drivers (Rising & Janoff, 2000; Schwaber & Beedle, 2002).
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In the hand off, we follow the scrum stand-up meeting pattern by attempting to ascertain: (1) what progress has been made in the prior shift; (2) what problems were encountered; and (3) what progress is planned for the next shift. Synthesis: In the context of the three scrum interrogatives, much of the response to (1) can be synthesized by operations on the Lifestream. These operations would observe project artifacts that have been created or experienced evolution in the last shift. A summary of progress can then be constructed from these observations. A common problem encountered in software development is when a developer is starved for information. If a dependency exists between two modules where B is dependent on the functionality of A, then the developer of B cannot complete B when he/she lacks knowledge of the behavior of A. This problem can be inferred when the developer of module B has open inquiries in the discussion associated to module A. Thus, a common problem often given in answer to scrum interrogative (2) can be synthesized without conscious developer action. Templates and workflow: Our research team is currently engaged in finding other commonly cited problems for interrogative (2). Once a body of common problems has been identified, these problems can be embedded into the scrum hand off as a workflow and template script. In keeping Figure 16.4. CPro code review in MultiMind
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with our design goals of minimizing the cognitive load of collaboration, templates favor go/no-go checklists over discrete set answers, discrete sets are preferred over numerical ranges, and numerical ranges are preferred over free text. Task assignment: In answering scrum interrogative (3), MultiMind uses its Lifestream and the most current set of task-phase complexity estimates to recommend a set of actions for the next developer. The MultiMind groupware tool has a simultaneous perspective on the estimated productivity of all the members in the CP, relieving the need for each developer to retain knowledge of the estimates made by his/her CP peers. With this knowledge, MultiMind can look ahead into the next shift and attempt to balance the workload by recommending actions to the current driver while also keeping a favorable position for the next driver. With several possible actions available, MultiMind may recommend that the current driver attempt an action that is not the subjectively easiest one available. In doing so, MultiMind may preserve future options for the next driver such that overall productivity is higher. Furthermore, MultiMind is sensitive to the scheduling heuristics of CPro and recommends actions that are balanced on the immediate potential of productivity and the long-term value of sharing knowledge within the CP.
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Decision Justification Forward communication will in most instances be sufficient to keep progress moving forward. However, there will likely be times when the current driver will not understand why the previous driver made a certain alteration to an artifact. Since the previous driver is not reachable, we can benefit by having some kind of proxy of the previous driver with which we can interact, even if this proxy is very limited. For example, the current driver may look at the latest committed version of some program module which was committed by the previous driver. The current driver does not fully understand a new conditional branch in the code. The current driver may study this artifact for quite some time and still not understand why the conditional was inserted. Further progress may hinge upon whether that conditional branch is executing as it should or if it is even necessary. Visualization and time travel: MultiMind’s Lifestream records all committed project artifacts and all knowledge events. While we cannot speak directly with previous drivers, we can time travel back across the Lifestream to read the series of events that took place immediately prior to some decision that is in question. The current driver will be able to read posted messages and their replies, Web searches, relevant Web pages, and other documents and artifacts that convey knowledge. In this way, the current driver is to some extent
replaying the sequence of knowledge events to put himself/herself in a similar state of mind to the previous developer. Figure 16.5 illustrates how a visualization of the Lifestream may appear. Semantic analysis and filtering: Visualization of the Lifestream is the first step towards decision justification. However, visualization itself is not likely to be sufficient. As the project evolves, series of decisions may not fit into the same space. Here, visualization must be augmented with intelligent filtering. Such a filter will apply semantic analysis to the events in the Lifestream and construct a visualization of dynamic scope and scale that includes only those events and artifacts believed to be relevant to the decision in question.
CONCLUSION Due to collective ownership and wide variance in programmer productivity, the PSP cannot be trivially extended to composite personae in the 24HrKF. Furthermore, the high internal cohesion of artifacts developed by CPs makes horizontal decomposition counterproductive and rules out team software processes as a viable tool. Thus, we have begun development on creating a lightweight software process for use by composite personae and project managers in the 24HrKF. This process, the composite persona
Figure 16.5. Visualizing the project Lifestream
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software process, is inspired by PSP but is not a direct descendant of its methods. Included in our work is a tool—Multimind— aimed at facilitating the developer in following the process and in communication between different members of the CP without much extra effort on the part of the developer. The tool has been designed to automate collection of data like actual time taken in completing a task and to reduce the relative cognitive load on the developer during activities like review. Also included in our work to date are a user interface to a tool for gathering project estimates as well as two simulation models that are used to compute likely effort, cost, and schedules.
Collins-Sussman, B. (2002) The subversion project: Building a better CVS. Linux Journal, 3.
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Poppendieck, M., & Poppendieck, T. (2003). Lean software development: An agile toolkit for software development managers. Addison-Wesley. Rifkin, S. (2001). What makes measuring software so hard? IEEE Software, 18(3), 41-45. Rising, L., & Janoff, N. S. (2000). The scrum software development process for small teams. IEEE Software, 17(4), 26-32. Sackman, H., Erickson, W., & Grant, E. (1968). Exploratory experimental studies comparing online and offline programming performance. Communications of the ACM, 11(1). Schwaber, K., & Beedle, M. (2002). Agile software development with scrum. Series in agile software development. Upper Saddle River, NJ: Prentice Hall. Searle, J. R. (1975). A taxonomy of illocutionary acts. Language, Mind and Knowledge, Minnesota Studies in the Philosophy of Science, 344-369.
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This work was previously published in Journal of Information Technology Research, Vol. 1, Issue 1, edited by M. Khosrow-Pour, pp. 57-71, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Section VI
Adaptation Paradigms for Academia and Industry
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Chapter XVII
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum Willaim J. Tastle University of Iceland, Iceland Ithaca College, USA Bruce A. White Quinnipiac University, USA Ársaell Valfells University of Iceland, Iceland Peter Shackleton Victoria University, Australia
Abstract Offshore outsourcing has been a growing phenomenon in recent years. Rarely will an IT professional pick up a trade publication or journal without some article relating to outsourcing or offshore outsourcing. This in turn raises the question for IS educators—what should we be doing to better prepare our graduates for a future where offshore outsourcing is a reality? This chapter looks at the following topics as they relate to IS curriculum matters for outsourcing: Offshore outsourcing and success factors, the skills needed to effective manage offshore outsourcing, a look at offshore outsourcing and the IS2002 model curriculum, suggested changes to IS2002 to incorporate offshore outsourcing education, and what skills from IS2002 are vital in preparing students for the future.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
PURPOSE AND MOTIVATION With the seemingly preponderance of jobs being outsourced to overseas locations (Athinson & Wial, 2007; Beckman, 2003; Bronfenbrenner & Luce, 2004; Mandel, 2003; Pednekar-Magal & Remlinger, 2006; Raynor, 2003; Shao & David, 2007) coupled with the pronounced reduction in student enrollment in MIS/IS/IT/CIS programs in colleges and universities throughout the world (Ferguson, 2004; Ferguson, Kussmaul, McCracken, & Robert, 2004; Hoganson, 2005; Swanson, 2005), IS-related programs are perceived to many entering American freshmen as being a discipline to avoid, especially as it relates to career potential. In Australia, student numbers in MIS programs have been severely reduced (DEST, 2007), programs cut, faculty retrenched, and programs merged. These actions have taken a toll on business. Avison, Gregor, and Wilson (2006) write that the managerial mindset of some very large businesses is such that there is a belief that “IT doesn’t matter” and that “the outsourcing of major projects will effectively transfer all risks.” This short-sighted view is reported to have resulted in at least one company going bankrupt and two others sustaining extreme financial losses. The long-term future for IS education seems bleak at best unless the IS curriculum is reoriented to address these critical issues that are also apparently neglected by some businesses, and our instruction is modified to make IS graduates more appealing and productive to business. But is such a reorientation possible? Friedman (2005) writes that with the cabling of the Indian subcontinent, massive offshore outsourcing of many tasks has occurred and many more will follow. Thus, a fully functional channel for the transmission of digital media exists in a country with an outstanding educational system, and where there exists a highly educated population of young men and women willing to work for a fraction of the money that similar skill sets command in the United States and other developed countries. American industry
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seemed to flock to India and the Philippines for technology support and then to China, Singapore, Korea, and now Vietnam for industrial workers. Companies in Europe, notably Iceland, outsource primarily to the Baltic nations with some secondary activity in India. Articles abound in professional magazines such as InformationWeek (Preston, 2006), Network World (Sayer, 2006), CIO Magazine (Rosenbaum, 2006), and InfoWorld (Margulius, 2006) attesting to the movement of positions and corporate functions to offshore locations. Such a transfer of jobs is definitely in the best interests of other countries as their employment rises and generally is in the financial best interest of the company that initiated the offshoring. But, such offshoring can cut into IT employment in the originating company, more so in American and Australian companies than in Icelandic companies. While small to medium-sized companies may not have the wherewithal to engage in offshore outsourcing, outsourcing is part of doing business and is already well-established. The concept of outsourcing has evolved. On the one hand an organization can assign particular tasks to other offshore companies, called “offshore outsourcing,” or a company can move parts of its operations to offshore locations, called “offshore in-sourcing” (Gupta, Mukherji, & Ganguly, 2007). For purposes of this chapter, we consider outsourcing to be the transference of noncore tasks from one company to another different company that specializes in that particular task, so that it can be performed more efficiently and effectively. Outsourcing need not require that the company receiving the task be in another country, but offshoring does require the receiving company to be located in another country. We use the term offshored to mean offshore outsourcing. When a task is offshored, the overall number of available jobs decreases in the originating country. To reduce confusion among the readers, we use the words offshore outsourcing or just offshoring throughout the chapter. The term outsourcing is not to be treated as a synonym for offshoring and
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
is meant to mean the transference of IT-related tasks to another company, regardless of geography. Further, we focus on curriculum redesign from the client perspective. Throughout this chapter, issues of curriculum are based on client need, and we offer no argument to issues of accreditation agency required courses, limited numbers of credit hours that are available in a traditional curriculum, and other matters that are significant but not addressed here. The transfer of jobs is not a new phenomenon, for offshore outsourcing of tasks has been a regular occurrence of American business; the transfer of IS tasks presumes that it may no longer be a core competency in building business value. A strong case has recently been made (Davis, Ein-Dor, King, & Torkzadeh, 2004) that offshoring can open up many opportunities for modifications in the IS curriculum, and that America has always done its best when it has been challenged (Friedman, 2005). This chapter addresses the curricular issues of offshoring and how ISprograms can adopt and benefit from this paradigm change. The chapter first introduces offshore outsourcing (and indirectly Global IT Management) including a brief discussion on reasons for outsourcing as well as what makes for successful offshore outsourcing. The main focus of the chapter is on what IS educators (and in particular, IS educators using the IS2002 model curriculum) can do to effectively educate students for the workplace. The authors give examples of how offshore outsourcing/Global IT management could be integrated into the current IS2002 model curriculum.
OUTSOURCING AND OFFSHORING Outsourcing is the use of resources outside of an organization (Patki & Patki, 2007). Generally, such outsourcing is to delegate noncore activities to an external entity. As a concept, outsourcing has been around for centuries, one example being that the British armies during the American
Revolution hired Hessian mercenaries to fight for them. Another more recent example involves the natural evolution of the automotive manufacturing operation. In the early 20th century, almost all the parts of the cars were made by the manufacturer. Over the years, increasing numbers of parts were outsourced to other manufacturers. Today, some companies merely assemble products from parts made elsewhere. Over the last decade, with the advent of the Internet and the resulting digital revolution, computer-related activities have been subject to significant outsourcing and offshoring. In the USA, Ross Perot built EDS by performing the outsourced tasks of payroll generation, management, and reporting for companies, thereby permitting them to focus their resources on their core activities (Weisman, 2007). Many organizations typically outsource at least some of their functions. As an example, the security requirements of a company might be outsourced to a local security company that can manage the physical security of a building or property, food service might be outsourced to other companies that staff and manage cafeterias, and even custodial services might be outsourced to companies to clean buildings. There is even the example of MacDonald’s outsourcing the order taking at the drive-by window (Freidman, 2005). Frequently such outsourcing may have occurred in the same community or region. With security, food service and custodial outsourcing, the employees from the contractor arrive at the local property and performed the required services. In other functional area such as accounting or payroll, the company may have taken time cards and/or other such recording information and sent it digitally to a service provider in the area. Campuses are very familiar with outsourced services such as food services, vending, bookstores, custodial services, maintenance and security as the leading outsourced services (Gupta, Kanthi Herath, & Mikouisa, 2005).
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The main benefits of outsourcing have generally been in reducing labor costs and to permit the company to focus on core activities. Thus, an insurance company that outsources food service, security, and custodial duties removes such employees from their payroll and permits the company to focus on internal insurance issues. Information technology outsourcing began in the 1960s and 1970s when in-house computer expertise was not available and it was much more cost effective to hire skilled workers from a consulting/outsourcing company (Weisman, 2007; Willcocks, Fitzgerald, & Feeny, 1995). As academic institutions produced more qualified IT workers, outsourcing declined in the 1980s and internal IT grew. In this period, IT was considered an important function supporting the vertical integration of all aspects of a business. Today’s businesses rely on computing/information technology for all aspects of the business, including telecommunications, electronic commerce, decision making, and information analysis. The technologies have evolved from a central mainframe in a glassed, air conditioned, and secure room to global enterprises with complex information processing needs and environments. The most common type of outsourcing has been to use a consulting company that specializes in IT: IBM, Accenture (formerly Arthur Anderson), Computer Associates, and Hewitt Associates, to name but a few, offer consulting and outsourcing expertise. With regional offices, these companies have either been able to place temporary consultants into IT positions or service clients with IT support functions. The advantage to companies who hire these consulting firms has been generally to get immediate expertise without adding to the company’s payroll. Typically, such arrangements are from 3 to 6 months. A more recent phenomenon is offshoring; that is, outsourcing functions away from the home country. For businesses in the United States, the offshoring choice of preference has been India; for Iceland it has been some offshoring to India,
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but most to the Baltic nations. In Australia, the preference has been for India and, in recent years, China. “In the last few years, outsourcing has emerged as one of the most critical business needs for companies to be competitive. A large number of Fortune 500 companies, including Microsoft, Oracle, Intel, General Electric, British Airways, and Dell Computers amongst others, have already chosen India as a base for their global back office operations” (Fortuna, 2006). Larry Ellison of Oracle is on record as asking why automakers, publishers, or doctor’s offices need to also be technology companies, employing high-paid staffs who spend their time fiddling with computers? Thomas Friedman (2005) references many conversations with business executives and CEO’s located in Asian companies. One conversation (Friedman, 2005, p. 5) with Nandan Nilekani, CEO of Infosys Technologies of Bangalore, India, dealt with the massive investment in technology during the bubble year when broadband connectivity was installed around the world. Nilekani said that the technology “created a platform where intellectual work, intellectual capital, could be delivered from anywhere. It could be disaggregated, delivered, distributed, produced, and put back together again, and this gave a whole new degree of freedom to the way we do work, especially work of an intellectual nature.” He went on to say that “the playing field is being leveled.” In other words, “countries like India are now able to compete for global knowledge work as never before and that America had better get ready for this. America was going to be challenged, but, he (Nilekani) insisted, the challenge would be good for America because we are always at our best when we are being challenged” (Friedman, 2005, p. 7). In another conversation with Win Liu, director of US/EU projects for DHC, a software company located in Dalian, China, that has expanded from thirty to 1,200 employees in 6 years, Liu states that “Americans don’t realize the challenge (of offshor-
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
ing) to the extent that they should….We have 22 universities and colleges with over 200,000 students…More than half of those students graduate with engineering or science degrees…and spend a year studying Japanese or English, plus computer science, so that they will be employable.…China is now becoming the country that develops the largest number of university graduates” (Friedman, 2005, p. 34). Friedman (2005) describes the situation where many standard process jobs can be easily outsourced, including computing (data processing), accounting and tax returns, and even the reading of X-rays and other medical tests. With high-speed data transmission, a company can send gigabytes to India at 5:00 p.m. (1700 hrs) eastern time USA, and have the results back by 8:00 a.m. (0800 hrs) the next morning. Such “time swapping” opportunities can give a competitive advantage to a global business. The Gartner Group has estimated that more than 80% of U.S. companies have discussed offshore outsourcing, and more than 40% have tried some kind of pilot program (Pastore, 2003). A similar study by the Meta Group predicted that 80% of organizations will outsource at least one IT function by 2005 (McCue, 2005). An estimate by Forrester Research predicted that 3.3 million jobs will move offshore in the next 15 years (Pastore, 2003). Multinational companies with locations worldwide generally use the term “Global IT Management” because of the global nature of their business. In many multinational companies, offshore development will be part of the global nature of their company.
ticular, IT outsourcing to India has significant savings. Cost savings or efficiency gains help companies maintain competitive prices without sacrificing quality or service to do it (Kakumanu & Portanova, 2006). India has been favored as skilled IT professionals are generally available, English is widely spoken, and the government has helped develop a reasonable IT infrastructure (Kumar, 2006). Kakumanu and Portanova (2006) describe some of the reasons that companies outsource: 1. 2. 3. 4. 5. 6. 7. 8.
