Differences Between Clients’ and Vendors’ Perceptions of IT Outsourcing Risks


Information technology/system (IT) outsourcing has been extensively
adopted in various industries over the past two decades (Bahli & Rivard,
2013 ). IT outsourcing involves using technological or professional IT
resources from a third party. Organizations adopt IT outsourcing to
develop IT or to enhance their IT capacity for purposes related to cost
effectiveness, schedule efficiency, or risk transfer (Willcocks & Lacity, 1999 ).
Although some organizations consider outsourcing as a risk-mitigation
approach, IT outsourcing involves the risks of undesirable outcomes, such as
difficult IT management (Choudhury & Sabherwal, 2003 ; Natovich, 2003 ) and
cost escalation (Bahli & Rivard, 2013 ). A previous survey on IT outsourcing
showed that approximately one-third of outsourced IT projects produced
an ineffectual or negative outcome (Lacity & Willcocks, 2012 ). More than
50% of outsourced IT projects were terminated before the contract expired
and switched to other vendors or in-house development (Qi & Chau, 2012 ;
Whitten & Leidner, 2006 ); therefore, managing the risks in IT outsourcing
projects is imperative for organizations to achieve their goals.
Numerous studies have investigated the risk factors of outsourced IT
projects. They illustrate several essential risks such as unsuitable vendors
and inadequate or incomplete contracts (Gefen, Wyss, & Lichtenstein, 2008 ).
In general, an IT outsourcing project involves two organizations: clients
and vendors (IT providers). Based on their agency relationship, the client
and the vendor often perceive project success and risks differently because
of diverse organizational goals and structures (Taylor, 2007 ). From the cost
perspective, the client desires a reliable product to be delivered on schedule,
without defects and within budget. The vendor desires a high-profit project
to be accomplished on time with no overrunning costs or surprises. This
perception discrepancy may lead to misunderstanding and conflict between
the two parties. Both the client managers and the vendor managers share the
responsibility for managing projects successfully. Conflicting risk estimates
cause the project managers to approach risks differently. The conflict reduces
the effective management of the risks (Kutsch & Hall, 2005 ). Moreover, IT
outsourcing contracts are negotiated partially on potential risks; therefore,
understanding how different the client and the vendor managers view risks
is critical in creating contracts that fall into the win–win category. To provide
comprehensive information for risk management, this study explored the
perception inconsistency between the client and the vendor regarding project
Differences Between Clients’
and Vendors’ Perceptions of IT
Outsourcing Risks: Project Partnering
as the Mitigation Approach
Julie Yu-Chih Liu , Information Management , Yuan Ze University , Taoyuan , Taiwan ; Innovation
Center for Big Data & Digital Convergence , Yuan Ze University , Taoyuan , Taiwan
Asri Rizki Yuliani , Information Management , Yuan Ze University , Taoyuan , Taiwan
KEYWORDS: risk perception ; risk
identification ; IToutsourcing project ;
project partnering ; project management
Information technology ( IT ) outsourcing has
been a business practice for more than two
decades. Researchers have suggested successful risk management as a key factor in successful IToutsourcing projects implementation.
The documented investigations, however, have
mainly addressed risk management only from
a single perspective of either clients or ITvendors. Considering only one perspective allows
for an omission of possible risks considered critical by the other party, as suggested by agency
theory. This study explored the potential perception inconsistency regarding the risks between
the client and the vendor for IToutsourcing
projects by using a quasi- D elphi approach. The
analysis results indicated some inconsistencies
in the risks perceived by the two parties: (1) the
clients regarded (a) lack of vendor commitment
to the project and (b) poor vendor selection
criteria and process as top critical risks but the
vendors didn’t; and (2) on the other hand, the
vendors perceived (a) unclear requirements
and (b) lack of experience and expertise with
project activities as significant risks but the
clients didn ’ t. Insights into how the client and
the vendor perceive risks may help both parties
determine how to partner and manage project
risks collaboratively to succeed in outsourcing.
Project Management Journal, Vol. 47, No. 1, 45–58
© 2015 by the Project Management Institute
Published online in Wiley Online Library
(wileyonlinelibrary.com). DOI: 10.1002/pmj.21559
Project Partnering as the Mitigation Approach
PAPERS
46 February/March 2016 ■ Project Management Journal ■ DOI: 10.1002/pmj
risks and addressed the following questions: What are the agreements and
disagreements between the client ’ s and
vendor ’ s perspectives on risk factors in
IT outsourcing projects? What are some
of the approaches that can be used to
reduce the disagreements and mitigate
the divergent risk factors? To answer
these questions, we used a quasi-Delphi
technique with two groups of IT outsourcing experts: client managers and
vendor managers. The analysis results
revealed that each party cannot anticipate every risk scenario, and there is
the need to see the inconsistent perception of risks and then address risks
from both perspectives in a partnership
arrangement. Insights into how both
parties perceive risks may help both
the client and the vendor to understand their perception discrepancy and
determine how to manage project risk
collaboratively to achieve outsourcing
success.
