Knowledge Requirements for Information Systems Outsourcing

Introduction

Outsourcing as a business practice is flourishing in almost every domain and organisations are outsourcing software development, innovation and even functional departments [Hirschheim & Dibbern, 2014; Power, Desouza & Bonifazi, 2006]. In an environment where survival depends on cost-cutting and downsizing, information systems (IS) becomes a probable target for outsourcing as it is difficult to measure direct contribution of the IS function to the organisation as a whole [Benamati & Rajkumar, 2002; Dibbern, Goles, Hirschheim & Jayatilaka, 2004].

Outsourcing is defined as the action of transferring organisational work to an outsource vendor [Power et al., 2006]. The scope of work outsourced and the delivery of the outsource vendor against the scope is managed by an outsourcing arrangement that stipulates the contract conditions, the required service levels and the required deliverable quality of the arrangement [Power, Bonifazi & Desouza, 2004]. A special type of outsourcing is IS outsourcing and Sparrow [2003: 1] defines IS outsourcing as “the practice of handing over planning, management and operation of certain functions to an independent third party, under the terms of a formalised service level agreement”. Sparrow [2003] maintains that outsourcing should be seen as a strategic management tool. As such, it should be evaluated in the context of the strategic position of the organisation [Power et al., 2006].

In the context of an IS outsourcing arrangement, the focus of value creation no longer remains internal to the organisation, but occurs within the relationship between the client organisation and the outsource partner. The client organisation has to rely on its outsource partner to share knowledge and continually respond to change [Gottschalk, 2006]. Currie and Pouloudi [2000b] observe that one of the emerging issues for management will be how to identify and evaluate knowledge-based assets in the context of IS outsourcing. A part of this emerging research agenda “is due to the growth in outsourcing and the realisation that many contracts have simply failed to take into consideration important issues of intellectual property protection, core competencies, managerial and technical capabilities and skills, and software development and exploitation” [Currie & Pouloudi, 2000b: 162].

However, the use of IS outsourcing as a strategy presents several knowledge management challenges to IS managers since both knowledge management and IS outsourcing are complex, multi-layered and multifaceted concepts [Currie & Pouloudi, 2000b]. An organisation may gain access to knowledge it does not own in-house, or may be able to obtain it at a lower price, by entering into an outsourcing relationship. At the same time, the organisation may risk losing key skills and capabilities, unless the outsourcing arrangement is managed strategically and knowledge transferred properly [Al-Salti, 2009; Currie & Pouloudi, 2000b; Laplante, Costello, Singh, Bindiganavile & Landon, 2004]. Knowledge management is important in preventing a loss of knowledge when an organisation downsizes or outsource its business activities [Aydin & Bakker, 2008; Christopher & Tanwar, 2012]. Currie et al [2000b] identified that one of the emerging issues for management is how to identify and evaluate knowledge-based assets in the context of IS outsourcing.