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From the perspective of companies
worldwide, due to the increasing standardization of IT services (Allweyer, Besthorn, and Schaaf, 2004; BITKOM, 2005), IT is losing in strategic
importance (Carr, 2004). Particularly CEO often face problems with recognizing
the value added by IT, resulting in drastically reduced IT budgets (Buchta, Linß, Röder,
and Ziegler, 2004). In addition, a rising number of CIO do not consider IT as a
strategic investment any longer (Habler, 2004). Consequently,
in an effort to cut costs and re-focus on their core competences, companies
outsource IT commodity services (Allweyer et al.,
2004). The first major instance of IT
outsourcing was reported when Kodak outsourced the entire operation of its
information center in 1990 (Mani and Rajkumar, 2001). Since then, well known companies worldwide
followed Kodak, indicating the global rise of IT outsourcing.
Alongside the concentration on core
competences, the major reason for engaging in IT outsourcing projects is cost
reduction (Allweyer et al., 2004). This can primarily
be reached through economies of scale and scope on the part of the service
provider. However, as long as the provider operates in the same country, the achievable
cost savings are limited (Buchta et al., 2004). These
restrictions on cost savings as well as the continuous increase in competition,
resulting from a globalization of sales and procurement markets (Bavarian
Chamber of Commerce and Industry, 2002) [BCCI], prompted companies worldwide to
look for new, profitable ways to structure their business operations. In this
context, the labor cost differences as well as the large pool of highly
qualified workers within low-wage countries like India attracted
companies’ attention and promoted the trend to IT offshoring (Buchta
et al., 2004). This distinct modification of IT
outsourcing is existent as soon as companies relocate IT services to a provider
in low-wage countries, such as China, India, or
the newly added EU-countries (Broß, 2005).
Beside the already mentioned cost- and
workforce-related benefits offshore countries have to offer, the IT offshoring
trend is primarily driven by the following structural changes of the global economy
(Kalakota and Robinson, 2004):
·
Globalization: Transition to a global
economy through technological advances (e. g., the Internet).
·
Competition: Reorganization of the IT
service provider landscape (e. g., market entry by offshore service
providers).
·
Evolution: Transfer of common business
practices from other industries (e. g., manufacturing).
·
Deflation: Rising customer demands
(faster, cheaper, better).
·
Demographics: Aging population and
declining birth rates in developed countries (e. g., Germany’s
workforce will decrease by two million in the next 15 years).
United States
In the United States, companies have already cooperated with offshore providers for more
than ten years (Allweyer et al., 2004). Contributing
to the rise of IT offshoring was the shortage of IT professionals in the late
1990s (Adelakun and Jennex,
2003). Nowadays, IT offshoring can be considered as an established business
practice in the United
States (Allweyer et al., 2004). At present, 70 to 80 percent of all
IT offshoring projects worldwide are commissioned by U.S. companies.
In this context, approximately 20 percent of U.S.
companies’ IT budgets is spent in low-wage countries, of which more than 80
percent is invested in India (Buchta et al., 2004). Here, according to
a study by Farrell (2004a), the U.S.
economy gains more than one dollar of new wealth for every dollar of corporate
spending abroad.
One aspect of IT offshoring is the
relocation of software services abroad (Krishna, Sahay, Walsham,
2004), the so-called offshore software
development (OSD). This service form of IT offshoring is relatively new (Delmonte and McCarthy, 2003) and was particularly driven by
the Y2K problem (Amoribieta, Bhaumik,
Kanakamedala, and Parkhe,
2001). Currently, the high demand for e-business and web-based solutions (Adelakun and Jennex, 2003), as
well as the maintenance and the re-development of legacy systems (Schaaf, 2004) are continuing the drive for OSD. In
consequence, a growing proportion of the global offshore market is in the
software development area (Delmonte and McCarthy,
2003). At present, almost two out of five Fortune 500 companies outsource software
development services to foreign countries (Amoribieta
et al., 2001). In addition, the implementation of OSD projects ranks high in
many organizations’ to-do-lists for the next years (Jacobson and Lidman, 2004).
