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«A Dissertation Presented in Fulfilment of the Requirements for the Doctor of Philosophy by Brian Haveckin, MEng, MBA. Student ID: 3025368 Supervisor: ...»

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Information Technology outsourcing by

large Australian organisations

A Dissertation Presented in Fulfilment of the Requirements for

the Doctor of Philosophy

by

Brian Haveckin, MEng, MBA.

Student ID: 3025368

Supervisor: Professor Michael McGrath

FACULTY OF BUSINESS AND LAW

VICTORIA UNIVERSITY

AUSTRALIA

Date prepared: February 2012

ABSTRACT

Outsourcing of Information Technology (IT) is a well-established part of Australian business.

Offshore outsourcing of IT support and development is a critical and widespread part of the globalised Australian and other nations’ economies. In Australia, national organisations such as the National Australia Bank (NAB) and Australia’s largest telecommunication company, Telstra, continue to outsource work to outsourcing vendors – that is, obtaining goods and services from outside suppliers.

It has long been thought that IT outsourcing is motivated primarily by cost cutting in the IT department but the latest trends suggest that outsourcing is more about improving usage of internal resources and service satisfaction. Authors Lee, J-N (2000) and Loh & Venkatraman (1992) argue that outsourcing IT functions to external service providers is done in order to acquire economic, technological and strategic advantage. In this thesis, it is proposed that the main driver for outsourcing IT has matured from being purely cost driven to one of strategic business practice. Reasons to outsource, as proposed by various authors such as Dahlberg &

Nyrhinen (2006), Beaumont & Sohal (2004) and Olson (2006), include:

 competitive pressures;

 core business activities; and  strategic, economic and technological benefits.

This thesis looks at the primary reason for outsourcing from an Australian perspective and the relationship between satisfaction and service quality from the outsourcer’s perspective. Researchers such as Dahlberg & Nyrhinen (2006), Whitten (2004), Han et al.

(2006) and Goles (2001) clearly demonstrate that satisfaction and service quality are important factors in outsourcing and have each proposed different factors that contribute to a decision to back source, change vendor or continue an outsourcing contract.

The primary thrust of this thesis is to build on existing research by identifying issues specific to Australian outsourcers, providing an analysis of current academic literature on IT outsourcing in relation to major systems, and investigate current attitudes within Australian corporate culture towards outsourcing, including offshoring parts of a company’s business.

This thesis uses exploratory research to determine suitable research design, data collection methods and selection of subjects. The study collected data from various sources including literature, exploratory research, interviews, a survey and questionnaire, and then ii combined them for analysis. Several hypotheses are proposed and tested against the collected data using quantitative methods; a causal method was employed to investigate relationships between the variables of outsourcing and satisfaction among Telstra users.

The research hypotheses are based on different personnel within an organisation having different criteria for success in the context of outsourcing, and that the overall satisfaction with outsourcing is strongly associated with a perception that it is working.

Satisfaction with outsourcing is related to outsourcing being seen as successful and working well but various organisational parties may still be dissatisfied with the arrangement. Some of the factors found to affect the degree of satisfaction with outsourcing are service quality, the relationship developed between the outsourcing company and vendor, and the costs involved in switching vendors.

This thesis proposes that the main reason for outsourcing IT has changed from cost considerations to various factors involving better management of resources. The proposal that senior management, middle managers and employees have different criteria for assessing whether or not outsourcing is working proved to be a negative hypothesis. In the Telstra case study, it was shown that satisfaction is strongly associated with the perception of whether or not outsourcing is working.

iii DOCTOR OF PHILOSOPHY DECLARATION

I, Brian Edward Haveckin, declare that the PhD thesis entitled Information Technology Outsourcing by Large Australian Organisations is no more than 100,000 words in length including quotations and exclusive of tables, figures, appendices, bibliography, references and footnotes. This thesis contains no material that has been submitted previously, in whole or in part, for the award of any other academic degree or diploma. Except where otherwise indicated, this thesis is my own work.

–  –  –

Also, I would like to thank colleagues and friends, in particular Ken Mayes and Tyrell Heathcote, for their ongoing assistance and support.

Finally, thanks to my wife Julie who has enabled this PhD thesis to become a reality. I also want Grace, Ellen and William to understand what can be achieved based on hard work, dedication and persistence.