Economic factors Equivalent quality of skills availability Remaining competitive Free internal resources for core business functions Pay as you go Avoiding technological obsolescence inhouse Work around the clock As noted in their study, economic factors (through lower wage/labor costs) were the primary reasons for outsourcing. That cost containment would free resources for other purposes (reason #4 above—Free internal resources for core business functions), as well as remaining competitive (through lower costs #3). However, these factors are far from international in content. Icelandic companies engage in offshoring, but the main reason for the offshoring was not identified as labor expense reduction by any major company interviewed; in every case the motivation for the outsourcing was something other than expense savings. In fact, reason four above, was the dominant reason (Tastle & Valfells, 2007).
MOTIVATION FOR OFFSHORING The primary reason for offshore outsourcing has been financial. IT professionals outside the United States and other developed countries generally receive much less pay for the same work. In par-
But, other benefits were presented by the Kakumanu and Portanova (2006) study. An underlying factor is that the quality must be evaluated by the originating company (reason #2, above). In 2003, of the 80 software centers that measure level 5
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on the CMM (capability maturity model from the Software Engineering Institute at Carnegie Mellon University in Pittsburgh), at least 60 of them were in India (Dataquest India, 2003). “The emphasis on quality is almost a no-brainer when it comes to outsourcing such demanding work as software development, where a small error can undermine an entire project. No matter the cost savings, turning that work over to strangers would be impractical without some means to control against quality risks” (Zamiska, 2005). Clearly, outsourcing (as well as offshore outsourcing) is here to stay and IS educators need to retool, relearn, and revise curricula, as necessary, to adapt to these serious challenges.
WHAT MAKES FOR SUCCESSFUL OFFSHORING? Gottschalk and Solli-Sæther (2005) conducted a study to find the critical success factors in IT outsourcing. Their top 10 factors for successful outsourcing were: Understanding the company’s core competencies and goals 2. Efficient and effective communication and management between stakeholders 3. Achieving cost reduction 4. Developing meaningful social interchange exploitation (i.e. understand cultural differences) 5. Reducing transaction costs 6. Full utilizing the vendor’s strength 7. Careful crafting and completeness of contracts 8. Building relationships 9. Solid oversight control 10. Strict demarcation of labor and responsibilities between company and outsourcer 11. Development of synergy between company and outsourcer. 1.
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Fjermestad and Saitta (2005) have identified eight factors for successful outsourcing: 1. 2. 3. 4. 5. 6. 7. 8.
Alignment to business strategy Management support Culture Infrastructure Contracts Strategic partnership Governance Economics
Both of these lists emphasize the strategic nature of the outsourcing relationship. A company needs to see if the outsourced activities align to the corporate goals and vision. Likewise, both lists emphasize the need for a strong contract with ongoing management support. Loh and Venkatraman (1995) found that outsourcing leads to superior performance, although moderated by the cost structure of the firm. Their empirical study of 159 CIOs from Fortune 500 companies suggests that it is not insourcing or outsourcing,but rightsourcing (Loh & Venkatraman, 1995). Since this 1995, reference, many new terms have been added to this area of research: in-source, outsource, onshore, in-house, thirdparty, off shore, captive centre, off shore, third party, and probably others, but we limit the scope of this study to the traditional and less conflicted terms outsourcing and offshoring. The President of ACM (Association for Computing Machinery), David Patterson (2006) also has a list of skills desired in managing outsourcing: 1. 2. 3. 4. 5. 6. 7. 8.
Sourcing methodology and processes Strategy development Project management Risk management Contract law Financial analysis Supplier selection and certification Relationship development.
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
INFORMATION SYSTEMS MODEL CURRICULUM: A SHORT HISTORY Having obtained a brief overview of outsourcing/offshoring/Global IT Management (including success factors), the authors now change their focus to how to better prepare Information Systems graduates to function in a client-perspective global IT marketplace. Computing as a discipline is a recent phenomenon. Computing hardware dates from the late 1940s, but computing as an academic discipline was slower to develop. The first computer science programs emerged in the early 1960s. The earliest explicit Information System undergraduate program came in 1973 with the ACM Undergraduate Programs in Information Systems (Couger, 1973). Since that time, there have been many information systems curriculum models, such as: •
•
•
•
1981 – DPMA Curriculum for Undergraduate Information Systems Education (DPMA 1981)1 1986 – DPMA Model Curriculum for Undergraduate Computer Information Systems (DPMA 1986) 1991 – DPMA IS’90 Curriculum for Undergraduate Programs in Information Systems (Longenecker & Feinstein, 1991) 1997 – ACM, AIS, AITP IS’97 Model Curriculum and Guidelines for Undergraduate Programs of Information Systems (Davis et al., 1997)2 And the current version:
•
2002 – IS’2002 Model Curriculum and Guidelines for Undergraduate Degree Programs in Information Systems – ACM, AIS, AITP (Gorgone et al., 2000)
These model curricula have been widely adapted and appreciated in both the USA and other
countries. In Australia, the model curriculum is used in certification of programs with professional bodies such as the Australian Computer Society (ACS). In the most recent versions, a more mature approach has been taken so that skills and knowledge are more robustly defined and generalized as compared to some of the earlier models that may have stated that students needed COBOL programming and other kinds of legacy skills. But, information technology is a moving target. What were needed skills in the 1980s may not reflect the current needs in the marketplace. For example, IS2002.2 E-Business Systems was added to the IS2002 model because of the rapid growth in the Internet and electronic commerce. ERP systems, security, outsourcing, human computer interfaces, and other topics may not be as fully covered specifically in IS2002 as occurs in the marketplace (Hawking, Shackleton, & Ramp, 2001) In Iceland the model curriculum was not embraced but, nevertheless, a curriculum established that contains much of the model. Efforts were made in the early 2000s to reduce the emphasis on IS in favor of the more traditional curriculum of marketing and management. While comparatively easier to teach than technology courses (it can be argued), such a curricular move leaves students with a void in their preparation. Within the Department of Business and Economics at the University of Iceland the course Personal Productivity with IS Technology, IS 2002.P0, has been a part of the mandatory core courses since 1988. A second mandatory course, Physical Design and Implementation with DBMS, IS 2002.8, was soon after introduced and a third course, similar to Electronic Business Strategy, Architecture and Design, IS 2002.2, was introduced as an elective course. However that course was abolished do to little student demand and a political swing in the architecture of business curriculum in favor of traditional curriculum such as marketing and management. The absence of knowledge in the strategy of technology is a skill desired by
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Icelandic industry but entirely lacking from the current curriculum. In 2003 a new and more business oriented approach was adopted at the University of Iceland with the introduction of a revised Personal Productivity with IS Technology, IS 2002.P0, course in which the students, in addition to learning knowledge software tools, received an introduction on the economics of networks and information products as well as basics of negotiation strategies. Following the redesign of the course IS 2002.8—Physical Design and Implementation with DBMS was also given a more business oriented approach with real life case studies on DBMS use and implementation. As described at IS2002.org, there have been many factors in the IS profession that have been part of the educational expectation from early versions of the IS model curriculum (Gorgone et al., 2002). These are: 1. 2. 3.
4.
IS professionals must have a broad business and real world perspective. IS professionals must have strong analytical and critical thinking skills. IS professionals must have interpersonal communication and team skills and have strong ethical principles. IS professionals must design and implement information technology solutions that enhance organizational performance.
Given the significant growth in IT outsourcing, and in particular offshore outsourcing, this chapter contends that future Information Systems curriculum models require a more rigorous coverage of outsourcing. The authors’ note that the four educational expectations (listed above) are potentially more important to business.
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EDUCATIONAL IMPLICATIONS FOR THE FUTURE OF IS EDUCATION As we can see from the previous discussion, outsourcing is a business reality in how businesses get IT service support. The outsourcing of IT functions has existed in the US for many years, originally domestic, but increasingly going offshore for significant cost savings. Once we move our perspective out of the US, the reasons differ. Icelandic companies sought outsourcing as a means by which they could respond to changing business needs at a much faster pace than by training in-house employees. Any financial benefit caused by reduced labor costs was incidental to the outsourced function. Similarly, in Australia, IT is often outsourced as a way to have access to skills, improved service quality and to increase managers’ ability to focus on core business activities (Beamont and Costa (2003). Nevertheless, offshoring of IT functions seems to be here to stay (as a form of Global IT Management). So, what are the implications for IS education, and in particular for the current IS model curriculum – IS2002 and for the next iteration of the model—which we shall call IS200X? Much of the IT activities that are sent offshore for processing are routine, not directly part of the corporate core functionality, and are of low risk. Some of the major IT activities that have been outsourced are application development (programming) and routine support (like help desk). The authors suggest that major changes in the IS model curriculum are needed to properly prepare the next generation of IS/IT professionals. Moreover, the authors suggest that the skills needed are primarily the soft skills of IT management, project management, and especially
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
contracts (contract law, contract management and contract negotiation). Also required is the hard skill of requirements analysis and requirements documentation. Gordon Davis, Phillip Ein-Dor, William King and Reza Torkzadeh presented a “senior scholars” paper at ICIS 2004 relating to Offshoring (Davis 2004). This paper was exclusively written about the MSIS 2006 graduate curriculum update. They do have many suggestions for an offshore curriculum specialization option in the graduate MSIS program. [The authors discuss these topics later in the context of where they can be incorporated into the current IS2002 undergraduate model and in the next iteration.] These topics include: • • • • • • • • • • • • • • • • • • • •
Change management Design methodologies Project management Business processes Consumer relationship marketing (CRM) Data warehousing Database administration Database systems planning Electronic commerce Emerging technologies and technology forecasting ERP systems Global cultural implications for IS Globalization IS Security Management of computer personnel Management of telecommunications Outsourcing Systems integration Transborder EDI and data flows Workflow and collaborative work
King, a well-regarded IS senior professor (founding president of AIS, and a co-author of the last referenced article), states “… many of the well-understood programming and systems analysis tasks will be offshored.” He continues “that traditional low and mid level IT jobs will
continue to migrate away from the US” and that IS education needs to be “weighed with gains towards the ‘high end’ in several areas” (King, 2005). He further states that “outsourcing/offshoring must be treated as a major and central IS paradigm.” Lastly, “IS students will need to understand negotiation techniques, contract law, contract change management and develop the ‘softer’ skills involved in partnering and developing trust between partners.” To be able to adapt to this paradigm, he suggests that IS professors will need to gain additional skills, such as contract law, contract management and negotiation. He emphatically states “IS education must adapt and change.” King (2006) lists five areas that need to be significantly covered in the IS curriculum: 1. 2. 3. 4. 5.
Relationship management Risk assessment and management Technology and vendor assessment Systems implementation Integrated business and IS planning
CHANGING THE CURRENT IS CURRICULUM When applied to the IS2002 undergraduate curriculum, the concepts from the paper on the MSIS graduate track in Outsourcing/Offshoring could well be adapted to existing courses – most especially to IS2002.10 Project Management and Practice; IS2002.7 Logical Analysis and Design; IS2002.8 Design and Implementation of Database Management Systems; and IS2002.9 Design and Implementation in Emerging Environments. BUT, in a larger sense, some of these issues also apply to the business environment that surround IS programs. Taking King’s five areas (above), most are predominantly traditional business issues. Relationship management is part of most management courses in Business Schools; risk assessment and management also tend to fall under the managerial umbrella. All-too-frequently
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curricula tend to be isolated courses – sometimes being described as “silo” courses. In general, the IS professor neither knows nor understands contract negotiation; likewise, (in general) the management professor does not understand how supply chain management can utilize information systems and information technology to gain effectiveness and efficiency. As Friedman (2005) points out, it is not just IS/IT functions that are being offshored. The authors contend that after a thorough review of IS2002 and the learning objectives, and a review of the offshoring literature that IS2002 is weak on the critical success factors involved in offshoring and on strategic management issues. Undergraduates at institutions following the IS2002 model curriculum may be weak in the areas discussed above. Reiterating King’s (2005) comment “IS education must adapt and change” and “outsourcing/offshoring must be treated as a major and central IS paradigm.”
CHANGING THE IS CURRICULUM: OPTIONS In the authors’ methodology, they looked at the learning objectives for each of the 10 courses in the IS2002 model curriculum. The authors used the Davis, et al, (2004) work as a springboard in their investigation. Although the Davis, et al, (2004) work was part of a graduate track on outsourcing in the MSIS graduate program, the authors felt that many concepts could be studied on the undergraduate curriculum level. The authors suggest that there are several options to incorporate outsourcing/offshoring in the IS curriculum: a. b.
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A separate required course in IS outsourcing/offshoring Require a course in international business (with a strong emphasis on outsourcing management) in the business component of an IS program
c.
d.
e.
Reorient the IS2002 curriculum to place less emphasis on topics that are frequently outsourced Retain the IS2002 curriculum, but incorporate outsourcing assignments and topics as appropriate. Strengthen the skills of requirements analysis and documentation.
Option “a” In the first option above, a separate required course in IS outsourcing/offshoring is proposed. Other academic issues have discussed these topics and approaches. For example, marketing academics have wrestled with the idea of incorporating a new course in Managing Marketing Outsourcing. An advantage of a separate course is that the entire course could be devoted to an in-depth coverage of outsourcing/offshoring that includes mastery of requirements analysis skills. As suggested by Davis, et al, (2004) earlier in this chapter, programs could offer an offshoring curriculum specialization (although their work was specifically aimed at the graduate audience). The major drawback of this approach on the undergraduate level might be how to add an additional required course in the IS200X model curriculum and yet not take out another course. Many programs that are in academic units accredited by AACSB have limitations on the number of credits in programs. In such programs, when a new course gets added to the required list, another course must be deleted. However from a teaching and learning perspective, while a separate course may highlight the importance of outsourcing/offshoring the IS discipline, it may fail to reinforce that notion that outsourcing/offshoring is pervasive and impacts on a growing number of IS functions.
Option “b” In the second option above, many campuses do require IS majors to take an international busi-
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
ness course. With the increasing global nature of business this can be valuable to students. But a drawback of such a course is that it not explicitly oriented to IS outsourcing/offshoring, but generally is a broad-based international business course. Further, there is no coverage of requirements analysis.
Option “c” The third option is to deemphasize topics and areas that are frequently outsourced. When applied to the IS2002 model curriculum, with an eye to frequently outsourced areas, the authors suggest that many topics in IS2002.4 Information Technology Hardware and System Software and IS2002.5 Programming, Data, File and Object Structures and some topics of IS2002.6 Networks and Telecommunications are frequently outsourced and could be deemphasized in the curriculum. For example, many outsourcing contracts are for programming and application development (IS2002.5), or for help desk support (IS2002.4). These courses/topics/concepts could be combined into one course with less coverage in order to allow for a course in outsourcing (see option 1 above)3. Nevertheless, if such an option was adopted, it would undermine the content and skill development upon which most current IS degrees are developed. Although an area of IS knowledge may be targeted for outsourcing/offshoring it does not in itself imply less learning is required in that area.
Option “d” The fourth option is to incorporate outsourcing/ offshoring concepts into the current IS2002 model curriculum. There is growing use of context-based learning in the areas within the IS discipline. We are seeing practical applications of contextbased learning in texts books where important concepts such as ethics and social issues are not ‘tacked on’ at the end of a course but integrated
through the content (Kroenke 2007). It may be as little as case studies and simulations or it may be at the more innovative end of problem-based learning. Whatever interpretation of the contextbased learning taken by the lecturer, the context within which students learn “… is important in providing meaning and deepening understanding of the concept, procedure, information or skill that they are required to learn” (UWA, 1998). It helps to bridge the gap between isolated facts and the practical implications of concepts outside of the classroom. Using the list compiled by Davis, et al, (2004) as a working list, the authors suggest the following ways to cover outsourcing/offshoring concepts using context-based learning in IS2002.
