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SO EXPERT VIEWPOINT
3,1
The next step for the CEO
Moving IT-enabled services outsourcing
62 to the strategic agenda
Leslie Willcocks
The Outsourcing Unit, Department of Management,
London School of Economics and Political Science, London, UK
Abstract
Purpose – This paper aims to distill research findings that will influence CEO and top team
behaviour.
Design/methodology/approach – The findings are based on case study research into 650 plus
organisations and their outsourcing arrangements in Europe, Asia Pacific and USA.
Findings – CEOs have five reasons for ensuring IT-based services outsourcing is included in their
strategy discussions. IT outsourcing impacts upon a firm’s market value. The sheer size of
outsourcing expenditure merits senior management attention. Getting outsourcing wrong can
seriously damage corporate health. At the same time, the evidence shows examples of outsourcing
playing a strategic role for many businesses, and only the CEO has the real bargaining power to
make outsourcing deliver this strategic dividend.
Research limitations/implications – The research was carried out by the LSE’s Outsourcing Unit
and uses in-depth longitudinal case studies to identify outsourcing practices that work, in terms of
achieving superior business results.
Practical implications – The paper spells out the reasons why CEO and top teams should be
engaged in their outsourcing decision making and management.
Originality/value – The paper establishes well researched grounds for why CEOs and top teams
need to act differently if more effective outsourcing is to be achieved.
Keywords Outsourcing, Competitive advantage, Communication technologies, Chief executives,
Strategic choices
Paper type Viewpoint

Strategic Outsourcing: An
International Journal
Vol. 3 No. 1, 2010
pp. 62-66
# Emerald Group Publishing Limited
1753-8297
DOI 10.1108/17538291011023089
Introduction
Why should hard-pressed CEOs devote attention to the outsourcing of IT-enabled
services? Because a substantial, and rapidly rising, amount of most large
organisations’ cost base is already with outsourcing service providers. Because getting
large-scale outsourcing wrong can seriously damage the business. Because, from now,
outsourcing is part of any future strategy. In our experience, the announcement of a
large-scale outsourcing deal regularly has a positive effect on share price that can last
between three and ten months. That said, the opposite can occur if the market
perceives outsourcing to be an inadequate measure, given the scale of difficulties
involved or where the deal seems to be flawed or hastily contrived, or where the CEO
and organisations ultimately fail to deliver the financial results stated or implied in the
initial announcement.
More positively, the evidence from our LSE Outsourcing Unit research shows
clearly that outsourcing – properly planned, resourced and managed – can deliver
significant competitive advantage to companies and organisations in all sectors. But
only when the CEO plays a key role – taking crucial strategic decisions, creating vital
capabilities, putting in place integrated management processes and applying effective
monitoring and evaluating mechanisms. Let us look at these issues in more detail. The
Outsourcing Unit’s research points (recent publications that distill this research are The next step
Willcocks and Lacity (2009), Lacity and Willcocks (2009), Willcocks and Lacity (2006), for the CEO
Oshri et al. (2009), Lacity et al. (2010), Willcocks and Craig (2009) and Willcocks et al.
(2009). Further details and downloads are on: www.outsourcingunit.org to five main
reasons why outsourcing must now move up the CEO agenda.

Reason one – outsourcing impacts on market value 63

Share price is a fundamental barometer of corporate performance. Previous research as
well as our own case histories have identified a significant correlation between firms
outsourcing their IT infrastructure or back offices and a positive stock market
response. Investors consider movement toward outsourcing as an important and
generally favourable variable when assessing a firm’s worth. In the Outsourcing Unit’s
experience, the announcement of a large-scale outsourcing deal regularly has a positive
effect on share price that can last between three and ten months. Outsourcing is seen as
a sign of active investment and management on the part of the firm.
That said, the opposite can occur if the market perceives outsourcing to be an
inadequate measure given the scale of difficulties involved, or where the deal seems to
be flawed or hastily contrived, or where the CEO and organisations ultimately fail to
deliver the financial results stated or implied in the initial announcement. The danger
for the CEO is being swayed by short-term share price concerns and signing a large,
long-term deal in order to try to shift the share price substantially upwards or perhaps
to buy time rather than focusing on the fundamental business logic of the outsourcing
deal. Long-term outsourcing contracts signed for short-term reasons invariably bring
about major disappointments for CEOs and their organisations.