–  –  –

Publications Haveckin, B. 2007. Evolution of the Chief Information Officer. In: McGrath, M. (ed.) International We-B (Working for E-Business) Conference (8th : 2007 : ) Melbourne, Vic. Australia: Victoria University.

Haveckin, B. 1995. Integrated Management for ATM and SDH network. In: Truyen, D. N. N.

(ed.) Australian Telecommunication Network and Application Conference. Melbourne, Vic. Australia Victoria University.

Awards Masters in Engineering (Telecommunications), Victoria University, 1994.

Master of Business Administration (Technology Management), Deakin University, 1999.

vi

TABLE OF CONTENTS

Abstract

DOCTOR OF PHILOSOPHY DECLARATION

ACKNOWLEDGEMENTS

PUBLICATIONS AND AWARDS

CHAPTER 1 Introduction

1.1 Research background

1.2 Research objectives

1.3 Research approach

1.4 Organisation of this dissertation

CHAPTER 2 Literature Review

2.1 Introduction

2.2 Definitions

2.2.1 Globalisation

2.2.2 IT outsourcing

2.2.3 Offshoring

2.3 History of IT outsourcing

2.3.1 ERP offshore outsourcing

2.3.2 IT organisation workings

2.3.3 Trends in IT

2.4 IT outsourcing: success or failure

2.4.1 Considerations in the outsourcing process

2.4.2 Conclusion on IT outsourcing: success or failure

2.5 Outsourcing advantages

2.5.1 Empirical evidence on offshore outsourcing

2.5.2 Types of outsourcing models

2.6 Outsourcing: obstacles and problems

2.6.1 Obstacles and problems in outsourcing

2.6.2 Government policy

2.6.3 Quality hypothesis and redistribution hypothesis

2.6.4 Reasons for rejecting outsourcing

2.7 Measuring service quality

2.7.1 Service quality and outsourcing

2.7.2 Issues with the SERVQUAL methodology

2.7.3 Satisfaction — User Information Satisfaction

2.7.4 Relationship quality

2.8 Conclusion

CHAPTER 3 Research Methodology

3.1 Introduction to research methodology

3.2 Exploratory

vii

3.3 Survey introduction

3.3.1 Survey (questionnaire)

3.3.2 Data analysis

3.4 Ethical considerations

3.5 Summary

CHAPTER 4 Interviews: Findings

4.1 Introduction

4.2 Background: Perception of IT at Telstra

4.3 Thesis sources

4.4 Telstra organisational changes

4.5 Telstra organisational history

4.6 Telstra information systems

4.7 Telstra information technology eras

4.7.1 Mainframe

4.7.2 Personal computers

4.7.3 Organisational units rapid growth

4.7.4 Consolidation of IT

4.7.5 Downsizing and outsourcing

4.7.6 Rationalisation of systems and outsourcing partners

4.8 Telstra conclusion

4.9 Exploratory phase interviews

4.9.1 Step 1: Organisation of details

4.9.2 Step 2: Categorisation of data into meaningful groups

4.9.3 Step 3: Interpretation of single instances

4.9.4 Step 4 and 5: Identification of patterns, synthesis and generalisation... 105

4.10 Interview Conclusion

4.11 Survey

CHAPTER 5 Results of Survey

5.1 Introduction

5.2 Respondents and organisation profile

5.2.1 About contracts and benefits: Questions 49–70

5.2.2 Issues and impact with outsourcing partner: Questions 71–100.............. 120 5.2.3 Relationship with outsourcing partner

5.2.4 Changing outsourcing partner — benefits and switching costs................ 127 5.2.5 Back-sourcing/switching costs

5.2.6 Switching, setup and sunk costs

5.2.7 Results of initial data analysis

5.3 Employees versus management t-test

5.3.1 Findings factor analysis

5.4 Findings UIS scale

5.5 Content validation of survey instrument

viii

5.6 Reason for outsourcing

5.7 Summary of results

CHAPTER 6 Conclusion

6.1 Re-statement of research

6.1.1 Emergence of hypotheses

6.2 Summary of research findings

6.3 Conclusions

6.3.1 Significance of this research

6.5 Academic and practitioner contributions to the study

6.6 Limitations of this study

6.7 Recommendations

APPENDICES

Appendix A Ethics Approval

Appendix B Questionnaire Cover Letter

Appendix C Introduction for Interview

Appendix D Consent Form of Participants

Appendix E Questionnaire

Appendix F Results of Interviews

Appendix G Independent Variable

Appendix H One sample t test

Appendix I Results of t test (Employee / Manager)