IS2002 COURSE-BY-COURSE ANALYSIS FOR OFFSHORING CONTENT IS 2002.1: Fundamentals of Information Systems Topics from Davis, et. al., (2004): • • • • •
Global cultural implications for IS Offshore outsourcing Globalization Requirements analysis (and many of the other topics to be lightly introduced)
This is an ideal first place to expose students to outsourcing/offshoring. According to IS2002. org, “Systems theory, quality, decision making, and the organizational role of information systems are introduced. Information technology including computing and telecommunications systems are stressed. Concepts of organizations, information systems growth, and process improvement are introduced” (Gorgone, et al, 2002). These concepts are applicable to outsourcing/offshoring.
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This frequently is a common or core course for all business students and is a good place to expose majors and non-majors to the issues involved in global IS/IT management. Possible assignments in IS2002.1 that incorporate outsourcing/offshoring: Short analytical papers about outsourcing/ offshoring; Pro and Con presentations; panel discussions (by students, graduate students or community experts); and possible presentations by working IS professionals that are involved in outsourcing. Simple case studies can be introduced that involve the principles of requirements determination. [Author’s note: A member of the campus IS advisory board of one of the author’s is an IS manager at a Fortune 500 company that utilizes Indian offshoring and has presented some of the issues to our courses.]
IS 2002.2: Electronic Business Strategy, Architecture and Design •
Transborder EDI and data flows
The E-Business course can also reinforce the concepts from IS2002.1. The concept of supply chain management is covered in IS2002.2 – and the global aspect of supply chain management could be covered. Possible assignments in IS2002.2 for outsourcing: •
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Short analytical papers about outsourcing/offshoring; discussion of multinational business systems; analysis of multinational business web sites and systems; currency and transborder electronic data interchange analysis. [Author note: One of the authors visited Dell Computers in Ireland which is responsible for Dell Computers in Europe, the Middle East and Africa. This author intends to require students to study Dell
Computer Web sites for the US and for other countries to see differences. The Dell of Ireland manufacturing facility ships computers with several languages (German, French, Flemish, Spanish, etc.), different keyboards (including Cyrillic for Russian language support) and other adaptations.]
IS2002.3: Information Systems Theory and Practice Topics from Davis, et al, (2004): • • • • • • • •
Business processes Customer relationship marketing Electronic commerce Design methodologies ERP systems IS security Management of computer personnel Workflow and collaborative work
Possible assignments in IS2002.3 related to outsourcing: •
Literature review (and short analytical papers on) of global security issues (such as what would happen if an Indian company lost thousands or millions of credit card numbers and social security numbers); design of a multilingual site (supporting such languages as English, Spanish, French and multiple currencies, such as American and Canadian dollar and the Mexican Peso). [Author note: On his travel to Ireland, one of the authors visited Kerry Group—a multinational food processing company. Kerry group owns subsidiaries around the globe and processes ingredients on five continents. At one point, Kerry Group had over 20 different ERP systems and would make for an interesting case study for the IS2002.3 course.]
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
IS 2002.4: Information Technology Hardware and System Software No specific outsourcing/offshoring concepts covered.
IS 2002.5: Programming, Data, File and Object Structures No specific outsourcing/offshoring concepts covered. Although IS2002.4 and IS2002.5 may not explicitly have outsourcing/offshoring concepts, there may be assignments and applications that relate to outsourcing and offshoring. For example, students in the IS2002.10 Project Management course may develop the specifications and manage a project where the development/programming is handled by students in the IS2002.5 course. See additional discussion under the IS2002.10 Project Management course.
IS 2002.6: Networks and Telecommunication
• • •
Business processes Design methodologies Workflow and collaborative work
In this course, when studying the design module, instructors cover the three options for development: in-house development, package selection, outsource. With more done on outsourcing, this is an ideal place to incorporate an outsourced assignment—with analysis of costs and benefits to offshore some functionality (such as help desk support) and to bring strong focus to the development of skills in requirements analysis and documentation. This could also be tied to a major project that is overseen and managed by students in the IS2002.10 Project Management course, with specifications developed by students in this course (IS2002.7) and with applications developed by students in the IS2002.5 programming course.
IS 2002.8: Physical Design and Implementation with DBMS Topics from Davis, et. al., (2004):
•
Management of telecommunications
Possible assignments in IS2002.6 for outsourcing: •
Students may write on the infrastructure and maintenance issues involved in supporting a global telecommunications system. If interaction between different institutions has been initiated, students can compare and contrast networking and telecommunications between the two campuses and the countries.
IS 2002.7: Analysis and Logical Design
• • • •
Here students could develop an application with a database (ranging from an Access database upward)—and have another class/campus develop the application (such as with the IS2002.5 course)
IS 2002.9: Physical Design and Implementation in Emerging Environments •
Topics from Davis, Ein-Dor, King and Torkzadeh:
Data warehousing Database administration Database systems planning Systems integration
Emerging technologies and technology forecasting
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In this class, the emphasis is on new and emerging environments, such as ERP systems. As an assignment, students could develop the schema for an ERP system and outsource the functional design/development to another class/campus (see the discussion in the IS2002.10 course)
• •
•
IS 2002.10: Project Management and Practice Topics from Davis, et al, (2004): • • • • • •
Change design Project management Systems integration Workflow and collaborative work (As the capstone course, this implicitly can incorporate many of the other topics) Equally important is the topic of IT strategy. While all business schools offer a business strategy course, some (i.e., Icelandic) companies have great need in hiring graduates who can help identify what technology can be used to benefit business. This offers business schools an opportunity to be proactive. Curricula should require a basic technical level of knowledge in what is currently, and timely, available and how that technology can be brought be bear on the business. Helping establish IT strategy at the boardroom level is a skill that should be developed (Tastle and Valfells, under review).
This course is an ideal place to incorporate a major outsourcing project into an IS education program. The concept of the project management course is to take a project, develop specifications, do the analysis and design and implement the project. Generally the IS2002.10 Project Management course is done as a major team project. The authors suggest four ways to incorporate outsourcing into the IS2002.10 course:
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•
Assign a research project to outsource processing functions to the teams Assign an project on your campus – such as have the students is IS2002.10 class work with students in the IS2002.4 Files/Development course (i.e. “programming”) Develop an assignment project team with students in IS2002.10 courses on two different campus (within the same country – in this context, generally the United States but collaboration with universities in other countries would add realism and foster a sense of virtuality likely to be absent). Develop a project with the management team and the IS2002.10 students, and the programming team comes from a university in a different country. This also provides an opportunity for students to engage in virtual team management.
The authors suggest that IS2002.10 could cover outsourcing/offshoring from a practical perspective by working with students from another class or from another campus. The authors of this chapter have collaborated with Australian, Icelandic, and Belarus colleagues and could develop such an extended collaboration.
CONCLUSION The authors have suggested four options to incorporate outsourcing/offshoring content in the undergraduate IS2002 model curriculum. There could be a new course; coverage outside the IS department (such as an international business course); combining IS2002 courses that contain content that is frequently outsourced so more emphasis can be put into courses where the skills needed for outsourcing are built; and finally explicit lists of topics and activities that could be added to the ten existing courses in the IS2002
Information Systems, Offshore Outsourcing, and Relevance in the Business School Curriculum
model curriculum. Moreover, the authors contend that with some planning, outsourcing topics could be incorporated into IS2002 successfully, but they do, nonetheless, encourage others to continue this dialog. Certainly, there will always be a set of small to medium sized companies that cannot or will not engage in offshoring, and those companies will require graduates with the current skill set. But even in companies that do not use offshoring, the softer skills of contract law, contract management and negotiation will grow with the increasing complexity of information systems. Even small and medium sized enterprises will be contracting for services and purchasing software package solutions (and may do so without actual in-house development). Loh and Venkatraman (1995) may have said it best – that is it not ‘insourcing’ or ‘outsourcing’, but ‘rightsourcing’ – and in whatever means of IS instruction, the topics suggested are worth investigation and possible incorporation into quality IS academic preparation.
ACKNOWLEDGMENT The authors gratefully acknowledge the efforts of the unknown reviewers who took great time and effort in providing commentary that strengthened this chapter. To them we extend our most appreciative and gracious respects.
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empirical study. Industrial Management and Data Systems, 105(6). Gupta, A., Kanthi Herath, S., & Mikouisa, N. C. (2005). Outsourcing in higher education: An empirical examination. The international Journal of Educational Management. Gupta, A., Mukherji S., & Ganguly, A. (2007). Offshoring: The transition from economic drivers toward strategic global partnership and 24-Hour Knowledge Factory. Journal of Electronic Commerce in Organizations, 5(2), 1-23. (An updated version of this paper is reproduced as Chapter 1 of this book). Hawking, P., Shackleton, P., & Ramp, A. (2001). IS’97 model curriculum and enterprise resource planning systems. Business Process Management Journal, 225-233 Hoganson, K. (2005). A strategic approach to computer science curriculum. In Proceedings of the 43rd Annual Southeast regional conference: Vol 1 (pp. 365-370). Kakumanu, P., & Portanova, A. (2006). Outsourcing: Its benefits, drawbacks and other related issues. Journal of American Academy of Business, 9(2), 1-7. King, W. R. (2005). Outsourcing and offshoring: The new IS paradigm? Journal of Global Information Technology, 8(2), 1-4. Kroenke, D. (2007). Using MIS. Upper Saddle River, NJ: Pearson/Prentice Hall. Kumar, S. (2006). A comparative analysis of key information technology players. Technovation, 26(7), 836. Loh, L., & Venkatraman, N. (1995). An empirical study of IT outsourcing: Benefits, risks and performance implications. International Conference of Information Systems (ICIS). Longenecker, H. E., Jr., & Feinstein, D. L. (Eds.). (1991). IS’90: The DPMA model curriculum for
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Sayer, P. (2006, February 24). Report offers tips to protect your job from offshoring. Network World. Retrieved September 15, 2006, from http://www. networkworld.com/news/2006/022406-offshoring.html Shao, B., & David, J. (2007). The impact of offshore outsourcing on IT workers in developed countries. Communications of the ACM, 50(2), 89-94. Stanton, V. (2006, January). Analysis: Outsourcing—The Indian solution. Accountancy, 137.1349, p. 60. Swanson, D. (2005). Offshoring outsourcing drives curriculum. In Proceedings of the 2005 ASCUE Conference (pp. 242-249). Tastle, W. & Valfells, A. (2007). Emerging trends in information technology departments of major Icelandic corporations. Manuscript submitted for publication. UWA. (1998, September). Learning in context. Issues of Teaching and Learning, 4(8). Weisman, R. (2007). Outsourcing expands to cover all but the core. Retrieved from http://www. boston.com/business/globe/articles/2007/02/11/ outsourcing _expands_to_cover_all_but_the_ core/ Willcocks, L., Fitzgerald, G., & Feeny, D. (1995). Long range planning. 28(5), 59-70. Wikipedia. (2007a). Calculating time differences. Retrieved September 15, 2006, from http:// en.wikipedia.org/wiki/Calculating_local_time Wikipedia. (2007b). EDS outsourcing. Retrieved September 15, 2006, from http://en. wikipdia. org/wiki/Electronic_Data_SystemsZamiska, N. (2005, May 5). Quality lures software outsourcing; other countries now follow pattern created by India. Wall Street Journal (Eastern ed.), p. B4.
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Endnotes 1
2
DPMA stood for Data Processing Management Association. It since has changed its name to AITP, the Association of Information Technology Professionals. AIS is the Association for Information Systems; AITP is the Association of Infor-
3
mation Technology Professionals, ACM is the Association of Computing Machinery The authors conducted a thorough study of each of the learning outcomes for IS2002 (IS2002 is available at: http://is2002.org) in terms of what is fungible and what is not. If you are interested in this study, please contact either of the authors by e-mail.
This work was previously published in Journal of Information Technology Research, Vol. 2, Issue 1, edited by M. Khosrow-Pour, pp. 61-77, copyright 2008 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XVIII
Innovative Technological Paradigms for Corporate Offshoring Tapasya Patki University of Arizona, USA A. B. Patki Department of Information Technology, India
Abstract Internet technology has impelled us to develop faith in the modern practices of business, commerce, and trade. Offshoring has been viewed as a global phenomenon on the economic frontier. While new technologies need to be framed, stopgap arrangements in the form of transient solutions to upgrade the current systems are also desired. Newer regulations and multi-jurisdictional compliance have profound impacts on the growth of outsourcing projects. The development of new technological solutions must challenge the myth that legislation and statutory practices are the only possible mechanisms to counter the unscrupulous activities in the context of outsourcing. A change in the outlook toward such methodologies is essential to shed away the technological inertia and latency. This chapter opens up discussion issues in the perspective of hardware and software requirements for efficient offshoring. The aim is to achieve higher precision, protection, and throughput by applying core-computing techniques to the existing practices of outsourcing.
Copyright © 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Innovative Technological Paradigms for Corporate Offshoring
Introduction The information and communications technology (ICT) revolution has triggered the economic development at collaborative and cooperative levels. Internet-based infrastructure provided impetus for outsourcing projects to hubs such as India, China, and the Philippines. Bednarzik (2005) indicates that due to its emerging nature, there is no universally accepted definition of offshoring. While the industry professionals use outsourcing and offshoring terms interchangeably, IEEE and ACM believe that when a U.S. company gives work to companies in other nations like India, it is outsourcing (and not offshoring). A general business expansion trend, including an outreach program, is to explore potentials of other nations for widening an organization’s horizons (Friedman, 2005). Considering this general view, offshoring, outsourcing, and subcontracting need to be distinguished. A report of the ACM Job Migration Taskforce (Aspray, Mayadas, & Vardim, 2005) looked at the issue from a global perspective, as compared to a country-centric one in the context of rapid globalization of IT and the migration of jobs resulting from outsourcing and offshoring. The report clearly defines the following two terms: • •
Outsourcing refers to having work for a company done by another organization. Offshoring refers to having this work done in another country, whether or not it is done by part of the same company.
This leads to a partially overlapping definition of outsourcing and offshoring. Transferring a part of the workload from a host location to another adjunct destination can broadly represent the meaning of these two terms. Predominantly, the host and the destination locations are in different countries. The authors explore the possibility of such situations from the previous perspective, that is, not adhering to a fixed definition. Such
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an approach is necessary for a global outlook, wherein the participation of developed and developing nations is at equal stake levels (Farrell, Kaka, & Sturze, 2005). Both subcontracting and offshoring/outsourcing have impact on work force realignment. The fears, however, are disjoint. Subcontracting may result in a partial relocation of the workforce with ensured job security. Such a possibility is absent in offshoring/outsourcing. In this context, the theory of comparative advantage, propagated by the economics of offshoring cannot be applied to subcontracting. With the introduction of business models in the developing nations for managing the available workforce and the infrastructure, the ICT industry paved the way for the foundation of first generation outsourcing oriented corporate models (FG-OOCM) for expanding commerce. The FG-OOCM has opened up various issues for outsourcing-based research, and a need for deploying technological solutions to offshoring activities is being felt. For example, consider a situation where Mexican, Indian, Chinese, and American people work together in an outsourcing-based system. In such cases, knowledge management is a challenge and a need for introducing technological solutions is felt. Although distinct units, rules, and documents of each participating organization can be considered as explicit knowledge, these do not make knowledge for the entire outsourcing system. Information and knowledge are interdependent, but information per-se contains no knowledge. Some of the issues of knowledge management in software engineering (Desouza, 2003) are applicable to outsourcing. In general, outsourcing system operations are performed by outside contractors, and the terms of understanding between the client and the contractor for outsourced services are defined based on distribution of responsibility, liability sharing, and performance monitoring. These issues require managing of electronic records and evidence, impose legal compliance requirements, and need to be viewed from the perspective of technology as opposed to that of mere administration.