Reason two – outsourcing is pervasive and growing – the spending

alone needs attention
Outsourcing makes up a substantial and rapidly increasing proportion of expenditure in
corporations and government agencies alike. On our figures global IT outsourcing
revenues exceeded $US 250 billion in 2008 and are scheduled to rise at 5-8 per cent per
annum over the next five years. Global business process outsourcing revenues were over
$145 billion in 2008 and likely to rise by 8-12 per cent per annum through 2009-2012
(Willcocks and Lacity, 2009). Organisations are choosing to outsource more and more and
for a variety of reasons: to get more quickly to market, to cut internal costs or to leverage
the increasing capabilities of external services providers. For many organisations,
outsourcing has become a major item of expenditure. However, this process is happening
incrementally, as a response to immediate market conditions and specific opportunities to
cut costs, rather than on the basis of long-term strategic thinking. CEOs, if they have not
already done so, need to put such large spending on to a much more strategic footing.

Reason three – outsourcing can damage corporate health

The outsourcing highway is littered with casualties. We have seen even experienced
organisations repeatedly running into massive problems, suffering from slow
organisational learning and working in a reactive rather than an anticipatory mode
(for evidence see Cullen and Willcocks, 2003; Kern and Willcocks, 2001; Kern et al.,
2002; Lacity and Willcocks, 2003). Here are some 21st century examples:
. In 2000, UK retailer Sainsburys signed a seven-year $3.25 billion deal with
Accenture to outsource its IT operations. By late 2004, the deal had been
SO renegotiated twice, and Sainsbury had announced a 2004/2005 write-off of $ 254
3,1 million of IT assets, and a further $218 million write-off of automated depot and
supply chain IT. The way forward was to reduce costs and simplify systems
(Rohde, 2004).
. In the face of poor financial results, the CEO of one of our cases signed a ten-year
$520 million IT outsourcing deal with a single supplier. Within 17 months, he
64 had been removed and the contract was then terminated prematurely. As well as
paying supplier fees, the company incurred $50 million implementation and $30
million termination costs. More money was swallowed up in then rebuilding
in-house capability and shifting to a multi-supplier model.
. A 2003 report into 182 outsourcing deals found more than a fifth ended
prematurely (Earle, 2004).
. In 2004, JP Morgan and Chase scrapped its $5 billion contract with IBM two
years into a seven-year deal, concluding that much of the work could be better
handled in-house (Wighton, 2004).
. Also in 2004, Dupont was reported to have discovered $150 million in over-
charges relating to outsourcing services with its supplier (Miller, 2004).
. In autumn 2004, the Child Support Agency-EDS deal surfaced as the latest in a
long catalogue of outsourcing failures in the UK public sector (Collins, 2004).
While it appears that clients have a history of outsourcing experiences to draw upon, the
problem is changed. First generation clients often change what and how they outsource
the second and third time around. Each time they find themselves in a relatively new
situation, having to learn anew. Moreover, if their knowledgeable people had left and not
been replaced, organisational learning may not occur until the fourth or fifth generation
deal.
Why should the CEO be involved? Because in outsourcing, strategic risk mitigation
is fundamental. Furthermore, pursuing an operational, cost-reducing outsourcing
strategy can drive costs down but often at the expense of other expected benefits.
Strategic and even operational inflexibilities can result (Lacity and Willcocks, 2001,
2009). As one example, while the Xerox-EDS 1994-2004 IT outsourcing deal
successfully achieved cost reductions, at one point it damaged Xerox’s ability to
respond effectively to a major change in market structure. In late 1999 Xerox lost
control of its billing and sales commission systems, and this had major consequences
for profitability. By the following year Xerox’s market share value had dropped from
above $90 to below $20 (Kern and Willcocks, 2001).
The CEO must also care because, as the examples above show, strategic decisions to
merge, acquire or enter new markets can incur substantial unforeseen damage, delays
and costs, if existing outsourcing arrangements need to be refocused.

Reason four – outsourcing can play a positive, strategic role

However we are increasingly seeing leading organisations utilise forms of outsourcing
and partnering in order to:
. penetrate new markets quickly;
. operate in new regions (for instance, Boeing sourcing IT to Malaysia to sell core
products there or Dell looking to sell into China);
 . achieve strategic agility (for instance, adjusting volumes in response to business The next step
cycles or to provide business continuity in times of crisis); for the CEO
. achieve strategic sourcing (for instance, offshoring; using offshore competition to
get better prices and service; best-of-breed sourcing); and
. enhance strategic capabilities by partnering with a complementary supplier.
In our latest research (Willcocks and Craig, 2009) we have also seen CEOs using 65
outsourcing to pursue the following strategies:
. Financial restructuring: improving the business’s financial position while
reducing or at least containing costs.
. Strengthening core competences: using outsourcing to re-direct business focus.
. Technological or business processes: strategically strengthening resources,
services and flexibility in these areas.
. Organisational transformation: using outsourcing to facilitate or support major
organisational change.
. Business innovation: using outsourcing to introduce new processes, skills or
technologies, while mediating the financial risks to drive for competitive advantage.
. New markets: profit generation through joint ventures with vendor partners.
All of these demand close CEO attention. If these moves are fully to pay off, the CEO
needs to shift from a tactical or arm’s length approach to outsourcing, to a much more
strategic and personally involved one.