Appendix J Iterations

Appendix K Factor Analysis

BIBLIOGRAPHY

ix

FIGURES

Figure 2.1: Technical Models and Trends

Figure 2.2: Typical Touch Points in an IT Organisation

Figure 2.3: CapGemini Global Revenue Model 2007

Figure 2.4: Linkage Map for Outsourcing

Figure 2.5: Typical IT Networking

Figure 2.6: Five Generic Dimensions of Service Quality

Figure 2.7: Model of Service Gaps

Figure 2.8: Revised Model of Service Gaps

Figure 2.9: Proposed Lee Research Model

Figure 2.10: Whitten Research Model

Figure 3.1: Problem Discovery and Definition

Figure 3.2: t-tests (Overview Diagram)

Figure 3.3: Cronbach’s Alpha Formula

Figure 4.1: ‘Full-time equivalent’ Staff Employed by Telstra in Australia.

................ 80 Figure 4.2: Survey (Questionnaire) Flow

Figure 5.1: Outsourcing Partner t-test (Employee to Senior Manager)

Figure 5.2: Research Model (Cronbach’s Alpha)

Figure 5.3: Research Model Linked to the Whitten Research Model

Figure 5.4: Reasons to Outsource

x

TABLES

Table 2.1: Timeline of Major Outsourcing Literature

Table 2.2: Drivers of Outsourcing

Table 2.3: Ranking of Critical Success Factors in IT Outsourcing Relationships.

...... 19 Table 2.4: IT Services Vendors by Revenue 2006 and 2007

Table 2.5: Major Outsourcing Companies 2008

Table 2.6: Major Outsourcing Companies’ Deals 2008

Table 2.7: Worldwide IT Spending Forecast 2009

Table 2.8: Linkage Table for Outsourcing

Table 2.9: User Satisfaction Relationship Variables

Table 2.10: Relationship Variables

Table 3.1: Summary of Research Paradigms

Table 3.2: Source of Interview Titles

Table 4.1: Eras of IT at Telstra

Table 4.2: Identification of Overall Patterns from Interviews

Table 4.3: Structure of Survey (Questionnaire)

Table 5.1: Age and Gender of Respondents

Table 5.2: Respondents’ Years of Service to Organisation

Table 5.3: Position in Firm (extract from Appendix G, Table G8)

Table 5.4: Summary of In-house IT support Before Outsourcing

Table 5.5: Strategic Importance of Outsourced IT Support and Development.

......... 120 Table 5.6: Summary of Contract and Benefits of Outsourcing

Table 5.7: Summary of Issues and Impact with Outsourcing Partner

Table 5.8: Summary of Relationship with Outsourcing Partner

Table 5.9: Summary of Switching of Outsourcing Partner

Table 5.10: Questionnaire Reliability Comparison (Cronbach’s Alpha) and ANOVA ‘F’

Table 5.11: Reliability Comparison UIS (Cronbach’s Alpha)

Table 5.12: UIS Scale Reliability Comparison with Previous Studies (Cronbach’s Alpha)

Table 5.13: UIS Scale Reliability Proposed Research Model

Table 5.14: Multi-item Construct Based on the Whitten Model

Table 5.15: Summarised Reasons for Outsourcing

Table 5.16: Reason to Outsource

xi CHAPTER 1 Introduction

1.1 Research background In simple terms, it is widely accepted that businesses regard Information Technology (IT1) services as an overhead cost (Cullen, Seddon & Willcocks, 2005; Hirschheim & Lacity, 2000). IT outsourcing2 is the classic make-or-buy decision — are you going to do it yourself, or are you going to buy it from a supplier? Hira & Ferrante (2005) noted that it is a question of whether to build or buy information services.

These services can be performed in offshore locations and delivered by internet, in concept, no different from products being manufactured abroad and being shipped to Australia physically. As noted by Chakraborty and Remington (2005), economists generally believe that offshore outsourcing of business services is not significantly different from international “trade in service” leading to gains from trade for both countries.



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