Innovative Technological Paradigms for Corporate Offshoring
Internet Technology Framework Outsourcing is a multistage phenomenon involving individual (usually management/technical positions), functional (knowledge and responsibility orientated), and process (flow of product or services) level activities (Greaver, 1998). Depending on the process requirements, outsourcing can be classified as tactical, strategic, and transformational (Brown & Wilson, 2005). The mindset of considering tactical outsourcing for reducing financial costs is assuming new dimensions to make business capabilities portable on a global basis. Detailed analysis of case studies in a research-based manner establishes the success pattern using transformational outsourcing (Linder, 2004). Conventional outsourcing approaches that focus on incremental cost savings have outlived and business process offshoring (BPO) as well as emerging knowledge process offshoring (KPO) are the likely next generation outsourcing activities. At present, the Internet technology-based computing deployed for Web services and outsourcing comprises of a broad range of processors, communication networks, and information reservoirs. The trustworthy computer systems encompassing a spectrum of information processing technologies will play a major role in the impressive growth of the BPO sector. The technology to support next generation outsourcing is likely to witness large scope computing instead of large scale computing to withstand attacks and to ensure greater security, dependability, and reliability. Multimedia, multilingual network operating software (MISNOS) supports large scope computing permitting application semantics (Bandyopadhyay, 1996). It has potential for context-sensitive and secure OS architectures to facilitate e-services needs of conventional and emerging ubiquitous embedded systems deployed in BPO sectors. Outsourcing, in the past, has evoked a response, which is a combination of excitement for corporate management and fear/worries like loss of jobs for employees
in the host country. In addition to these social issues, the technological issues like data thefts, privacy protection, and timely deliveries have been concerns in the past few years. Figure 18.1 depicts problems triggered by outsourcing. The Internet must also provide substantive benefits to the various stakeholders of outsourcing business community as opposed to merely offering traditional subcontracting disguised with technology. The early management-oriented outsourcing studies focused on employment issues instead of productivity aspects. The job losses due to direct impact of offshoring and indirectly due to productivity enhancements are concerns of transient nature (Bednarzik, 2005). Lo (2005) has demonstrated using a mathematical approach that the international outsourcing trade and technology improvements have potentials to make the world better off with higher real wage and more product variety. Outsourcing failure is termed as a situation when a deal is either terminated or re-negotiated (Brudenall, 2005). High rate of outsourcing failure is attributed to factors like poor planning, choice of partner, or lack of proper strategy. The importance of identifying short-term and long-term goals to prevent outsourcing failures is discussed in the context of vendor selection and cultural match (Chandrasekar, 2005). Lee, Huynh, Chi-Wai, and Pi (2000) identify key research areas for deeper understanding on outsourcing as a two-phase exercise. Evolution of several identified outsourcing issues from motivation, performance angle, to management control has been the focus of first phase. The second phase describes partnershipbased outsourcing trend. A management checklist (Kobayashi-Hillary, 2004) focuses on preparation as a critical part of transition and redundancy process for managerial commitments. However, the preference of the “touch-and-feel” factor over the impersonal virtual environment and the lack of adequate security systems to safeguard strategic information may limit the extent and pace of outsourcing.
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Figure 18.1. Problems triggered by outsourcing A Typical View of Problems Triggered by Outsourcing
Issues at the Destination Location
Issues at the Souce Location
Job Loss
Data Theft, Breach of Privacy
Increasing Crime Rate
Poor Health Due to Odd Working Hours
Economic Disparity in the Society
Solutions Framework Technology Domain
Absorption into the e-Service Sector for Outsourcing
Concurrency Control and Security Web based services
A need to structure and equip the outsourcing business community for content sharing and control has arisen in the Internet technology framework. With the continued globalization and technology push, outsourcing is seen as the growth engine of the global economy (Roger, Smith, & Kidd, 1999). The IT infrastructure currently available to small- and medium-sized enterprises (SMEs) does not provide sufficient integration amongst different application components of business to support trustworthy inter-organizational outsourcing process. As a stopgap arrangement to improve trustworthiness, we suggest an eservice-oriented methodology for outsourcing for addressing trustworthiness concerns. The approach suggested in the section on establishing concurrency control and security is on the lines of TIOBE programming community index that is updated once a month (TIOBE, n.d.). Flexibility in arranging trans-organizational BPO is a key requirement for a common middleware. Shifting
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Governace GovernanceDomain Domain
Health Care Schemes and Stress Relieving Excercises During Office Hours
Govt. to take initiatives to bridge the gap by creating more opportunities
of skill set up the value chain is useful (Fowler, 2005). As a long-term goal, underutilized skill sets arising out of job losses due to outsourcing must be deployed for assessing global methodologies for benchmarking BPO/KPO infrastructure on the lines of supercomputer ranking initiatives (Top 500 supercomputer Sites, n.d.) that are updated half yearly. Technological approaches suggested in this chapter are useful from this perspective.
Status of Initiatives Taken by Developing Nations to Support Outsourcing In order to gain economic benefits of the BPO boom, a number of developing nations responded in a multipoint fashion. This included focus on the science and technology policy, introduction of cyber legislation, the creation of supportive legal infrastructure, and reforming academic/educational courses (Matsuura 2002; NASSCOM &
Innovative Technological Paradigms for Corporate Offshoring
BCG, 2001; Patki, 2004). Outsourcing principles and practices never addressed the cybernetic angle of the process. Issues of the cyber-legislative status and the cyber-crime rate of the outsourced/outsourcing nation were not given due attention. Community centers, Internet kiosks, cyber cafés, cyber marts that are the Internet access points in metropolitan cities, and townships are the objects of attack (Matsuura, 2002). The profile of cyber café usage, types of browsers used, and time of day vis-à-vis the physical locations are among the major criteria for assessing cyber crimes through the potentially floating user population. In the present form, cyber forensic tools concentrate merely on electronic records and need to extend their scope to network forensics. This is one issue that is an impediment in the growth of the BPO industry, and needs to be handled at the research and implementation levels. While statistical data on the quantum of business of BPO sector are published to encourage investments, no data are readily available in open source for assessing legislative potential prior to the commencement of any outsourcing contract-based project. The print media offers some basic narrative information and completely overlooks the analytical and technological aspects of outsourcing. These areas call for further detailing and need to be addressed at the national and international levels. Previous studies related to offshoring have concentrated on a developed nation (primarily U.S.) offshoring to a developing nation (India/China), resulting in an economically win-win situation for both the participating nations. The ACM report (Aspray et al, 2005), has, to some extent, succeeded in overcoming such constraints by addressing broader issues from both national and company perspectives, including the globalization of research, and educational changes. Thus, the initial concept of establishing an offshoring base in a developing nation needs to be altered for the sustained growth, especially for partnership-based outsourcing.
TECHNOLOGICAL ISSUES Reifer (2004) brings out the views of both sides of the outsourcing debate and highlights that in order to succeed in outsourcing, it is necessary to avoid conflict arising out of lawyers and contract administrators. In this chapter, we discuss the technology aspects (viz. hardware/software) to avoid the conflict. The present day information systems designed on von Neumann philosophy and the applications tailored for such architectural platforms are successfully running on various hardware/software platforms. Electronic data processing (EDP) was the sole purpose of the early generation of computers. Their extensions to scientific and commercial applications paved the way for new avenues using high-speed computation and DBMS. All through, the Boolean-logic based data items continued to be a basic micro unit and the concepts of raw data, processed data, raw information, and processed information were implemented at application-level instead of CPU hardware (instruction set level) or system software level. This mindset resulted into OS commands of delete type for removal of data as well as information. However, information weeding is much different than simply deleting a file or the contents of a directory from a computer system. Subsequently, algorithms were developed for data compression to overcome storage, transmission, and retrieval problems. With the introduction of information transfer through the Internet (video graphics, sound, and images), the data compression algorithms grew more popular. Such patchwork approach was acceptable for in-house, networked IT installations. However, the lack of built-in cognitive supports at computational/operational levels adversely influenced outsourcing. It has led to situations of outcry toward outsourcing ranging from labour dissatisfaction to data thefts, forcing countries to resort to legislation. The authors identify the limitations of the current outsourcing technologies and focus on using soft computing based solutions.
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Cognitive Support for Data Processing With the availability of Internet, EDP-oriented methodology has been directly extended to the BPO sector for establishing dedicated application-oriented servers (e.g., ftp, mail, and dbms) to preclude the intermixing of data and information. However, concept modeling as per the user specifications and requirements is not incorporated in these dedicated servers. Unlike the EDP applications of the bygone century, the future information systems will require computers with capabilities to handle imprecise and partial information, approximate reasoning, and learning, both for scientific and commercial applications. Capturing and representing knowledge and inferencing are major challenges in classical computing techniques due to the imprecise or gray nature of real-life decisions. Since computer programming is the ultimate vehicle for the practical realization of outsourcing plans, it is necessary to cater to imprecision and context through software construction approach (Hunt & Thomas, 2003; Patki, 2004). Fuzzy logic (Zadeh, 1965, 1976) techniques allow system modeling using linguistic hedges for handling imprecision, partial truth, uncertainty, and approximations. The focus should be on reducing the cognitive load of the end user leading to the simplification and ease of use of the data processing framework. We provide a brief review of the basic concepts of fuzzy logic (FL) next.
Fuzzy Logic The theory of binary logic is based on the assumption of crisp membership of an element to a certain set. An element x thus either belongs to (i.e., has a membership value of 1) or does not belong to (i.e., has a membership value of 0) a particular set X. Conventional logic systems can be extended to encompass normalized values in the range of [0,1];
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thus introducing the notion of partial membership of an element to a particular set. The variable in a fuzzy system is generally described linguistically prior to its mathematical description, as it is more important to visualize a problem in totality to devise a practical solution. A fuzzy set F, on a collection of objects, X, is a mapping µF (x): X → [0,a] Here, µF (x) indicates the extent to which x ∈ X has the attribute F, thus it is the membership function. In general, we use a normalized fuzzy domain set, for which a = sup µF (x) = 1 The membership function can be generated with the help of mathematical equations. Typically, it can be in trapezoidal, triangular or in the form of S or π - curve. The support of a fuzzy set, F, S(F) is the crisp set of all x ∈ X such that µ (x) >0. The three basic logical operations of intersection, union, and complementation can be performed on fuzzy sets. 1. The membership µC (x) of the intersection C = A ∩ B satisfies for each x ∈ X,
µC (x) = min {µA (x), µB (x)}
2. The membership µC (x) of the union C = A ∪ B satisfies for each x ∈X,
µC (x) = max {µA (x), µB (x)}
3. The membership µC (x) of the complementation C = A satisfies for each x ∈X,
µC (x) = 1- µA (x)
Innovative Technological Paradigms for Corporate Offshoring
Example Fuzzy logic hardware modules (Alag & Patki, 1996; Hung, 1995; Watanabe, 1991) as well as disk operating system (DOS) level FL software (Patki, Raghunathan, & Khurshid, 1997) have potential for ameliorating outsourcing/offshoring infrastructure. Basic DOS level commands like dir, list, copy, move, and del have been provided with FL support. The use of variables like old and recent in the time domain and large, average, and small in the size domain have been used to modify the existing DOS commands. A further support using hedges such as very, moreorless, and not is demonstrated in the fuzzy logic-based operating system, FUZOS© (Patki et al., 1996). This concept can be extended to the data processing unit of a BPO, in which the FL based browsers, text editors, call support utilities etc., can be incorporated. For real time response, software approaches are not adequate and there is a need for fuzzy hardware support. Although, add-on cards for computing hardware have been suggested, the practical solution calls for instruction set based processors with hardwired or micro-programmed implementations (Patki, 1997; Watanabe, 1991).
Machine Intelligence Quotient In the past, the performance of computing systems was judged purely by its constituent hardware. Thus, MIPS (million instructions per second), GFLOPS (giga floating point operations per second), and Gibson mix were the metrics for the computer performance assessment. Subsequently, with the developments in the fields of artificial intelligence and fuzzy logic, the software performance index like FLIPS (fuzzy logic inferences per second) appeared in the hardware dominated era to determine the combined hardware and software (i.e., integrated technological performance). FLIPS did not become as popular as MIPS since there were not many occasions to benchmark fuzzy logic hardware/software sys-
tems. MIPS rating for benchmarking computing hardware is slowly being replaced with machine intelligence quotient (MIQ) and is likely to have potential impact on offshoring. MIQ permits the understanding of any machine through multiple perspective analysis (Jamshidi, Titli, Zadeh, & Boveriv, 1997). Any numerical or linguistic index/structure indicating the degree of autonomy of an intelligent system module can be regarded as MIQ. Although it is difficult to obtain an absolute measure of MIQ in the strictest sense, a relative value based on a comparison of the system with an existing baseline machine in use can be determined. This allows us to rate a particular system with respect to an already established machine in use, thus, allowing us to determine its efficiency and effectiveness that can be deployed to tackle a certain problem. MIQ differs significantly from indices like control performance, reliability, fault-diagnosis (Park, Kim, & Lim, 2001). MIQ has been defined as the measure of autonomy and performance for unanticipated events. The MIQ approach can link the infrastructural needs of an offshoring/outsourcing institution with its throughput. Issues regarding the measurement of MIQ have been discussed by analyzing human-machine cooperative systems. MIQ (M) can be considered as a union of machine control intelligence (MC) and machine interface intelligence (MF). M = MC + M F Engineering systems or products that are said to be intelligent have been analyzed and a threedimensional construct space representation as entities has been suggested (Zeungnam, Bang, Kim, & Han, 2002). In order to determine the numeric value of MIQ, Sugeno fuzzy integral and Choquet fuzzy integral have been adopted. An important characteristic of the future outsourcing information systems will cater to a situation in which information needs are not defined precisely at the time of the system design
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Innovative Technological Paradigms for Corporate Offshoring
and awarding the contract. This brings the focus on dynamically integrated intelligent information systems instead of the computer hardware and software as disjoint infrastructure entities for service sectors. In the near future, when we consider outsourcing, we shall also encompass the broad category of information producing and information lending industries that are likely to usher in a new type of global market. Thus, MIQ will occupy special significance since the outsourcing contract awarding and project-executing organizations will be part of same MNC where current trend of country-oriented legislation will serve no purpose. Example The offshoring procedure poses an operational threat in deploying commercial off-the-shelf (COTS) product procuring strategies for building IT based critical infrastructure. Such a view is expressed (Aspray et al., 2005) in the context of source and application code of COTS products procured through offshoring. This situation can be improved by introducing MIQ evaluation of subassemblies/assemblies using individually certified COTS products. Recommended methodology could include in-depth research in introducing the concept of MIQ authorization and type approval of the COTS products and the evaluation of the host and the destination companies by an international agency.
(CCI), customer satisfaction rate (CSR), and civil infrastructure status (CIS). These parameters are extremely important to compute cyber trustworthiness of a particular service unit, and to assess how far the unit succeeded in reaching its targets. This approach calls for a technological development and is not possible by merely adhering to standards and/or certification practices like the ISO. The CCI, CSR, and CIS term set has been briefly described next, as elaborate explanations are beyond the scope of this chapter. This methodology is on the lines of TIOBE programming community index, which is updated every month (TIOBE, n.d.). However, unlike TIOBE, the trustworthiness assessment requires online project data collection based on inherent cognitive styles prevailing in offshoring. In order to illustrate a cognition-based approach for such situations, we discuss how rough set theory (RST) can be applied for assessing CCI. Independent agencies should be setup centrally that provide a Web-based portal for these parameters and also provide periodic updates on a regular basis for assessing cyber trustworthiness. The data access to such an e-service must be standardized so that processing of requests for proposals (RFPs) is more effective. •
Establishing Concurrency Control and Security As brought out in the previous sections, there is a strong need to assess the figure of merit from the security point of view for any city-based infrastructure in an outsourcing/outsourced nation where the project is being executed. The infrastructure does not merely refer to the physical hardware/software setup; but also encompasses dynamic parameters like the cyber crime index
328
•
Cyber crime index (CCI): It is the cumulative measure of the various cyber crimes that occur at a particular service unit in a city where the outsourcing infrastructure has been installed and involves inter-nation as well as intra-nation successful illegal attempts that have taken place in the time period of observation. The term illegal attempt is based on a cognitive factor and cannot be determined directly. Customer satisfaction rate (CSR): It determines the percentage-based value of the number of satisfied customers per unit time (this time is the time-period of observation). The CSR value determines the reliability and the serviceability of the infrastructure
Innovative Technological Paradigms for Corporate Offshoring
•
unit. Weekly project progress of the targets as per the PERT chart serves as an important parameter. This value is fuzzy in nature as it is used to plot a membership function of CSR with the help of parameters like satisfied and dissatisfied. Furthermore, hedges like moreorless and very can be applied to these values. This membership curve can be used to determine the efficiency and the effectiveness of a service center unit. Civil infrastructure status (CIS): This is a value that is computed from the join of various other factors like the present population of the city, the administrative status of the city, the present need and urgency of a request, and several such related factors. This factor uses type-II fuzzy sets representation. This is a highly variant quantity and it generally fluctuates with parameters like the current climate/season, the socioeconomic condition of the city, the language and culture of the people, the percentage of academicians in the city, the business base of the city etc. This is a very important value as it determines the usability and accessibility of a service unit for offshoring, and needs to be consulted before investing in a particular location prior to the finalizing of the outsourcing project.