Literature Review
and Theories
IT Outsourcing
IT outsourcing is an activity conducted by
an organization that involves the substantial use of technological or IT professional
resources external to the organization
(Loh & Venkatraman, 1992 ). An organization adopts IT outsourcing to develop IT
or to enhance its IT capacity for reasons,
such as cost effectiveness (Loh & Venkatraman, 1992 ), schedule efficiency (Khan,
Niazi, & Ahmad, 2011b ), and risk transfer
(Willcocks & Lacity, 1999 ). Researchers
have indicated that reducing cost is the
primary impetus of outsourcing (Lacity,
Willcocks, & Solomon, 2012 ). Ho wever,
despite the benefits of IT outsourcing,
outsourcing projects lead to numerous
problems; for example, at the early stages,
the client might encounter hidden costs
such as those of selecting a vendor, contracting, and transitioning activities to the
vendor (Barthelemy, 2001 ; Xue, Sankar,
& Mbarika, 2004 ). The problems related
to IT outsourcing exceed those related to
in-house IT projects. If vendors underestimate the difficulties of IT outsourcing,
they pay less attention to the potential
risks (Osei-Bryson & Ngwenyama, 2006 ).
The difficulties in IT outsourcing include
the lack of information sharing (Aundhe
& Mathew, 2009 ), management of the
working relationship between the client
and the vendor (Natovich, 2003 ), and
monitoring of vendor behavior during
implementation (Choudhury & Sabherwal, 2003 ). Evidence shows that a lack
of project management skills can lead to
outsourcing failure (Nakatsu & Iacovou,
2009 ).
Studies intended to help companies
implement outsourcing have explored
the knowledge of selecting vendors (Barthelemy, 2001 ; Khan, Niazi, & Ahmad,
2011a ), managing relationships (Qi
& Chau, 2012 ), establishing contracts
(Aubert, Patry, & Rivard, 2005 ; OseiBryson & Ngwenyama, 2006 ), and identifying potential risks (Natovich, 2003 ;
Willcocks, Lacity, & Kern, 1999 ). Both
selecting vendors and establishing contracts are imperatives for outsourcing
decisions. Vendors demonstrating complementary and core competency capabilities can provide high-level technical
capability and manage costs effectively
(Levina & Ross, 2003 ). The ability of
clients and vendors to work together to
seamlessly implement or integrate the
outsourced projects is crucial to project success (Xue et al., 2004 ). Seamless
implementation requires effective risk
management. An outsourcing contract
must incorporate effective mitigation
mechanisms for managing the uncertainty and risks of both client and vendor.
Risk Identification
Risk identification is an essential step in
risk management and has been extensively studied in software projects and
IT outsourcing projects. Numerous
studies have emphasized the importance of risk management for IT outsourcing projects (Nakatsu & Iacovou,
2009 ; Taylor, 2007 ). An empirical study
demonstrated that project management
risks have significant effects on the system performance in outsourced projects
(Liu & Wang, 2014 ). The risks discussed
in IT outsourcing literature are similar
to those in general IT project management literature, except for several risk
factors such as the risk of an incomplete
contract (Aubert et al., 2005 ) and poor
vendor selection (Willcocks et al., 1999 ).
For the risk factors that are mentioned
in both types of literature, some may
be exacerbated in the outsourcing context, such as the lack of communication,
misunderstanding of requirements, and
poor change management.
Although researchers have extensively examined the risks in IT outsourcing projects, their investigations
have been limited to a single perspective of either the client ’ s or the vendor ’ s.
For example, evidence shows that a
lack of technical expertise and inadequate vendor staffing are two critical risk factors from the perspective of
the client (Nakatsu & Iacovou, 2009 ).
Natovich ( 2003 ) also emphasized risk
factors that the client could face in IT
outsourcing situations, such as the lack
of vendor commitment and conflicts
with the vendor because of disagreements about the scope and definition
of contractual requirements. All of
these researchers have emphasized the
importance of the vendor ’ s ability and
commitment to project success. By contrast, Aundhe and Mathew ( 2009 ) identified risks from the perspective of the
vendor and categorized them into either
project or relationship dimensions; they
also specified how the ability of the client, the quality of the contract, and the
traits of the project influence project
risks. Taylor ( 2007 ) interviewed vendor
managers and indicated several clientrelated risk factors such as the lack
of ability and willingness to manage a
project and the lack of preparedness for
a new system. These studies revealed
the fact that the perception of risks varies among stakeholders.