Reason five – CEOs alone possess the crucial bargaining power

There is one element in outsourcing which the CEO alone can bring to bear on the
massive scale that is required – bargaining power. Organisationally and strategically the
CEO is the ultimate pivot of bargaining power. As a management process, the constant
aim during the outsourcing lifecycle is to build and manage relative bargaining power.
Enter that lifecycle without having first amassed the best possible bargaining power
prior to negotiation, and you will find it almost impossible thereafter to improve your
position. A key CEO role, therefore, is to ensure that their organisation’s bargaining
power is sustained – both through their personal influence with the supplier’s
powerbrokers and by putting in place the strategies, processes and people needed to
keep the relationship with the supplier sharply competitive and productively leveraged.

References
Collins, T. (2004), ‘‘MPs given little comfort on state of child support agency systems’’, Computer
Weekly, 28 October, p. 5.
Cullen, S. and Willcocks, L. (2003), Intelligent IT Outsourcing, Butterworth Heinemann, Oxford.
Earle, A. (2004), ‘‘End of the affair: bringing outsourced operations back in-house’’,
Computerworld, 31 May, p. 38.
Kern, T. and Willcocks, L. (2001), The Relationship Advantage: Information Technology,
Outsourcing and Management, Oxford University Press, Oxford.
Kern, T., Willcocks, L. and Van Heck, E. (2002), ‘‘The winner’s curse in IT outsourcing: how to
avoid relational trauma’’, California Management Review, Vol. 44 No. 2, pp. 47-69.
SO Lacity, M. and Willcocks, L. (2001), Global IT Outsourcing: In Search of Business Advantage,
Wiley, Chichester.
3,1 Lacity, M. and Willcocks, L. (2003), ‘‘Information technology sourcing reflections’’,
Wirtschaftsinformatik, special issue on Outsourcing, Vol. 45 No. 2, pp. 115-25.
Lacity, M. and Willcocks, L. (2009), Information Systems and Outsourcing: Studies in Theory and
Practice, Palgrave, London.
66 Lacity, M., Willcocks, L. and Zheng, Y. (Eds) (2010), China’s Emerging Outsourcing Capabilities,
Palgrave, London.
Miller, A. (2004), ‘‘Outsourcing options and performance management in the private and public
sectors’’, paper presented at the Outsourcing Summit, London, 22 November.
Oshri, I., Kotlarsky, J. and Willcocks, L. (2009), Handbook of Global Outsourcing and Offshoring,
Palgrave, London.
Rohde, L. (2004), ‘‘Sainsbury, Accenture to Redo Outsourcing Pact’’, Computer Weekly, 25 October,
p. 3.
Wighton, D. (2004), ‘‘JP Morgan scraps IT deal with IBM’’, Financial Times, 16 September, p. 34.
Willcocks, L. and Craig, A. (2009), Outsourcing Enterprise5: Step-Change – Collaborate to
Innovate, Logica, London.
Willcocks, L. and Lacity, M. (2006), Global Sourcing of Business and IT Services, Palgrave, London.
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BPO and Offshoring, Palgrave, London.
Willcocks, L., Griffiths, C. and Kotlarsky, J. (2009), Beyond BRIC: Offshoring in Non-BRIC
Countries – Egypt A New Growth Market, ITIDA, London.

About the author

Leslie Willcocks is a Professor of Technology Work and Globalisation and Director of the
Outsourcing Unit at the London School of Economics and Political Science. He has an
international reputation for his work on global sourcing, information management, IT
evaluation, e-business, organisational transformation as well as for his practitioner contributions
to many corporations and government agencies. He has been for the last 18 years Editor-in-Chief
of the Journal of Information Technology, and is joint series editor of Palgrave’s Technology
Work and Globalisation Book Series. He is co-author of 32 books, including most recently
Information Systems and Outsourcing: Studies in Theory and Practice (Palgrave, 2009), and the
Practice of Outsourcing: From ITO to BPO and Offshoring (Palgrave, 2009). He has published
over 180 refereed papers in journals such as Harvard Business Review, Sloan Management
Review, California Management Review, MIS Quarterly, MISQ Executive, Journal of Management
Studies, Communications of The ACM, and Journal of Strategic Information Systems. In 2001 he
won the Price Waterhouse Coopers/Michael Corbett World Outsourcing Achievement award for
his contribution to the field. He is an adviser to many corporations and government agencies
around the world. Leslie Willcocks can be contacted at: l.p.willcocks@lse.ac.uk

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