In the context of the previous discussions, when we talk of outsourcing at the most fundamental level, we refer to a collection of operations that form a single logical unit that need to be executed to perform a specified task to fulfill a particular request. This collection of operations is referred to as a transaction. Transaction management (TM) and concurrency control (CC) are thus evolving issues in outsourcing. To support such schemes, technological solutions have to be provided in the form of cognition-based protocols for TM and CC. Some important considerations with regard to TM include atomicity, consistency, isolation, and durability, popularly referred to as
ACID properties. When several transactions take place simultaneously, the isolation property may not necessarily be preserved and to ensure that it holds, a separate CC algorithm must be designed to control the interaction between simultaneous transactions. Serialization of transactions is one such method to establish CC. We can do this by the use of protocol-oriented techniques. Techniques such as lock-based, timestamp-based, graph-based, and validation-based protocols have been previously employed for database systems (Elmasri & Navathe, 2004; Silberschatz, Korth, & Sudarshan, 2002). However, these techniques fail to deliver a good output, as they are not based on the real-life problems. A major limitation of these protocol-oriented solutions is that they have been founded on the grounds of example situations, and they do not by any means address the grass-root reality of outsourcing/offshoring setup, as they cannot take intelligent decisions. In order to develop more practically efficient solutions, we have to move to the soft-computing based options (Kapoor, Patki, & Khurana, 2005). Proposed TM could be implemented using rough set theory (RST) approach, which also supports the powerful concept of information systems (IS). We provide a brief introduction to RST (Pawlak, 1982, 1984) as well as IS in this chapter and then discuss how these can be applied for security and concurrency control.
Information Systems A system that is capable of storing information for archival and reference purposes can be thought of as an IS. It is quite similar to a relational database (Silberschatz et al., 2002) in terms of its physical structuring. The difference lies in the powerful concepts of reduction and abstraction that it uses. It can also perform the task of a decision making system, allowing us to select a few attributes as decision parameters. The attributes can also be classified as relevant and irrelevant.
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Mathematically, an IS is defined as a 4-tuple system (Marek & Pawlak, 1976; Pawlak, 1984) S = {U, D, V, ρ} where • • •
•
U is a non-empty finite set of objects known as the Universe of Discourse; D is a non-empty finite set of attributes or descriptors used to represent the objects; V is the set of values, such that for every a∈D, we associate a set Va, called the domain of attribute a; and ρ is the mapping function such that: ρ : U x D → Va
Rough Set Theory Rough set theory, as the name suggests, is based on the concept of roughness or approximation of the crisp sets. It extends the conventional set theory to include a concept known as an approximation space, which can be defined mathematically as an ordered pair, A = (U, R) where U refers to the universe of discourse, and R refers to a binary relation over U, also called the indiscernibility relation of the IS (Marek et al., 1976; Pawlak, 1984). We assume R to be an equivalence relation, thus broadly classifying R as reflexive, symmetric,
and transitive. Thus, if an ordered pair (x, y) ∈ R, we say that x and y are indiscernible or indistinguishable in A. Equivalence classes of relation R are often called elementary sets or atoms in rough set theory. An empty set (i.e., φ) is assumed to be the elementary set for every A. When the union of elementary sets for a set X is finite, we say that the set X is definable or composed. Essentially, for a quantifiable set X, we can talk of two approximations in general, a lower approximation (LA or A), which refers to the greatest definable set in A of which X is a superset, and an upper approximation (UA orA), which refers to the least definable set in A of which X is a subset. The positive region is the union of the lower approximations (Pawlak, 1982). The boundary of X in A is mathematically the set difference of the upper approximation and the lower approximation. Thus, BND (X) = A – A. Figure 18.2 illustrates these operations. The negative region (or NEG (X)) is the difference between the universe of discourse and the positive region. A set can also be referred to as definable when its LA and UA represent the same set, i.e., when A = A. In all other cases, the set X is said to be undefinable. Undefinable sets in a given approximation space A are of the following four types: •
Roughly definable: When for a given set X, A ≠ φ and A ≠ U
Figure 18.2. Basics of rough sets
BND(X)
POS(X) or A Set (X) Universe of Discourse, U
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• • •
Externally undefinable: When for a given set X, A ≠ φ and A = U Internally undefinable: When for a given set X, A = φ and A ≠ U Totally undefinable: When for a given set X, A = φ and A = U
Example RST can be effectively applied for determining and analyzing the CCI. To find CCI, we need to follow up a given service unit and approximate its illegal activities/attempts. This approximation can be done in a suitable time frame, which depends on the traffic load of that particular unit. In case of a heavy traffic, we can approximate the attempts every half-an-hour; and in case of low traffic, the procedure can be carried out every 12 hours. The approximated results would give us a rough idea of the illegal attempts that are taking place. We can thus formulate two extreme limits, given by the upper and the lower approximations. These limits can be overlapped in a cumulative fashion to gather information about that particular service unit. The number of successful illegal attempts can also be determined. This value however, will not be an approximated value, as the number of crimes that have actually taken place, i.e. the number of successful illegal attempts can be determined finitely. The CCI can then be computed by considering the ratio of these two values. RST can also be applied in case of the security of transactions that are taking place in a service unit on an outsourced enterprise. This is done through the development of an intrusion detection system (IDS) for protection of a networked link (Peng, Yun, Douglas, & Dingbang, 2004). An IDS evaluates suspected intrusions and signals an alarm once a suspected intrusion happens. It also watches for attacks that originate from within the setup. The basic process extracts predictive features from the raw data stream being monitored to produce formatted data that can be used for detection. Following this, a detection model de-
termines whether the data is intrusive. RST based methods for the development of IDS is promising in terms of detection accuracy, requirement of training data set and efficiency. In a classical RST based approach, the new attack records are combined with the original training data, and a process of rule generation is employed. The rules generated are used for detection and analysis of further similar attacks. However, this process is not very practical as the entire existing knowledge base has to be re-examined. To solve this problem, an incremental learning procedure is required to approximate the attacks in a more efficient manner in a real-time environment (and not in a post-mortem style of cyber forensics’ analysis). A rough set based incremental knowledge acquisition algorithm requires that whenever a new attack type or a new variation of attack appears, the rule generation process with the entire training data need not be repeated. The only computation required is that new rules should be generated from the new attack records and these should be used in conjunction with the existing rules. This algorithm has higher speed and recognition rate and can be appropriate for processing huge amounts of data/transactions. Handheld portable gadgets for cyber police patrolling have already been proposed based on the previous ideas (Patki, Patki, Khurana, & Sivasubramanian, 2005).
Limitations of Existing software Practices Offshoring operations are heavily dependent on networked computer systems, making it essential to address software and hardware issues. The existing software practices, their limitations, and the scope for improvements are rarely studied in this context. Methodologies focused on producer/ consumer philosophy for software development, upkeep, and maintenance are no longer adequate for outsourcing as they lack of monitoring flexibility. Outsourcing practices have requirements
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for frequent cognitive interactions. In the absence of technological solutions, retrofit measures in the form of management and administrative directives are adopted. We broadly classify and discuss software issues in order of their immediate significance: operating systems, file systems, database management systems, and computer programming languages.
Issues at the Operating System Level The traditional approaches to OS focus on memory management (paging/segmentation/overlays), process scheduling, multiprocessing environment, and networking (Stallings, 2004). Not only for offshore work assignments, but also in general, OS is considered to be an extension of computer hardware, and as an interface to the users. This has led to an agglomeration of system level calls in OS implementations, to cater to each requirement. The batch processing and multiprogramming oriented approaches need to be modified to support and strengthen outsourcing. In the strictest sense, there is no accepted universal practice for measuring the performance of an OS in an outsourcing environment. On the lines of reduced instruction set computing (RISC) philosophy of microprocessors, OS will have to shed off some of its existing burden onto hardware. Some of the salient points in the context of outsourcing are presented below. •
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Emergence of application specific processor architecture (ASPA) that permits dynamic loading, configuring and remote monitoring of the software environments by the originator on the outsourced contractor’s infrastructure, should be supported by OS. Thus, the concept of information disposal arising out of this will open up issues like weeding of information records (text, graphics, images, video clips, movies, audio
•
sounds, program code—both source and binary executables). Information weeding is different from the delete commands of OS or the data compression methods for storage and retrieval as viewed by cyber forensic professionals. The cognitive aspects of raw data, processed data, raw information, and processed information will gain special significance in outsourcing to overcome today’s data theft problems and associated legislation practices. The conventional approach adopted for servers for different purposes (e.g., application-oriented servers providing ftp, mail, and database will undergo transformations using concept modeler techniques both at hardware/software modules). This will call for generation of information, determining its contents using fuzzy information inference, and processing of partial/imprecise information. Today’s OS shell programming does not permit such constructs. Thus, if we have to execute an iterative loop for few times, there is no context available or created by programming environment to map the fuzzy term few. We have to state the quantity explicitly—loop 100 times. In an outsourced scenario, to avoid misuse of resources (user’s data is also a resource for unscrupulous people as they can misuse or abuse it), resource aware programming support requires to be incorporated for OS shell programming itself, instead of library support since either deliberately or inadvertently, library support can be switched off in an outsource job processing infrastructure.
Issues at the File System and Database Levels Outsourcing at the primary level is data-dependent and calls for efficient information systems, which can endorse search and information mining opera-
Innovative Technological Paradigms for Corporate Offshoring
tions. Traditionally, partial information systems were adopted and configured for outsourcing resulting into situations leading to conflict management (Reifer, 2004). File system organization and databases are linked up and we describe them from the perspective of problems associated with data-theft in outsourcing. We suggest a fuzzy logic-based approach to overcome the existing lacuna. Two mechanisms for file systems have been proposed: 1.
2.
The files can be grouped fuzzily in a dynamic manner according to guidelines inherent to the system installation (or configured by the user), taking into account security policies. Membership function values and fuzzy relations can be computed using following considerations. a. Files open at the same time or in the same session by a single user will be strongly related. b. User as well as system profiles (including privileges) in multi-user systems deployed in BPO installations. c. File extensions and categorization like .cpp, .exe, .jpeg in the case of noncompilatory tasks. The user will specially create types of directories with certain crisp (or fuzzy) attributes for all the files associated with the directory, so that these may be updated dynamically as per the previous principle.
In the existing directory structure, organizational policies may lead to complex access restrictions as well as wastage of disk storage. The present software practices handle such situations and protect information through password-based authorization schemes, which make the system prone to attacks bordering on hacking/password cracking. Generally, there exist fuzzily definable relationships between files like pathological data and medical insurance; hence, a model based on the role theory (Kandel & Lee, 1979) must be employed to handle the complexities. Consider the case of five fuzzily related directories (D1 to D5), having degrees of association ranging from 0 to 1 (membership values), which have been listed in Table 18.1. A degree of association with the value unity indicates self and direct hierarchical subdirectories, while any real value less than unity means informal influence. Similar maps of associations may be generated among the users of the system logged on during a particular session. Such a session must be dynamically updated in accordance to the logging in and logging out of any user. Matrices to map the relationships between (a) directory/subdirectory, (b) directory/user, and (c) group/user are created in the system to analyze the attribute-value domains. Then, with the help of fuzzy equations and recursive matrix operations, the influence of different users on each Figure 18.3. Directory structure for example
Example Consider the directory structure in Figure 18.3. The directory Medical_data_ papers under MrX\Restricted contains laboratory investigations examined by pathologist DrY. Although it is desired that DrY may share rights to access MrX\Restricted\Medical_data_papers, the files under MrX\Restricted\Insurance are not to be shared with DrY.
Root Directory
Mr. X
Dr. Y
Mr. Z
Public Public
Private
Restricted Public
Insurance
Private
Medical_data_ papers
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Table 18.1. Degrees of association amongst various directories D1
D2
D3
D4
D5
D1
1
0
1
0.6
0.9
D2
0
1
0.4
0.2
0.5
D3
0
0
1
0.5
0.4
D4
0.5
0.6
0
1
0.1
D5
0.8
0.4
0
0.7
1
other as well as influence of different directories on the users and system is computed. The time and date of creation in fuzzy format will enable processes to make inferences by considering hedges regarding the file being new, very new, old, moreorless old, etc. This is useful for detecting tampering of files and assessing the damage due to unauthorized access using fuzzy role theory (Kandel et al., 1979). Unlike the text-oriented databases of the current decade, future information systems would primarily use multimedia and non-multimedia databases. The current efforts in the multimedia databases have been restricted to audio, video, and textual stimuli. In order to give them true power of expression, a concept mapping system needs to be viewed as a core, instead of considering these objects merely as collection of symbols, bitmaps, or audio signals. With provision for open ended queries comprising of textual and an ordered group/ring/field-based composition of audio/image/video clippings as language symbols displayed on the small screen of an optical keyboard (Bandyopadhyay, 1997), multimedia database systems can play a significant role in providing information for the masses (Bandyopadhyay, 1996). It is envisaged that for building large-scope information systems using outsourcing methodology, the data entry, query, and retrieval nodes would naturally be distributed. The data in the form of textual reports, audio/video clippings, and images arriving in all these information reservoir nodes would be un-modeled raw data.
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The existing password-protected schema view methods of SQL/DBMS environments can be modified to incorporate encryption and decryption methodologies operative through ASPA for sensitive data. Software tools would be required to analyze and aid modeling using raw data for concept generation.
Programming Language Considerations The conventional programming languages from the era of FORTRAN/LISP to the present day C/C++/Java are based on the following building blocks: • • • •
Iterative statements ( for loop, do loop). Conditional and non-conditional executions (If-then-else, Goto). Recursion oriented structures (Stack oriented). Assignments with associated enhancements (i= i +1, c+= 5).
A need for an effective programming medium in place of a programming language was sensed while examining various issues of information banking related activities in the development phases for SIIIS (Sivasubramanian & Patki, 1996) and FUZOS© (Patki et al, 1997). We discuss the programming medium approach, which encompasses programming languages as one of the building blocks around which other modules
Innovative Technological Paradigms for Corporate Offshoring
for monitoring information disposal, fraudulent attempts, resource aware, and context-based data collections are dynamically configured. In order to facilitate ASPA to load instruction set modules to improve trustworthiness of outsourcing projects, object-oriented programming systems (OOPS) need to include synthesis support. The existing programming languages are more in the form of large suite of tools (with associated integrated development environment IDE), which support algorithmic methodology constructs like iterative loops, multiple branch (switch-case), and conditional controls (if-then-else). These languages emphasize algorithmic programming using an iterative philosophy instead of design using synthesis approach. At present, the existing programming languages used in information systems design do not support synthesis constructs prevailing in the hardware engineering design practice like VHDL for digital VLSI circuit design. This calls for introducing basic primitive modifications at object-oriented programming languages. Ruby programming language has attempted to bring programming closer to the application space of the user (Thomas, Fowler, & Hunt, 2004). Ruby’s object-oriented features are designed to add an instance during runtime, allowing this instance of a class to behave differently from the other instances of the same class. This feature is useful in combination with ASPA loaded partial instruction set to monitor security concerns and prohibit data thefts in real time environment at outsourcing infrastructure. However, Ruby does not address features required for outsourcing. In order to address issues ranging from sharing code development across the globe to asynchronous interactions amongst developers and/or supervisors, it is essential to deploy cognition-based algorithms. We illustrate a case of document support in programming language for outsourcing environment. The debugger and documentation capabilities of object-oriented programming languages (e.g., Java) are not much useful after the software-
testing phase is over. Program understanding and documentation, which is useful for software designers, code developers, and testing personnel keeps the end-user out of loop. This bottleneck leads to conflict creation, which should be avoided (Reifer, 2004). The information retrieval and documentation approaches in the past had been traditionally configured for isolated activity and had never been considered for a group activity like outsourcing. The scope for utilizing document features is very limited in the software maintenance and practically no scope exists for its usage by the end users who use such software at their computer installations. We should concentrate on group performance in the outsourcing environment (Damian & Eberlein, 2000). Since existing documentation is not tailored for multiple perspectives, there is no provision to configure the documentation application module on a user selection basis. An end user in an outsourcing scenario rarely uses the software documentation supplied with the systems since it does not provide any cognitive assistance. Thus, OOPS should provide application semantic support on documentation so that cognitive assistance is provided individually to every category of user community consisting of management controllers, cyber forensic analysts, security supervisors, and client managers. Thus, existing broadcasting modes of documentation should be replaced by an interactive category-specific mode for users. Intelligent software agents can help to simulate such studies. Support documentation for outsourcing infrastructure should answer cognitive queries and not function as help menus or FAQs. The text analysis orientation in traditional documentation retrieval leads to the situation that two words with same underlying meaning/stem refer to the same concept for indexing, e.g. neutron and neutralize. The index terms that are derived from the text of the document use pre-coordinate or post-coordinate principles. The controversy about index language for document retrieving (Farradane, Russell, & Yates-Mercer,
335
Innovative Technological Paradigms for Corporate Offshoring
1973) is primarily due to text analysis approaches adopted and can be overcome using synthesis principle. Conventional documentation retrieval techniques do not address mid-operation support and the scope of fuzzy logic and rough set techniques is promising (Bandyopadhyay, 1996; Goguen, & Lin Kai, 2000). A fuzzy logic-oriented documentation support system for programming language that will permit offshoring community to develop a dynamic view of the same output from multiple perspectives like software code obfuscation, trustworthy computing, and forensic examinations to improve the overall group performance has been proposed (Patki & Khurana, 2006). By using the lower and upper approximation techniques of rough set theory, along with fuzzy relational data view, different projections of the same information are feasible for different information consumers (Kapoor et al., 2005). This capability is a must for efficient outsourcing to restrict and partially overcome the data thefts and similar problems.