Previous research has indicated a
gap in the expectations and perceptions
of project outcomes among multiple
stakeholders (Jiang, Klein, & Discenza,
2002a ). The gap leads to user dissatisfaction with the product or service of the
February/March 2016 ■ Project Management Journal ■ DOI: 10.1002/pmj 47
project. Different stakeholders may have
different opinions regarding potential
risk factors, and their opinion influences
risk control planning (Keil, Tiwana, &
Bush, 2002 ); therefore, an inconsistent
perception of risks has attracted numerous researchers’ attention and must be
examined. Reconciling stakeholder perceptions of project risks is an important
issue in IT literature (Keil et al., 2002 ;
Liu, Zhang, Keil, & Chen, 2010 ; Schmidt,
Lyytinen, Keil, & Cule, 2001 ). In one
study, a survey was conducted to identify risk factors from the perspectives of
senior executives (Liu et al., 2010 ), and
the results were compared with the findings in literature (Schmidt et al., 2001 ).
However, these results cannot be applied
to IT outsourcing projects, because the
stakeholders pursue their own interests
as dictated by agency theory. Since vendors pursue an object of project efficiency and clients consider objectives
of product scope and quality (Moynihan, 1996 ; Taylor, 2007 ), each will have
unique views of skill requirements, relationships to be built, and individuals to
be satisfied (Earl, 1996 ; Tafti, 2005 ).
Project Partnering
Agency theory suggests that both the
principal and agent are motivated by
self-interest and maximal profit, and the
agent may not act in the interests of the
principal (Levinthal, 1988 ). Compared
with in-house IT service providers, IT
outsourcing results in lower user satisfaction and lower quality of project
outcome because of conflicting goals
between clients (i.e., principals) and
IT vendors (agents) (Gorla & Somers,
2014 ). When the IT competence of clients is insufficient, they may face a
hidden characteristic problem before
entering into a contract, such as vendor selection. A contract often fails to
specify all contingencies and elaborate
all details because of bounded rationality, incomplete information, and uncertainty (Aubert et al., 2005 ). When an IT
outsourcing project is only a contractbased activity, a contract missing critical elements can be a crucial risk factor
in the IT outsourcing (Lee & Kim, 1998 ).
Research has indicated that project
planning and control have little contribution to the process performance of
projects with a high level of inherent
uncertainty (Jun, Qiuzhen, & Qingguo,
2011 ).
This study proposes project partnering as a tool to reduce inconsistent risk
perception between clients and vendors. Project partnering, in the information systems literature, is a concept that
emphasizes creating a cohesive team
with a single set of goals and established
procedures for collaboration (Jiang,
Klein, & Discenza, 2002b ). The concept
of project partnering is to overcome
the unique pursuits of each agent. An
effective partnership can achieve common ground and more readily avoid the
problems dictated by agency theory.
From this perspective, the management
goal is to enhance the positive effect of
stakeholders’ participation and behavior on mutual understanding and consensus and to establish trust and mutual
support during IS development. The
trust and mutual support reduce conflict
among project stakeholders and, thus,
enhance project performance ( Liu, Chiang, Yang, & Klein, 2011 ). Project partnering also suggests the combination
of skills, knowledge, and experience in
a project team that produces economic
value (Jiang, Klein, & Chen, 2006 ). The
management intervention strategy
designed on the basis of the project
partnering concept is to enhance collaboration among stakeholders, identify potential risks, and to contribute
optimal solutions and effective work
before the project commences. Through
project partnering, user–developer relationships and communication quality
can be considerably improved; this is
critical because poor communication
quality can reduce the effectiveness of
requirements elicitation (Jiang, Klein,
Van Slyke, & Cheney, 2003 ). Communicative quality (i.e., seeking consensus
and mutual understanding) is a crucial
mediator in the effect of risk management on project success (De Bakker,
Boonstra, & Wortmann, 2011 ). From
the risk management perspective, project partnering has been regarded as an
effective management strategy for mitigating critical user-related risks in IS
development projects (Liu, Yang, Klein,
& Chen, 2013 ).
Methodology
This study employed a variation of the
Delphi survey method developed by
Schmidt ( 1997 ). The Delphi survey
provides a statistical measurement
that enables comparing distinct perspectives. The Delphi method has been
used extensively in information systems
research to yield reliable risk rankings
(Schmidt et al., 2001 ).
Composition of the Panels
The panelists in this study were experienced IT project managers from organizations that have been involved in IT
outsourcing activities for several years.
The sampling frame was obtained from
members of the Project Management
Institute (PMI) and multiple organizations from Taiwan and Indonesia. Initially, a total of 62 project managers
agreed to participate in the first round:
41 on the client panel (28 from Indonesia and 13 from Taiwan) and 21 on
the vendor panel (10 from Indonesia
and 11 from Taiwan). Eventually, the
number of panelists was reduced to 46,
consisting of 26 client panelists (15 from
Indonesia and 11 from Taiwan) and 20
vendor panelists (9 from Indonesia and
11 from Taiwan). It was not necessary
for the two panels to be identical in
size (Schmidt et al., 2001 ). Table 1 lists
the demographic characteristics of the
sample; on average, the IT experience of
the panelists was eight years, and they
had managed at least two outsourced
IT projects. The panelists worked in different organizations in a wide range of
industries.

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