CRITICAL SUCCESS FACTORS OF OFFSHORE SOFTWARE DEVELOPMENT PROJECTS

Carrying out research in the field of IT outsourcing and hereby concentrating on OSD, we decided to structure this as well as the following sections along the hierarchy of outsourcing research fields illustrated in the figure below. Here, IT offshoring can be regarded as a sub-field of IT outsourcing, and, in turn, OSD can be viewed as a sub-field of IT offshoring.

Figure: Hierarchy of IT outsourcing research fields

In regard to the hierarchy presented above, the term IT outsourcing in a broad sense is defined as IT outsourcing including IT offshoring and OSD, whereas IT outsourcing in a narrow sense refers to IT outsourcing excluding IT offshoring and OSD. Analogous to this definition, the term IT offshoring in a broad sense (in a narrow sense) is defined as IT offshoring including (excluding) OSD.

In the following, pivotal terms in the field of IT outsourcing are defined. Alongside IT outsourcing itself, IT offshoring as well as OSD is introduced. At this point, it must be emphasized that the three terms examined are related to one another as described above.

According to Allweyer et al. (2004), the word “outsourcing” finds its roots in the words “outside”, “resource”, and “using”. Generally speaking, it reflects the use of external agents to perform one or more organizational activities (e. g., purchasing of a service), and is therefore not solely specific to IS. In addition, Schwarz (2005a) argues that the aspect of in-house performance of a specific activity prior to outsourcing that same activity must also be considered, as some start-up companies speak of “outsourcing” functions which they have never performed themselves. Nevertheless, the term is currently in vogue in the IS field of research, applying to everything from the use of contract programmers to third party facilities management (Dibbern, Goles, Hirschheim, and Jayatilaka, 2004). In IS literature, IT outsourcing has distinctly been defined as follows:

“…the practice of turning over the planning, management and operation of certain functions to an independent third party, under the terms of a formalized service level agreement. It is usually, but not always, characterized by the transfer of assets from the customer to the service provider.” (Sparrow, 2003, pp. 1-2)

“…turning over part or all of an organization’s IT/IS functions to external service providers.” (Chen, Lin, and Tu, 2002, p. 101)

“…the third party provision of IT products and services.” (Hackney and Hancox, 1999, p. 1)

“…business practice in which a company contracts all or part of its information systems operations to one or more outside information service suppliers.” (Gebelt, Hu, and Saunders, 1997, p. 288)

“…a decision taken by an organization to contract-out or sell the organization’s IT assets, people and/or activities to a third party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period.” (Kern, 1997a, p. 37)

“…the handing over to a third party management of IT/IS assets, resources, and/or activities for required results.” (Kern and Willcocks, 1998, p. 2)

The concept of application service providing (ASP) represents a modified form of IT outsourcing and can often be found in IS literature. An ASP consortium, founded in 1999, defines ASP as follows: “An [application service provider] deploys, hosts and manages access to a packaged application to multiple parties from a centrally managed facility. The applications are delivered over networks on a subscription basis.” (Knolmayer, 2000, p. 443)

In contrast to traditional IT outsourcing, the ASP concept is only sparsely, if at all, tailored to meet the individual client’s request. As a result, application service providers develop their applications in alignment with specific target groups (Knolmayer, 2000).

The concept of IT offshoring, also referred to as offshore outsourcing, can be regarded as a sub-category of IT outsourcing. While the classic outsourcing of IT functions requires an external provider situated in the same country as the client, Haried and Nazareth (2005) define IT offshoring as “a term used in the United States to refer to IT outsourcing that occurs outside the United States.” (p. 2664)

In a more general fashion, without mentioning a specific country, Adelakun and Jennex (2003) suggest the following definition: “Offshore outsourcing is the transference of an Information Technology (IT) function, from a client company to a supplier organization located outside the borders of the client company’s country.” (p. 12)

Further definitions, frequently found in IS literature, include the following:

“…sharing or transferring of responsibility for (…) IS services to a third-party vendor who operates from a foreign country.” (Lado, Parzinger, and Ramarapu, 1997, p. 27)

“…an activity where client firms outsource IT activities to external service providers in other countries.” (Currie, Guah, and Khan, 2003a, p. 996)

Figure: Types of IT outsourcing/offshoring

According to Schaaf (2004), IT offshoring refers to the relocation of IT activities and processes to foreign countries, mainly low-wage countries. The different types of IT offshoring are illustrated in the right column of the matrix presented in the figure above. In many cases, offshoring projects are performed by external service providers (offshore outsourcing). However, in some instances, offshore services can also be rendered by subsidiaries, joint ventures or strategic alliances (captive offshore outsourcing).

Our research project follows Schaaf’s (2004) definition of IT offshoring. Consequently, a subsidiary or joint venture is considered an option for the performance of the outsourced IT services. In addition, depending on the distance between the origin and destination country, IT offshoring can be categorized into offshoring and nearshoring. From the perspective of a German-speaking company, countries such as India, China, or other similarly distant regions are regarded as offshore countries (Mayer and Söbbing, 2004), whereas potential nearshore countries include the Baltic States, the Czech Republic, Poland, or Romania, again observed from a German point of view (Prehl, 2005).

In practice, several different modifications of IT outsourcing or offshoring have emerged. This development can primarily be traced back to the wide array of different requirements companies pose during an outsourcing project. In order to create a consistent understanding of the relevant terms in the field of IT outsourcing, on the one hand, while drawing a clear line between the different kinds of concepts, on the other hand, Amberg and Wiener (2004a) distinguish between three dimensions of outsourcing forms (compare figure below):

·        Service: The associated forms specify which IT services are being relocated (Which services shall be outsourced?).

·        Scope: The associated forms reflect the degree to which IT services are being outsourced (To what extent shall the selected services be outsourced?).

·        Organization: The associated forms describe alternate structures for the implementation of an outsourcing project (How shall the selected services be outsourced?).

Figure: IT outsourcing/offshoring dimensions and forms

With regard to the service dimension, OSD represents one specific form of IT offshoring, and primarily encompasses the offshoring of application development. In this context, individual and standard software as well as web-based and e-business applications have been subject to OSD projects in recent years.

Mani and Rajkumar (2001) define OSD as follows: “Outsourcing of the application initiative for new applications development, enhancement or maintenance of existing applications is called applications outsourcing. Offshore development of software occurs when the supplier is from a different country than the company outsourcing its development.” (p. 63)

Gopalakrishnan, Kochikar, and Yegneshwar (1996) go a step further and take into account the characteristical division of work within an OSD project: “…[offshore software] development is done predominantly at offshore development centers, with a small team being stationed at the customer’s site (‘onsite’). The offshore team typically handles most of the coding and unit testing, while the onsite team’s responsibility primarily consists of customer interfacing, integration and system testing.” (p. 392)

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