Multiplexing of BPO Infrastructure At present, BPO infrastructure is being used in absolute terms with respect to the consumer community. There is a need to think on the lines of relative BPO houses where scheduling of jobs is carried out in a manner corresponding to the demands as well as the feedback of the user. Multiplexing of infrastructure on the basis of geographical locations to provide and serve a larger user community to the fullest extent is a novel idea. Such a scheme may use a three-schema architecture at the grass root level, comprising of a physical (internal) schema, a conceptual (logical) schema, and an application (external) schema. This architecture will aid the development of secure systems and will thus revolutionalize
336
the concept of data protection and safe transfer. The OSI reference model for the TCP/IP network protocol can be extended to accommodate such multiplexed BPOs. Resource allocation should be carried out using platform independent integrated development environment (IDE). This will also cater to the increasing traffic through the network at the peak hours due to the availability of efficient resources, resulting into the optimal utilization of the BPO infrastructure. In order to provide a makeshift arrangement to incorporate concept modeling as per the client requirements, we introduce the concept of an inter-dialoguing processor (IDP). The IDP infrastructure could be based on a simple microcomputer, which takes in machine level inputs (instructions as well as data packets). The IDP acts as a transfer-establishing a resource link between the service center and the customer interface array dynamically. The main task of the IDP is to merge and route the traffic of the N service centers via a single transfer path to the customer interface array, which is responsible for interactions with the actual customer. The CCI value is computed for each service center. This value is used for handling the security issues. At the IDP level, the CIS value is calculated. The customer interface array uses the CIS value for routing information to various customers. It is also responsible for finding the CSR with the help of user feedback. Such an arrangement is depicted in Figure 18.4. The arrangement shown here is very fundamental in nature and is not necessarily a final solution to the multiplexing concept. It can however be used as a makeshift pattern in this transient phase of offshoring. Since some special customized hardware needed for such a system is not yet available, this section of the chapter may be considered as a precursor. Refinements of this design are expected. We discuss fuzzy logic-based algorithm for BPO multiplexing in the following subsection.
Innovative Technological Paradigms for Corporate Offshoring
Figure 18.4. Multiplexing architecture SC 2
SC 1 Network link 1
SC N
Network link 2
Network link N
IDP 1 (N:1 MUX, 1:N Demux) Information Transfer
CCI Det. Level
CIS Det. Level
User Feedback (CSR)
Customer Interface Array Legend: 1. 2. 3. 4. 5
Algorithmic Steps for BPO Multiplexing 1.
2.
3.
4.
Create a global FMAP of service centers available to the customers, mapping customers to the multiplexed infrastructure based on the membership function value. FMAP is a resource relation that allows customers to determine which service center stores or caches which files. The structure of a typical FMAP is given in Table 18.2 where customer interface array (CIA) index of Figure 18.4 is used. Manage metadata through proxy servers that reference the locations where data blocks of different files are placed in an encrypted format. Maintain a cache block so that some permitted, registered requests can be handled without accessing the machine disks and resources directly. Maintain cache consistency metadata (i.e., version information so that no writes can be done on obsolete data) however, read requests for this data are permitted.
SC: Service Center IDP: Inter-Dialouging Processor CCI Det. Level: Cyber Crime Index Determination Level (Misuse/Abuse) CIS Det. Level: Civil Infrastructure Status Determination Level CSR: Customer Satisfaction Rate
The control-system-managing module of inter-dialoguing processor (IDP) of BPO multiplexer acts as a load balancer and changes the FMAP by increasing the membership value of lesser-used BPO infrastructure machines and reducing those of heavily loaded machines. This representation and replication (FMAP is globally replicated and present in different machines with different entries) of FMAP enables the customers to be serviced with minimum number of network hops using BPO multiplexing, by taking into account parameters like link speed, bandwidth, and load status when assigning membership values in the FMAP. This helps in preventing network congestion. As and when a new machine joins the multiplexing infrastructure, the FMAP of the closest link is read, and the system-updating module of IDP modifies its own map accordingly. Updating of FMAPs takes place synchronously. The system can also be expanded using multiple fuzzy variables like distance between client and BPO, cyber trustworthiness, and cost factor to provide other advantages. Such an approach helps in reducing the cognitive load. It is important to observe that the conventional von Neumann
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Innovative Technological Paradigms for Corporate Offshoring
Table 18.2. Fuzzy control for BPO multiplexing CIA Index
Service Center I
Service Center II
0X00
0.5
0.9
0
0X01
1
0
0.1
….
..
..
0XFF
0
0
architecture is not efficient for handling fuzzy logic processing and IDP can be only simulated in software environment for demonstrating the effectiveness. ASPA based instruction sets can be introduced for modeling such a system. Instead of general-purpose processors, digital fuzzy hardware is required for acceptable real-time performance. In the absence of such dedicated fuzzy hardware, either the limited scaled down software solutions will be used or the approach may be abandoned altogether, as it requires very high fuzzy inference speeds (Alag et al., 1996; Hung, 1995; Patki 1996; Watanabe, 1991).
Conclusion In the past, computing technologies were framed by developed nations and were deployed domestically as well as internationally. This view of technology producers and consumers must be understood in the context of offshoring by integrating consumer experiences rigorously. Data collected at the outsourced infrastructure destinations will be a useful technology driving parameter. This is now feasible as many MNCs have set up their own infrastructure units in various countries, which are routinely undertaking outsourcing work. Thus, the trend will focus on the transformation of human resources, ethics, practices, and motivations into software intelligent agents involving cognitive processing. The present practice of isolated country specific solutions
338
…
..
Service Center N
.. 0.5
needs to be replaced with global initiative, as outsourcing is emerging as new trade and commerce vehicle for world economic growth. The exploratory and development work carried so far has validated the initial assumption that better integration using MIQ approach at hardware and software module level along with the multiplexing of BPO infrastructure is central to the next generation offshoring technology. Soft computing techniques such as the fuzzy logic and the rough set theory are vital to the expansion of such ideas. The recent announcement of the National Science Foundation of planning an effort to fundamentally re-engineer the Internet and overcome it’s shortcomings, and thus creating a network more suited to the computerized world of the next decade, indicates the willingness to redesign the net for future. The technological paradigms suggested in this chapter can be thought of as a stepping-stone in this direction.
Acknowledgment Authors wish to acknowledge their discussions with industry representatives, academic community, and government policy makers. The experimental work undertaken by various students has been the driving force to consolidate the issues to face the challenges of outsourcing technological revolution. Interactions with Mr. Mahesh Kulkarni, Group Coordinator, Center for Development of Advanced Computing (CDAC),
Innovative Technological Paradigms for Corporate Offshoring
Pune and Mr. S. Sivasubramanian, Scientist-E, Department of Information Technology, New Delhi, have been enlightening. Suggestions from editors have been useful in shaping the chapter effectively.
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TIOBE Programming Community Index. (n.d.). Retrieved September 15, 2006, from http://www. tiobe.com/tpci.htm Thomas, D., Fowler, C., & Hunt, A. (2004). Programming ruby: A pragmatic programmer’s guide (2nd ed.). O’Reilly Media Inc. Top 500 supercomputer Sites. (n.d.). Retrieved September 15, 2006, from http://www.top500. org Watanabe, H. (1991). Some consideration on design of fuzzy information processors—From a computer architectural point of view. In Proceedings of Fuzzy Engineering Towards Human Friendly Systems, IFES’ 91 (pp. 387-398). Zadeh, L. A. (1976). A fuzzy-algorithmic approach to the definition of complex or imprecise concepts. International Journal of Man-Machine Studies, (8), 249-291. Zadeh, L. A. (1965). Fuzzy sets. Information and Control, (8), 338-353. Zeungnam, B., Bang, W., Kim, D., & Han, J. (2002). Machine intelligence quotient: Its measurement and applications. Fuzzy Sets and Systems, 127(1), 3-16.
This work was previously published in Journal of Electronic Commerce in Organizations, Vol. 5, Issue 2, edited by M. KhosrowPour, pp. 57-76, copyright 2007 by IGI Publishing, formerly known as Idea Group Publishing (an imprint of IGI Global).
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Chapter XIX
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era Igor Crk University of Arizona, USA Dane Sorensen Raytheon Missile Systems, USA Amit Mitra TCS Global Consulting Practice, USA
Abstract Collaborative work groups that span multiple locations and time zones, or “follow the sun,” create a growing demand for creating new technologies and methodologies that enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. The hurdles faced by members of such virtual teams are in three key areas: differences in concepts and terminologies used by the different teams; differences in understanding the problem domain under consideration; and differences in training, knowledge, and skills that exist across the teams. These reasons provide some of the basis for the delineation of new architectural approaches that can normalize knowledge and provide reusable artifacts in a knowledge repository.
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Introduction The increasing prevalence of collaborative work groups that span multiple locations and time zones create a growing demand for creating new technologies and methodologies that can enable traditional spatial and temporal separations to be surmounted in an effective and productive manner. In the specific case of information technology (IT), more than 380,000 professionals are currently focused exclusively on export-oriented activities (Aggarwal & Pandey, 2004). The hurdles faced by members of such virtual teams are in three key areas: (1) differences in concepts and terminologies used by the different teams; (2) differences in understanding the problem domain under consideration; and (3) differences in training, knowledge, and skills that exist across the teams (Chang, Dillon, Sommerville, & Wongthongtham, 2006). These reasons provide some of the basis for the delineation of new architectural approaches that can normalize knowledge and provide reusable artifacts in a knowledge repository. This chapter focuses on the issue of providing information systems agility, especially when the work is outsourced from one country (or company) to another or as the work is performed in multiple countries using a hybrid offshoring model such as the 24-Hour Knowledge Factory concept (Gupta, Seshasai, Mukherji, & Ganguly, 2007). This chapter also deals with the issue of creating an evolving knowledge repository that can be used when systems need to be redesigned or reimplemented.
Related Work The object management group (OMG) is actively involved in the creation of a heterogeneous distributed object standard. In a departure from modeling standards, such as the common object request broker architecture (CORBA) and the related data distribution service (DDS), OMG
moved towards the unified modeling language (UML) and the related standards of meta-object facility (MOF), XML data interchange (XMI), and query views transformation (QVT). The latter standards provide a foundation for the model drive architecture (MDA). In an effort to bring UML and the Semantic Web together, OMG is leading progress toward the ontology definition metamodel. More specifically, MDA, as related to software engineering, composes a set of guidelines for creating specifications structured as models. In MDA, the functionality is defined using a platform-independent model with a domain-specific language. The domain specific language definition can be translated into platform-specific models by use of a platform definition model (PDM). The ontology definition metamodel is an OMG specification that links common logic and OWL/ RDF ontologies with MDA. Common logic being an ISO standard for facilitating the exchange of knowledge and information in computer-based systems, and resource description framework (RDF) and Web ontology language (OWL) being the latest examples of framework and related markup languages for describing resources authored by the World Wide Web Consortium (W3C). OMG and W3C standards are available online at omg. org and w3.org, respectively. The notion of reuse of knowledge has been previously explored with respect to organizational memory systems. Markus (2001) identified distinct situations in which reuse arose according to the purpose of knowledge reuse and parties involved. The knowledge reuse situations exist among producers who reuse their own knowledge, those who share knowledge, novices seeking expert knowledge, and secondary knowledge miners. The solutions to the problems of meeting the requirements of knowledge storage or retrieval were presented as a combination of incentives and intermediaries. In the context of allocation of IT resources, O’Leary (2001) conducted a case study of a
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knowledge management system of a professional service firm concluding that service-wise requirements for knowledge reuse should impact the design of knowledge systems. For example, the studied firm contained three primary service lines: tax, consulting, and audit. Differential reuse, stemming from the relatively low reuse in the consulting service line to high reuse in the tax line, leads to a particular allocation of knowledge bases, software, hardware, and network resources. O’Leary’s paper supports earlier work by Vanwelkenhuysen and Mizoguchi (1995), which showed that knowledge reuse has depended on organizational aspects of knowledge systems. Their work suggested dimensions along which ontologies for knowledge reuse may be built, based on workplace-adapted behaviors. The concept of knowledge reuse and agility is especially relevant to “follow the sun” models, similar in spirit to the 24-Hour Knowledge Factory, and have been attempted by others. Carmel (1999, pp. 27-32) describes one such project at IBM. In this project, IBM established several offshore centers in a hub-and-spoke model where the Seattle office acted as the hub. Each offshored site was staffed by a phalanx, a mix of skill sets that were replicated across each spoke. Work would be handed out by the Seattle hub; each spoke would accomplish the given task and send the results back to Seattle. This hub-and-spoke model necessitates specialization of the Seattle site. With only one site offering the specialized service, the Seattle site quickly became overwhelmed. The original goal of daily code drops could not be maintained. Treinen and Miller-Frost (2006) highlight several lessons learned that are echoed in other studies, particularly problems with continuity, misunderstanding and the lag time between cycles of conversation. Cultural differences are also cited as being problematic, especially with respect to various assumptions that were held in lieu of well specified requirements and planning.
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Perhaps the most relevant study in respect to the 24-Hour Knowledge Factory, Follow the Sun: Distributed Extreme Programming Development (Yap, 2005) describes a globally distributed, round-the-clock software development project. Here, a programming team was distributed across three sites (United States, United Kingdom, and Asia). One of the three sites had prior knowledge of extreme programming. The two remaining sites were coached on extreme programming practices prior to the collaboration. These two sites believed that the first site had an advantage due to its previous knowledge with extreme programming. Individuals from the three sites also met in person, which helped to build confidence about the capabilities of the members of other sites. The team used virtual network computing (VNC) and video conferencing to facilitate communication. Hand-off of project artifacts initially consisted of a daily work summary, but later grew to include knowledge learned and new objectives. Xiaohu, Bin, Zhijun, and Maddineni (2004) discussed the situation where development teams were dispersed globally, though it seemed that each global unit was still responsible for its own module of the project. The teams did not need to discuss development decisions with each other unless they were related to interfacing or would affect another team. They used the extreme programming method, but because of the global dispersal of teams, they lacked the benefits of customer colocation and participation. They thought the inability to get rapid customer feedback when the customer was in a different location adversely impacted the development of the product and the development time. These issues could easily impact development in a 24-Hour Knowledge Factory setting because customers in one location would thus not be able to interact with all sites. The above examples highlight the need for an agile knowledge ontology that can more adequately manage the problem of change.