However, up to now, OSD had its fair share
of trial and error and disappointment. Many a time, companies sent software
project specifications to offshore providers on the vague presumption that they
would save costs (Cliff, 2004). As a result, while potential cost savings are
close to 50 percent, actual savings were many a time lower than 20 percent. In
the worst case, no cost savings at all were realized (Jacobson and Lidman, 2004). Among other reasons, these negative results
can be traced back to the changing type of OSD projects (Adelakun
and Jennex, 2003). Traditional OSD projects dealt
with application development, which tends to be highly structured, requiring
little or no changes to the requirement specifications. Contrary to these
traditional projects, nowadays, OSD projects are more complex, including
e-business and web application development, frequently using a “follow the sun”
approach. These projects tend to be less structured in general, requiring more
client contact and project management than traditional OSD projects, leading to
an increasing risk of failure.
In an attempt to assist companies with the
successful implementation of OSD projects, the concept of critical success factors (CSF) is gaining in importance. The term “critical
success factors” initially appeared in management literature in
Daniel (1961). Rockart (1979, p. 85) defines
these as “the limited number of areas in which results, if they are
satisfactory, will ensure successful competitive performance for the organization”,
and emphasizes the great amount of importance, which should be attributed to CSF,
when he says: “…the critical success factors are areas of activity that
should receive constant and careful attention from management”. Ramaprasad and Williams (1998) also acknowledge the increasing
popularity of the CSF concept: “…there is a great deal of attention devoted
to the concept [of CSF] in the IS literature as many argue that the use of CSF
can have a major impact on the design, development, and implementation of IS”.
In this context, Delmonte and McCarthy (2003) look at
the benefits and the risks of OSD, thereby developing a set of CSF from a U.S.
client perspective. In line with Delmonte and
McCarthy (2003), Raval’s (1999) “seven secrets” of successful
OSD address the perspective of U.S.
clients. On the contrary, Mani and Rajkumar (2001) describe key success factors from the point
of view of Indian service providers. Adelakun and Jennex (2003) expand this research by focusing their CSF
research on OSD providers located in Eastern and Western Europe. However, with
regard to the mentioned studies, it has to be noted that the presented CSF
are many a time insufficiently described and analyzed. For instance, only one
of the four studies examines the relevance of the identified CSF (Adelakun and Jennex, 2003), and
none of these studies provides a more sophisticated management analysis in
regard to the proposed CSF.
Germany
In recent years, the rising trend to IT
offshoring has also reached Europe. According to Farrell (2004a), 40 percent of the 500 largest
companies in Western Europe have already begun relocating IT services abroad. More than 80
percent of these companies are satisfied with the results of their offshore
projects, reporting cost savings in the range of 20 to 40 percent (Eichelmann, Fredriksson, Sauvant, and Schneidereit, 2004).
However, the majority of European companies with offshore experience are
located in the UK, which accounts for almost two thirds of the European IT offshoring
market (Eichelmann et al., 2004). Here, according to Buchta et al. (2004), particularly culture- and
language-related advantages of UK-based companies facilitate the relocation of
IT services abroad.
In comparison to English-speaking
companies, Buchta et al. (2004) assume that German companies are currently three years
behind. This becomes particularly evident when considering
the size of the German IT offshoring market. With a total market volume of 0.4
billion euros in 2003 (compared to a 54 billion euros U.S.
market), at present, the German market
for IT offshoring is still in its fledgling stages (Broß,
2005). According to Buchta et al. (2004), Germany’s considerably
smaller market size can be reasoned by structural
issues of the German IT market (e. g., high vertical integration, small
number of strong relationships with local IT service providers) as well as
cultural and linguistical issues of German companies.
