From the Vendor’s Perspective: Exploring the Value Proposition in Information Technology Outsourcing1, 2

Abstract

To date, most research on information technology (IT) outsourcing concludes that firms decide to outsource IT services because they believe that outside vendors possess production cost advantages. Yet it is not clear whether vendors can provide production cost advantages, particularly to large firms who may be able to replicate vendors’ production cost advantages in-house. Mixed outsourcing success in the past decade calls for a closer examination of the IT outsourcing vendor’s value proposition. While the client’s sourcing decisions and the client-vendor relationship have been examined in IT outsourcing literature, the vendor’s perspective has hardly been explored. In this paper, we conduct a close examination of vendor strategy and practices in one long-term successful applications management outsourcing engagement. Our analysis indicates that the vendor’s efficiency was based on the economic benefits derived from the ability to develop a complementary set of core competencies. This ability, in turn, was based on the centralization of decision rights from a variety and multitude of IT projects controlled by the vendor. The vendor was enticed to share the value with the client through formal and informal relationship management structures. We use the economic concept of complementarity in organizational design, along with prior findings from studies of client-vendor relationships, to explain the IT vendors’ value proposition. We further explain how vendors can offer benefits that cannot be readily replicated internally by client firms.