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bly language. As such, assembly language is not portable and does not increase flexibility, but it does provide the essential abstractions that free the programmer from the tedium of remembering numeric codes or calculating addresses (as was the case when programming was accomplished through machine code). An assembly language is an example of a second-generation language. Third generation languages, denoted by 3GL in Figure 19.1, finally freed the task of programming from the underlying hardware. This is a much overlooked, but crucial, example of adapting technology to find a solution to the problem of change. The more recent notion of component-based development (CBD) involves building software systems using prepackaged software components (Ravichandran, 2005). CBD involves reusing application frameworks, which provide the architecture for assembling components into a software system. Components and frameworks may be either developed in-house or externally procured. CBD typically involves using both inhouse developed and externally procured software components and frameworks. CBD leverages the emergence of middleware and software objects standards to make software reuse a reality (Ravichandran, 2005). Since CBD encourages the move toward more modular systems built from reusable software artifacts, it was expected to enhance the adaptability, scalability, and maintainability of the resultant software (Szyperski, 1997). CBD requires systems to be architected using a component framework necessitating developers to think through the interrelationships between
Agility and the Problem of Change Change is difficult, complex, and risky because it usually has unintended side effects. Each decision has many consequences, which in turn have many more. The Y2K problem is a classic example of a seemingly innocuous design decision that snowballed into a worldwide problem. The decision to use a 2-digit representation of the year was originally deemed to be prudent. Later, it was thought to be a problem that would cripple computer systems when their clocks rolled over into the year 2000, since 00 is ambiguous. Ultimately, it cost the world around $600 billion (López-Bassols, 1998) to convert a 2-digit representation of the calendar year to four digits!
Fundamental Computing Technologies Figure 19.1 shows the evolution of computing technology as researchers sought to tackle the problem of change and to remain agile though increasingly more complex demands are placed upon the technology. At the far left end of the spectrum lies hardware, originally physically and meticulously programmed to perform relatively simple tasks. Machine code replaced the physical machine programming by the formulation of CPU-specific words, bit patterns corresponding to different commands that can be issued to the machine. Each type of CPU has its own machine code. Similarly, the CPU architecture has a corresponding assemFigure 19.1.
Increasing Flexibility and Abstraction Hardware
Machine Assembly Code
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Code
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Functional Data Decomposition Models
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various elements of an application system at a more granular level at an earlier stage in the development process than in traditional development approaches (Sparling, 2000).
sential capabilities. The ideas of encapsulation of functionality and the standardization of system interfaces inherent in System/360 are critical to understanding the importance of leveraging and reuse of knowledge.
IBM’s System/360: The Beginnings of Agile Development A good example of a business transformation tackling the issues of agility and change through modularity is provided by IBM’s System/360 (Amdahl & Blaauw, 2000) in the 1960s (Baldwin & Clark, 2000). The hardwired instruction sets of virtually all computers in the 1950s imposed a high level of interdependence of design parameters. Each computer was designed from scratch and each market niche was matched with a different system. Searching for new ways for teams to work together on a project, IBM led the effort to use modularity as a guiding principle. System/360 was the result of that effort. Further, System/360 marks the point at which the industry was transformed from a virtual monopoly to a modular cluster comprised of more than a thousand publicly traded firms and many startups (Fergusson, 2004). What makes System/360 an important landmark in the agility effort is that it belongs to the first family of computers that was designed with a clear distinction between architecture and implementation. The architecture of each model in the 360 family was introduced as an industry standard, while the system peripherals, such as disk drives, magnetic tape drives, or communication interfaces allowed the customer to configure the system by selecting from this list. With the standardization of the architecture and peripheral interfaces, IBM opened the doors for the commodity component market. With its list of peripherals, System/360 allowed the technology to adapt to a customer’s needs. Its backward compatibility tackled the problem of change in its own right, by allowing customers to upgrade and replace their hardware without losing es-
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Business Rules and the Structure of Information Just as was the case with early computer technology decades ago, prior to 3GL in our first example and System/360 in the second, today’s business rules are replicated in dissimilar formats in intermingled ways in multiple information systems and business processes. When any rule is changed, a concerted effort must be launched to make modifications in multiple systems. It makes change and innovation complex and error-prone. The framework described in this chapter attempts to untangle business rules with an ontology derived from the inherent structure of information. By untangling business rules even in complex legacy models and systems, one gains the capability to represent specific elements of business knowledge once, and only once, in a knowledge repository. Using this repository, the specific elements of knowledge can be designed to naturally manifest themselves, in appropriate forms, to suit the idiosyncrasies of different business contexts. As business processes became more tightly coupled with automation, the lack of agility in information systems became a serious bottleneck to product and process innovation. Frameworks that have attempted to solve this problem include structured programming, reusable code libraries, relational databases, expert systems, object technology, CASE tools, code generators and CAPE tools. They were not very effective partially because they did not adequately address the ripple effects of change; ideally, business rules and knowledge should be represented so that when we change a rule once, corresponding changes
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
should automatically ripple across all the relevant business processes (Mitra & Gupta, 2006). Knowledge transfer and reuse (Kingston 2002; Myopolous 1998; Van Zyl & Corbett, 2000) attain greater importance in the case of outsourcing. In order to achieve efficiency of resource consumption, we need new approaches to facilitate encapsulation of knowledge and the sharing of such knowledge among the relevant set of workers.
The Framework of Knowledge Reuse While meaning and understanding are abstract notions, they are rooted in the physical world. We learned in chemistry that we can continually subdivide a substance before reaching a building block, the subdivision of which would disallow us from identifying the substance and knowing its properties. Similarly, to identify the components of knowledge, we must distinguish between assertions whose division will involve no loss of information, and assertions whose division will sacrifice meaning, i.e., if an assertion is decomposed into smaller parts and the information lost cannot be recovered by reassembling the pieces. The fundamental rules that cannot be decomposed further without irrecoverable loss of information are called indivisible rules, atomic rules, or irreducible facts (Ross, 1997).
Objects, Relationships, Processes, Events, and Patterns In the real world, every object conveys information. The information content of physical objects is conveyed to us via one or more of our five senses. Objects are associated with one another. While some associations involve the passage of time, other associations, such as the relative locations of physical objects, are relationships that do not necessarily involve time. These relationships and
associations are natural storehouses of information about real world objects. Further, these relationships are objects in their own right. Processes are artifacts for expressing information about relationships that involve the passage of time (i.e., those that involve before and after effects). As such, the process is not only an association but also an association that describes a causative temporal sequence and passage of time. This is also how the meaning of causality is born: The resources and the processes that create the product are its causes. A process always makes a change or seeks information. Business process engineers use the term cycle time to describe the time interval from the beginning of a process to its end. A process, like the event it is derived from, can even be instantaneous or may continue on indefinitely. Processes that do not end, or have no known end, are called sagas. Therefore, a process is a relationship, and also an event, which may be of finite, negligible, or endless duration. Knowledge involves the recognition of patterns. Patterns involve structure, the concept of similarity, and the ability to distinguish between the components that form a pattern. Claude Shannon developed a quantitative measure for information content (Shannon, 1948). However, he did not describe the structure of information. For that, we must start with the concept and fundamental structure of Pattern and measurability in order to build a metamodel of knowledge. The integrated metamodel model of Pattern and measurability (from which the concept of “property” emerges) will enable us to integrate the three components that comprise business knowledge (inference, rules, and processes) into one indivisible whole. The interplay between objects and processes is driven by patterns. Patterns guide the creation of relationships between objects, such as the formation of a team or the modular assignment of duties within a team and across geographically distributed teams. Partnering Employee belonging to one team with that of another is caused by a skill or performance pattern that governs the
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relevant properties of Employee. As such, the ownership of an artifact under development is shared between Employee objects, which, at a coarser granularity, exist as a unified object we can refer to as a Composite Persona (CP) (Denny et al., 2008).
Perception and Information: Meaning, Measurability, and Format When an object is a meaning, it is an abstract pattern of information. Its perception is a concrete expression of this meaning, and the same information may be perceived or expressed in many ways. Lacking perceptual information, several expressions or perceptions may all point to the same pattern of information, or meaning. In order to normalize knowledge, we must separate meaning from its expression. This may be done by augmenting our metamodel to represent entities of pure information that exist beyond physical objects and relationships. This section will introduce three of these objects: domain, unit of measure (UOM), and Format. Unlike matter or energy, meaning is not located at a particular point in space and time; only its expression is (Verdu, 1998). All physical objects or energy manifested at a particular place at a point in time convey information, and the same meaning can occur in two different artifacts that have no spatial or temporal relationship with each other. They only share meaning (i.e., information content; Baggot, 1992). A single meaning may be characterized by multiple expressions. Differing understandings of concepts, terminology, and definitions are some of the problems that have characterize software developers working in a multisite environment (Chang et al., 2006). Unlike a specific material object or a packet of energy that is bound to only a single location at a single point in time, identical information can exist at many different places at several different times. The need to understand the underlying natural structures that connect information to its
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physical expressions is inherent in the effort to normalize business rules. Information mediation and expression within the real world is achieved by two metaobjects. One is intangible, emerging from the concept of measurability and deals with the amount of information that is inherent in the meaning being conveyed. The other is tangible; it deals with the format, or physical form, of expression. The format is easier to recognize. It is much harder to recognize the domain of measurability, henceforth referred to simply as domain (Finkbeiner, 1966).
Measurability and Information Content Through the behavior, or properties, of objects we observe, the information content of reality manifests itself to us. Although these are quite dissimilar qualities of inherently dissimilar objects, such as a person’s weight and the volume of juice, both these values are drawn from a domain of information that contains some common behavior. This common behavior, that each value can be quantitatively measured, is inherent in the information being conveyed by the measurement of these values, but not in the objects themselves.
Physical Expression of Domains Domains convey the concepts of measurability and existence. They are a key constituent of knowledge. There are four fundamental domains that we will consider in this chapter; two of them convey qualitative information and the other two convey quantitative information, as follows: •
Qualitative domains, containing: Nominal Domains, which convey no information on sequencing, distances, or ratios. They convey only distinctions, distinguishing one object from another or a class from another.
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Ordinal domains, which convey distinctions between objects and the information on arranging its members in a sequence. Ordinal domains are a pattern of information derived from nominal domains by adding sequencing information. However, ordinal domains posses no information regarding the magnitudes of gaps or ratios between objects (values). Quantitative domains: Difference-scaled domains not only express all the information that qualitative domains convey, but also convey magnitudes of difference; they allow for measurement of the magnitude of point-to-point differences in a sequence. This makes difference-scaled domains to be a pattern of information derived from ordinal domains by adding quantitative information on differences between values in the domain, which makes it a subclass of ordinal domains in the ontology of the meaning of measurability. Ratio-scaled domains perform three functions; they assist in the classification and arrangement of objects in a natural sequence, are able to measure the magnitude of differences in properties of objects, and take the ratios of these different properties.
•
The hierarchy of domains provides the most fundamental kind of knowledge reuse. However, this information is still abstract. In order to give information a physical expression, it must be physically formatted and recorded on some sort of medium. A single piece of information must be recorded on at least one medium, and may be recorded in many different formats. A symbol is sufficient to physically represent the information conveyed by nominal and ordinal domains. Of course, ordinal domains also carry
sequencing information, and it would make sense to map ordinal values to a naturally sequenced set of symbols like digits or letters. Unlike qualitative domains, quantitative domains need both symbols and units of measure to physically express all the information they carry. This is because they are dense domains (i.e., given a pair of values, regardless of how close they are to each other, it is always possible to find a value in between them). A discrete set of symbols cannot convey all the information in a quantitative domain. However, numbers have this characteristic of being dense. Therefore, it is possible to map values in a dense domain to an arbitrary set of numbers without losing information. These numbers may then be represented by physical symbols such as decimal digits, roman numerals, or binary or octal numbers. There may be many different mappings between values and numbers. For example, age may be expressed in months, years, or days; a person’s age will be the same regardless of the number used. To show that different numbers may express the same meaning, we need a unit of measure (UOM). The UOM is the name of the specific map used to express that meaning. Age in years, days, months, and hours are all different UOMs for the elapsed time domain. Both the number and UOM must be physically represented by a symbol to physically format the information in a quantitative domain. Indeed, a UOM may be represented by several different symbols. The UOM “dollars,” for the money domain, may be represented by the symbol “$” or the text “USD.” In general, a dense domain needs a pair of symbols to fully represent the information in it: a symbol for the UOM and a symbol for the number mapped to a value. We will call this pair the full format of the domain. Domains, UOMs, and Formats are all objects that structure meaning. They are some of the components from which the very concept of knowledge is assembled. The metamodel of knowledge is a model of the meaning of knowledge built from abstract components. 349
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Figure 19.2 depicts a semantic model. The lower limit (1) on the occurrence of Unit of Measure highlights the fact that each quantitative domain must possess at least one unit of measure. This is because the unit of measure is not optional. A quantitative value cannot be expressed unless a unit of measure can characterize it. The arrow that starts from, and loops back to, Unit of Measure reads “Unit of Measure converts to none or at most 1 Unit of Measure.” Conversion rules, such as those for currency conversion or distance conversion, reside in the Metamodel of Knowledge. This relationship provides another example of a metaobject (since relationships are objects too), and demonstrates how a metaobject can facilitate the storage of the full set of conversion rules at a single place. The conversion rule is restricted to conversion from one UOM to only one other UOM; this constraint is necessary to avoid redundancy and to normalize information. A single conversion
rule enables navigation from one UOM to any other arbitrary UOM, by following a daisy chain of conversion rules. The upper bound of one on the conversion relationship in the metamodel also implies that if you add a new UOM to a domain, you have to add only a single conversion rule to convert to any of the other UOMs, and that such information will suffice to enable conversion to every UOM defined for that domain.
Metaobjects, Subtypes, and Inheritance Metaobjects help to normalize real world behavior by normalizing the irreducible facts we discussed earlier. The metaobjects that of interest are object, property, relationship, process, event, domain, unit of measure (UOM), and format. The kinds of atomic rules normalized by each type of metaobject are summarized in Figure 19.3.
Figure 19.2. A partial metamodel of domain Domain
Quantitative
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DifferenceScaled
Ratio-Scaled
Increasing Information Content
Qualitative Domain
Quantitative Domain
is expressed by 1 or many
is expressed by 1 or many
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convert to 0 or 1
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is expressed by 1 or many
Unit of Measure convert to 0 or 1
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
The ontology in Figure 19.3 organizes objects in a hierarchy of meaning. Lower level objects in the ontology are derived from objects at higher levels by adding information. Figure 19.3 shows that the meaning of process is configured by combining the meanings of relationship, an interaction between objects, with the meaning of event, the flow of time. This kind of relationship is special. It is called a subtyping relationship and forms the basis of the ontology. Subtyping relationships convey information from higher levels to lower levels of an ontology. The lower level object becomes a special kind of higher level object. Figure 19.3 shows that ratio scaled domain is a special kind of domain because of the chain of subtyping relationships that lead from Domain to ratio scaled domain via quantitative domain.
natural repositories of knowledge. They provide the basis of real world meaning. Just as molecules react with molecules in chemical reactions to produce molecules of new substances with different properties from the original reagents, atomic rules may be built from other atomic rules. As we enhance our business positions with product and process innovation, some atomic rules will be reused. These rules are examples of those that can act as reusable components of knowledge. In order to build specialized domains of knowledge, entire structures and configurations may be reused. This is similar to manufacturers creating reusable subassemblies to build machines from ordinary parts. The end product may incorporate many versions and modifications of these reusable subassemblies.
The Repository of Meaning
24HrKF: A Practical Application of Knowledge Reuse
The atomic rule is the most basic building block of knowledge and the ultimate repository of information. It is a rule that cannot be broken into smaller, simpler parts without losing some of its meaning. The metaobjects of Figure 3 are the
Suchan and Hayzak (2001) found that a semantically rich database was useful in creating a shared language and mental models. MultiMind is a collaboration tool under development at the
Figure 19.3. Basic inventory of metaobjects
Object
Relationship
Dynamic
Static
Domain
Property
Increasing information content
Event
Nominal
Ordinal DifferenceScaled RatioScaled
Format
} }
Unit of Measure
Qualitative
Quantitative
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
University of Arizona (Denny et al., 2008), aimed at improving upon DiCE (Vin, Chen, & Barzilai, 1993) and other collaborative engineering tools. A Lifestream database (Freeman & Gelernter, 1996), is a chronologically ordered persistent database, used to collect objects and events relevant to a project. Lifestream incorporates an algebra that can be coupled to the semantics of project artifacts and knowledge events, allowing substantial opportunity for the automation of mundane tasks and higher level functions. In MultiMind, the Lifestream archives project artifacts and provides configuration management services, in a similar fashion as the Concurrent Versioning System (CVS) or Subversion (SVN) revision control system. In MultiMind, knowledge events are observed and logged into Lifestream. Activities such as reading a message, posting a message, executing a search, or reading a web page, are logged into LifeStream. The correlation of knowledge events with the evolution of project artifacts allows for the reuse of relevant knowledge between members of a development team. Communication is facilitated by the encapsulation of knowledge as objects which represent interactions with the development environment. Higher level tasks, such as the visualization of the current state of a project under development or decision facilitation can also be automated. Through MultiMind and its underlying LifeStream, information regarding artifacts and project progress can easily be visualized, identifying the artifacts which required the most maintenance or debugging. This visualization can be used as a guide for business decisions, when queries to MultiMind are filtered to visualize information relevant to a decision.