In addition, numerous German companies are still in the process of preparing
their IT organizations for IT offshoring. However, behind the background of
potential cost savings for German firms of approximately two billion euros per
year (Buchta et al., 2004), enormous market growth
potentials remain (Allweyer et al., 2004). Broß (2005), for instance, assumes that the German IT
offshoring market will double in size until 2008. In this context, particularly
the rising cost
pressure, triggered by globalization (Böhm, 2003a),
increases the likelihood of a significant growth of the German market. For example,
statistics show that more than half of all software projects in Germany fail on account of cost pressure.
In turn, German companies lose an enormous amount of potential innovations, making
it even tougher for these companies to maintain their competitive position in a
global economy (Beeler, 2004). Another reason for such
a development of the German IT offshoring market can be seen in the increasing
saturation of the U.S. market. In an effort to keep annual growth rates of more than 20
percent, especially large offshore providers (e. g., India-based providers
such as TCS, Wipro, and Infosys)
will attempt to fortify the penetration of the German market in the near future
(Buchta et al., 2004).
Figure: Levels of IT outsourcing/offshoring
projects
Regarding the type of services, relocated
in the context of an IT outsourcing/offshoring initiative, Allweyer
et al. (2004) generally distinguish among a process, an application, and an
infrastructure level (compare Figure
2). On a process level, entire business processes such
as call center operations are relocated. This specific service form is also
referred to as business process outsourcing/offshoring (BPO) (e. g., Fritsch
and Stimmer, 2004). While the application level
encompasses the outsourcing/offshoring of software development projects, the outsourcing/offshoring
of network or server management operations is related to a company’s IT infrastructure.
Analogous to the global IT offshoring
market, OSD (compare gray highlighted row in the figure above) currently makes
up the majority of the German offshore market (Broß,
2005). In general, this can be reasoned by the fact that software services are
particularly suitable for relocation abroad due to their labor intensity and modularity (Rack,
2001). In particular, this can be traced back to the
insufficient German language abilities in many offshore countries, hampering
the relocation of other IT services like call center operations to low-wage countries.
In Germany,
the increasing trend towards OSD is mainly fortified by the opportunities it
offers. According to a survey by Moczadlo (2002), the
major reasons for German companies to develop software offshore are:
·
Cost reduction: Exploitation of lower
labor costs in low-wage countries like India, Russia,
etc.
·
Flexibility in staff numbers: Improvement
of a company’s reactivity on current market conditions.
·
Quality improvement: Utilization of economies
of scope.
·
Time-to-market reduction: Reduction of
development times through external support and “follow the sun” approaches.
Despite the manifold benefits of OSD, German
companies’ first experiences were not consistently positive (Schaaf and Weber, 2005). Media reports of companies, whose OSD
projects could not live up to their expectations, were abundant (BITKOM, 2005).
Beside the changing type of OSD projects (Adelakun
and Jennex, 2003), in the case of German companies,
the major reason for these negative headlines can be found in
poor project management (Moczadlo, 2002). Primarily,
this can be traced back to these companies’ lack in experience with IT
outsourcing projects in general and OSD projects in particular (Buchta et al., 2004).
Against this background, the questions, which factors
determine the success or the failure of an OSD project and how these factors
can be influenced, arise. In this context, some German associations
(e. g., BITKOM, 2005) as well as research institutes of large-scale German
enterprises (e. g., Schaaf, 2004) have published
practical guidelines on the implementation of IT offshoring projects in
general. However, only little research has been carried out in regard to the
CSF of OSD projects from a German client perspective. Even though, some
research studies, which concentrate on the CSF of OSD projects from a U.S.
client perspective (e. g., Delmonte and
McCarthy, 2003; Raval, 1999), already exist, we do not
know if the results of these studies can be transferred to German clients. This
can be reasoned by the structural, cultural, and linguistical issues of German companies (Buchta et al., 2004). Therefore, in an effort to support German
companies with the successful implementation of OSD projects, we decided to
examine the CSF of such projects in more detail. Here, according to Kulik (1997), understanding why projects succeeded is of
particular importance, because “repeating
what worked on successful projects is a powerful strategy to ensure the success
of future projects”.
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