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According to Dibbern et al. (2004), the
outsourcing of information systems initially consisted of an external vendor
providing a single basic function to the customer. This could for instance
include the operational control over the customer’s technology assets, primarily
a data center.
In 1963, IT outsourcing began to
evolve when Blue Cross of Pennsylvania turned over their data processing services
and IS employees to Electronic Data Systems (EDS) in a pioneering agreement,
which marked the first time a large company handed over their complete data
processing department to a third party.
Despite constant growth in the 1970s, most
notably due to standardized software packages and a lack of qualified IT staff,
IT outsourcing did not receive real acceptance until the mid 1980s, when EDS
signed contracts with Continental Airlines, First City Bank, and Enron. All
three of these deals were financially motivated, as EDS took an equity position
in its clients and paid for certain software products, which it thought could
be expanded and used to allure new clients.
According to Dibbern et al. (2004), IT
outsourcing ultimately stepped into the limelight in 1989 when Eastman Kodak
engaged in a strategic alliance with IBM, Digital Equipment Corporation, and
Businessland. Although a number of outsourcing deals had been concluded in the
years prior to the Kodak deal, none of them generated as much interest as this
particular strategic alliance did. In consequence, well known companies
worldwide soon followed in the footsteps of Kodak, indicating the global rise
of IT outsourcing. This newborn trend towards outsourcing was further supported
by the concept of core competences, publicized by Hamel and Prahalad (1990).
The idea of a company focusing solely on its core competences simultaneously
implicated that corporate functions outside the limits of these competences
were regarded as less important and, therefore, analyzed in terms of their
suitability for outsourcing (Schwarz, 2005). In consequence, many internal IT
functions, which were viewed by managers as a necessity rather than a tool for
gaining a competitive edge, became top candidates for outsourcing arrangements.
Managers were less concerned about the technical details of the IT
infrastructure than with the final outcome of their IT investments and its
impact on the organization’s efficiency and effectiveness (Sparrow, 2003). The
concept of outsourcing IT activities began to prosper.
IT outsourcing has left the traditional one
vendor – one client structure behind and evolved to complex arrangements
integrating multiple vendors and clients. Dibbern et al. (2004) describe the present
role of IT outsourcing as follows: “Outsourcing
now embraces significant partnerships and alliances (…) where client and vendor
share risk and reward. The deals have moved beyond simple cost-savings to
include value-based outsourcing, equity-based outsourcing, eBusiness outsourcing
and business process outsourcing.” (p. 8)
IT
offshoring first started to make waves in the 1980s,
as several companies began to relocate their IT activities to foreign, mainly
low-wage countries. In the mid 1990s, this process evolved significantly, most
notably due to both the significant differences in labor costs (e. g., Schaaf,
2004) and a lack of qualified staff in the booming IT industry (e. g., BITKOM,
2005).
In the United States, primarily labor-intensive aspects of software development were initially
outsourced to nearby countries like Mexico or
Canada. Soon thereafter, countries such as Ireland, Israel,
or India emerged as attractive destination countries for IT offshoring, as
the costs for qualified IT personnel were low and the working language was
English (Arora and Gambardella, 2004). At present, India
occupies more than 450.000 employees within the IT sector, boasting an annual
growth rate of 30 to 40 percent in the country’s IT industry (BITKOM, 2005).
Regarding the total amount of investments
in offshoring services, Germany is momentarily about three years behind the United States and the UK (Buchta et
al., 2004). Although, several German companies have
engaged in IT offshoring in recent years, the concept never really made waves
within the nation’s economy (BITKOM, 2005). One reason for this was the
country’s decision to fight the lack of qualified IT staff by granting green
cards to IT experts from foreign countries in the 1990s, rather than
considering IT offshoring. Since then, however, things have changed, as IT
processes have constantly become more standardized. As a result, a company’s
competences in the field of IT are not necessarily seen as a tool for gaining
an edge over the competition any more, and have therefore become subject to IT
offshoring deals (BITKOM, 2005).
Similar to the evolution of IT offshoring, OSD began to catch on in the late 1990s
(Adelakun and Jennex, 2003). According to Mani and Rajkumar (2001), the Y2K problem as well as the conversion of systems to accommodate the
European change in currency to the euro have stressed the organizations’
ability to keep up with necessary development. This, in turn, has led to the
outsourcing of software development projects to offshore developers. Furthermore,
significant advances in telecommunications technology have increased the
ability of companies in low wage countries to provide the requested development
services. Currently, the high demand for e-business and web-based solutions are
primarily responsible for keeping the OSD trend afloat (Mani and Rajkumar,
2001).
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