An Architecture of Knowledge Information systems are built to satisfy business requirements. Sometimes they are undertaken
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to implement purely technical changes (Smith & Fingar, 2002). Poorly formulated and ill-managed requirements have led to many of the problems that Information Systems projects currently face (Bahill, & Dean, 1999). Our first task, therefore, is to understand the meaning and structure of requirements. Requirements flow from knowledge. Knowledge is encapsulated in configurations of atomic rules. Knowledge of Information Systems involves configurations of (atomic) rules of business as well as technology. A four-layered hierarchical approach can be used, as depicted in Figure 19.4. Table 19.1 contains brief descriptions of each layer of the architecture of business knowledge, examples of the kinds of policies that may be implemented at the layer, as well as examples of change that may occur in that layer along with examples of the effects of change within a particular layer. The top business layer helps to assemble components of knowledge into business concepts, such as products, services, markets, regulations, and business practices. Consider a situation where a telephone services provider wishes to integrate cable TV and entertainment media into its business. Such changes in the Business Rules layer will impact business functions and systems functionality, whereas changes to process automation layers alone will impact only availability, timeliness, accuracy, reliability, and presentation of information. Changes in business process automation, in turn, can impose new requirements for performance, reliability and accuracy on technology platforms, which will impact the technology layer. The level of Business Process Automation is usually changed to leverage information technology or to focus on those processes that create most value while eliminating those of little value. Changes in this layer seldom impact the fundamental business of the firm. For example, the firm could deploy its ordering process on the Web, but not make any fundamental change in
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Figure 19.4. The architecture of knowledge BUSINESS OPPORTUNITY OR ENVIRONMENTAL CHANGE
BUSINESS
BUSINESS PROCESS AUTOMATION
BUSINESS RULES
INFORMATION LOGISTICS
INTERFACE RULES (HUMAN & AUTOMATION) TECHNOLOGY PLATFORM OPERATION TECHNOLOGY RULES
Table 19.1. Layers of the architecture of knowledge Layer
Description
Example Policy
Example of Change
Business
Contains assertions about products and services and defines relationships between customers and products or services.
Obtain necessary market freedoms to effectively compete; purchase competitor fixed assets; penetrate untapped markets
Acquisition of new assets necessitates the addition of new relationships between customers and services.
Information Logistics
Contains the repository of rules related to the logistics of storage, transfer, and utilization of business information.
Digital artifacts under development will be stored using a versioning system; artifact access privileges are maintained at a fine granularity
A new employee joins an active team necessitating a change in the rules regarding access to a team-owned artifact.
Interface
Contains the rules for the presentation of business information to human entities.
Access to team-owned objects is controlled by an administrator in close contact with team members; GUI follows Microsoft’s Inductive User Interface guidelines.
A new employee joins an active team, necessitating the creation of additional security rules regarding artifact access privileges.
Technology
Contains low-level operational and strategic rules regarding the operation of technology.
Hardware and systems software is standardized through a single reputed vendor.
A change of hardware or systems software vendor necessitates change of legacy software developed for obsolete system.
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Table 19.2. RDF Classes (retreived from http://www.w3schools.com/rdf/default.asp) and their Metaobject Inventory Equivalents Element
Class of
Class
All classes
Metaobject Inventory Equivalent All value
Datatype
All Data types
Class
Domain, Meaning
Resource
All resources
Class
Resource
Container (set of objects)
All Containers
Resource
Aggregate Object
Collection(set membership is restricted by some criteria)
All Collections
Resource
Object Class
Literal
Values of text and numbers
Resource
Subtype of Symbol
List
All Lists
Resource
List of
Property
All Properties
Resource
Property, Feature
Statement
All RDF Statements
Resource
Irreducible fact, rule, atomic rule
Alt
Containers of alternatives
Container
Mutability; Liskov’s principle, aggregation of mutable resources
Bag
Unordered containers
Container
Aggregate Object
Seq
Ordered containers
Container
Subtype of Aggregate Object
ContainerMembershipProperty
All Container membership properties
Property
Subtype of Relationship
XMLLiteral
XML literal values
Literal
Subtype of symbol. XML is a subtype of language.
the nature of its products, services, or markets. Business Process Automation refers to process innovation and change that leverages information technology. The technology layer is changed primarily to improve computer performance in terms of speed, cost, reliability, availability or alignment, and support for business process automation. The fundamental ideas of separating systemspecific rules from software implementation, as in the case of 3GL, and separating system architecture and implementation, as in the case of System/360, are even more important today in the context of separating business rules from implementation technologies. The rules related to transporting and presenting the information would belong to the Business Process Automation
354
Subclass of
layers, not the pure business layer. Figure 19.4 shows that Business Process Automation consists of two layers. The Information Logistics layer is the repository for rules related to the logistics of moving and storing information in files, and the Interface layer is concerned with how this information is presented to human operators. Creating a business knowledge hierarchy such as the one depicted in Figure 19.4 facilitates the flow of information between the business entities responsible for managing knowledge. Organizing knowledge and information, as described in previous sections, is essential for realizing the flow of information between the layers and creating meaningful and useful relationships between objects within each layer.
Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Table 19.3. RDF properties (retrieved from http://www.w3schools.com/rdf/default.asp) and their metaobject inventory equivalents
Property
Operates on
Produces
Description
Metaobject Inventory Equivalent
Domain
Property
Class
The domain of the resource The domain defines what a property may apply to (operate on).
Domain
Range
Property
Class
The range of the resource. It defines what the property may map to (produce).
co-domain
subPropertyOf
Property
Property
The property of a property
Feature
subClassOf
Class
Class
Subtyping property
Polymorphism
Comment
Resource
Literal
User friendly resource description
Elaboration, description, synonym
Label
Resource
Literal
User friendly resource name
Name, synonym
isDefinedBy
Resource
Resource
Resource definition
Id Elaboration, reference
seeAlso
Resource
Resource
Additional information about a resource
Member
Resource
Resource
The property of being an instance of a kind of resource
Instance of
First
List
Resource
The property of being the first member of a list
A demiliting role: Lower Limit
Rest
List
List
The second and subsequent members of a list
Subtype of List
Subject
Statement
Resource
The subject of an assertion, i.e., the subject of a resource in an RDF statement
The source of a relationship
predicate
Statement
Resource
Similar to “subject”: The predicate of an assertion
Relationship, function
object
Statement
Resource
The object of the resource (in an RDF) Statement
The target of a relationship
value
Resource
Resource
The value of a property
Value
Type
Resource
Class
An instance of a class
Member of a class of classes
Efforts to process and integrate information based on meaning have been made by the W3C consortium, which recommended two modeling standards in 2004: RDF, the Resource Description Framework for metadata, and OWL, the Web ontology language for integrating information. We have seen examples of how some meanings are derived from others by constraining patterns of information they convey to create new meanings. These constrained patterns are subtypes of the
meanings they constrain, and every meaning is a polymorphism of the universal object, an unknown pattern in information space that means everything and anything, and conveys nothing. Every object in the inventory of components is a polymorphism of the universal metaobject. RDF and OWL are tailored for the Web and applications of the Semantic Web. Tables 19.2, 19.3, and 19.4 show that the various elements of RDF and OWL as well as their metaobject inventory equivalents,
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Table 19.4. OWL classes (retrieved from: http://www.w3.org/TR/owl-ref/) and their metaobject inventory equivalents Class
Description
Metaobject Inventory Equivalent
AllDifferent
all listed individuals are mutually different
Subtype of Exclusion partition, exclusivity constraint. The concept of distinctions emerges as a polymorphism of the concept of class as information is added o an object/pattern.
allValuesFrom
All values of a property of class X are drawn from class Y (or Y is a description of X)
Domain, Inclusion Set, inclusion partition
Subtypes of Elaboration
AnnotationProperty
Describes an annotation. OWL has predefined the following kinds of annotations, and users may add more: • Versioninfo • Label • Comment • Seealso • Isdefinedby OWL DL limits the object of an annotation to data literals, a URI, or individuals (not an exhaustive set of restrictions
Version is implicit in temporal objects. Audit properties are implicit in object histories: • The process, person, event, rule, reason and automation that caused a state to change • Time of state change • Who made the change (all the dimensions of process ownership: Responsibility, Authority, Consultation, Work, Facilitation, Information/ knowledge of transition) • When the change was made • The instance of the process that caused the change and the (instances of resources) that were used • Why it was made (the causal chain that led to the process) • How long it took to make the change Label is implicit in synonym, name Comment may be elaboration or reference. The two are distinct in the metamodel of knowledge See also: same remarks as comment. IsDefinedBy may be elaboration, Object ID, or existence dependency. Each is a distinct concept in the metamodel of knowledge
backwardCompatibleWith
The ontology is a prior version of a containing ontology, and is backward compatible with it. All identifiers from the previous version have the same interpretations in the new version.
Part of Relationship between models or structures
cardinality
Describes a class has exactly N semantically distinct values of a property (N is the value of the cardinality constraint).
Cardinality
Class
Asserts the existence of a class
Object Class
complementOf
Analogous to the Boolean “not” operator. Asserts the existence of a class that consists of individuals that are NOT members of the class it is operating on.
Set negation, Excludes, Exclusion set, Exclusion partition
DataRange
Describes a data type by exhaustively enumerating its instances (this construct is not found in RDF or OWL Lite)
Inclusion set, exhaustive partition
continued on following page
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Table 19.4. continued Class
Description
Metaobject Inventory Equivalent
DatatypeProperty
Asserts the existence of a property
Feature, relationship with a domain
DeprecatedClass
Indicates that the class has been preserved to ensure backward compatibility and may be phased out in the future. It should not be used in new documents, but has been preserved to make it easier for old data and applications to migrate to the new version
Interpretation. However, the specific OWL interpretation of depreciated class is considered to be a physical implementation of a real life business meaning, outside the scope of a model of knowledge that applies on the plane of pure meanings.
DeprecatedProperty
Similar to depreciated class
See Depreciated Class
differentFrom
Asserts that two individuals are not the same
The concept of distinctions emerging as a polymorphism of the concept of class as information is added o an object/pattern.; subtype of exclusion partition
disjointWith
Asserts that the disjoint classes have no common members
Exclusion partition
distinctMembers
Members are all different from each other
Exclusion Set, List
equivalentClass
The classes have exactly the same set of members. This is subtly different from class equality, which asserts that two or more classes have the same meaning (asserted by the “sameAs” construct). Class equivalence is a constraint that forces members of one class to also belong to another and vice versa.
Mutual inclusion constraint/equality between partitions or objects.
equivalentProperty
Similar to equivalent class: i.e., different properties must have the same values, even if their meanings are different (for instance, the length of a square must equal its width).
Equality constraint
FunctionalProperty
A property that can have only one, unique value. For example, a property that restricts the height to be nonzero is not a functional property because it maps to an infinite number of values for height.
Value of a property, singleton relationship between an object and the domain of a property
hasValue
Links a class to a value, which could be an individual fact or identity, or a data value (see RDF data types)
relationship with a domain
imports
References another OWL ontology. Meanings in the imported ontology become a part of the importing ontology. Each importing reference has a URI that locates the imported ontology. If ontologies import each other, they become identical, and imports are transitive.
Subtype of Composed of. Note that the metamodel of knowledge does not reference URIs. This is an implementation specific to the Web. The Metamodel of Knowledge deals with meanings.
incompatibleWith
The opposite of backward compatibility. Documents must be changed to comply with the new ontology.
Reinterpretation, Intransitive Relationship, asymmetrical relationships
continued on following page
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
Table 19.4. continued Class
Description
Metaobject Inventory Equivalent
intersectionOf
Similar to set intersection. Members are common to all intersecting classes.
Subtype of Partition, subtype with multiple parents, set intersection
InverseFunctionalProperty
Inverses must map back to a unique value. Inverse Functional properties cannot be many-to-one or many-to-many mappings
Inverse of an injective or bijective relationship
inverseOf
The inverse relationship (mapping) of a property from the target (result) to the source (argument)
Inverse of
maxCardinality
An upper bound on cardinality (may be “many”, i.e., any finite value)
Cardinality constraint:, upper bound on cardinality (subtype of cardinality constraint and upper bound)
minCardinality
A lower bound on cardinality
Cardinality constraint: Lower bound on cardinality (subtype of cardinality constraint and lower bound)
Nothing
The empty set
of the empty set, null value
Instances of properties are not single elements, but may be subject-object pairs of property statements, and properties may be subtyped (extended). ObjectProperty asserts the existence and characteristics of properties:
ObjectProperty
•
RDF Schema constructs: rdfs: subPropertyOf, rdfs:domain and rdfs:range
•
relations to other properties: owl:equivalentProperty and owl:inverseOf
•
global cardinality constraints: owl:FunctionalProperty and owl:InverseFunctionalProperty
•
logical property characteristics: owl:SymmetricProperty and owl:TransitiveProperty
Property, a generalized constraint, which implies an information payload added to a meaning.
oneOf
The only individuals, no more and no less, that are the instances of the class
members of a class, the property of exhaustivity of a partition
onProperty
Asserts a restriction on a property
constraint on a Feature (makes the feature (object) a subtype of the unconstrained, or less constrained feature (object)
Ontology
An ontology is a resource, so it may be described using OWL and non-OWL ontologies
The concept of deriving subclasses by adding information to parent classes
OntologyProperty
A property of the ontolology in question. See imports.
None, beyond the fact that the ontologoly is an object, which means that it inherits all properties of objects, and adds the property of interpretation
Refers to a prior version of an ontology
An instance of Object Property where a relevant instance of ontology Object Class exists, containing a Temporal Succession of concepts. The property of reinterpretation is implicit between versions of an ontology.
priorVersion
continued on following page
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Table 19.4. continued Class
Description
Metaobject Inventory Equivalent
Restriction
Restricts or constrains a property. May lead to property equivalence, polymorphisms, value constraints, set operations, etc.
Rule Constraint
sameAs
Asserts that individuals have the same identity. Naming differences are merely synonyms
Set Equality, Identity
someValuesFrom
Asserts that there exists at least one item that satisfies a criterion. Mathematically, it asserts that at least one individual in the domain of the “SomeValuesFrom” operator that maps to the range of that operator.
Subsetting constraint
SymmetricProperty
When a property and its inverse mean the same thing (e.g., if Jane is a relative of John, then John is also a relative of Jane)
Symmetry
Thing
The set of all individuals.
Instance of Object Class
TransitiveProperty
If A is related to B via property P1, and B is related to C via property P2, then A is also related to C via property P1. For example. If a person lives in a house, and the house is located in a town, it may be inferred that the person lives in the town because “Lives in” is transitive with “Located in”.
Transitive Relationship
unionOf
Set union. A member may belong to any of the sets in the union to be a member of the resulting set
offset Union, Aggregation
versionInfo
Provides information about the version
Instance of Attribute. Implicit in the concept of the history of a temporal object
showing that, in effect, the Metaobject Inventory provides a more general framework than either RDF or OWL, and that either of the restricted frameworks are special cases of the types of ontology frameworks that can be realized through the various polymorphisms of the universal object.
Conclusion In an effort to provide a framework for surmounting the temporal and spatial separations in collaborative, distributed environments, this chapter presented a framework for knowledge object management that can facilitate reuse of knowledge. The encapsulation of knowledge for
distributed environments is also highlighted. The knowledge encapsulation uses a four-tier architecture that facilitates knowledge transfer and reuse, as well as enables better understanding of the problem domain under consideration. Differences in training, knowledge, and skills that exist across the distributed teams can be surmounted by use of a common means of discourse about the problem domain under consideration.
For Further Reading The concepts described here have been utilized and extended in this chapter to cater specifically to the special needs of offshoring and 24-Hour Knowledge Factory environments. For a detailed
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Leveraging Knowledge Reuse and System Agility in the Outsourcing Era
discussion of the basic concepts and their wider applications, please refer to the following books by Amit Mitra and Amar Gupta: •
•
•
Agile Systems with Reusable Patterns of Business Knowledge —a Component Based Approach (Artech House Press, Norwood, Massachusetts) Creating Agile Business Systems with Reusable Knowledge (Cambridge University Press, Cambridge, England) Knowledge Reuse and Agile Processes— Catalysts for Innovation (IGI-Global, Hershey, Pennsylvania)
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