Journal of Information Technology Teaching Cases (2012) 2, 79–86

& 2012 JITTC Palgrave Macmillan All rights reserved 2043-8869/12 palgrave-journals.com/jittc/ Teaching case

Understanding the process of backsourcing: two cases of process and product backsourcing in Europe
Julia Kotlarsky1, Lars Bognar2
1 2

Aston Business School, Aston University, Birmingham, UK; Google Ireland Ltd., Dublin, Ireland

Correspondence: J Kotlarsky, Aston Business School, Aston University, Birmingham, B4 7ET, UK. Tel: þ 44 121 2043116; E-mail: j.kotlarsky@aston.ac.uk

Abstract Backsourcing, defined generally as bringing services outsourced to a third party back inhouse, is now a growing phenomenon. The decision to backsource has several significant implications for an organization, as it requires the organization to manage organizational change, reintegrate knowledge, and develop new capabilities and competences. Taking into account there is very limited empirical evidence of how to successfully accomplish the backsourcing process, two case studies included in this teaching case offer additional insight into the process of backsourcing. To prepare students for case analysis, this teaching case starts by describing the backsourcing phenomenon, followed by an overview of the backsourcing trend, and includes a brief review of the relevant literature that mainly focuses on backsourcing decisions and touches on critical success factors for implementing a backsourcing initiative. This is followed by two case studies that describe two essentially different examples of backsourcing. The first case study (MediaCorp) deals with the example of backsourcing IT hosting services, which is considered a business process, whereas the second case study (ITServCorp) talks about bringing an IT product development back in-house. However, regardless of the nature of the backsourced activity, analysis of these two cases allows deeper understanding of the process through which the backsourcing initiative has been implemented. Therefore, while each case can be used separately to analyze different aspects of backsourcing, they also can be analyzed in a comparative manner to better understand the process of backsourcing. Journal of Information Technology Teaching Cases (2012) 2, 79–86. doi:10.1057/jittc.2012.7; published online 23 October 2012 Keywords: backsourcing; backsourcing decision; backsourcing process; outsourcing; in-house Introduction he issue of backsourcing has become a hot topic, both politically and economically, since the global financial meltdown. Outsourcing work to lower cost countries became a popular resource for companies seeking to cut costs and free up resources. IT services in particular became a popular back-office function transferred overseas. As the trend for companies to outsource grew, many Multi National Enterprises began to question the wisdom and true cost-effectiveness of their decisions. Some companies have faced more problems than they anticipated, raising the real costs associated with outsourcing. Backsourcing, defined generally as bringing services outsourced to a third party back in-house, is now a growing

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phenomenon. Companies have learned important lessons from outsourcing mistakes and some have made the move to reverse their earlier direction. Some of the most highprofile backsourcing decisions include JP Morgan Chase (ended contract with IBM), Dell (backsourced customer support from India), Farmers Group (terminated contract with Integrated Systems Solutions), and Chase Manhattan (terminated outsourcing contact with Fiserv). Some companies cite breach of contract and others pay millions in cancellation fees to terminate early. But what factors have gone into the decision to backsource? This is one question presented in this case study about the backsourcing trend. While there is a growing

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body of literature regarding backsourcing decisions, what remains overlooked is what happens once the decision has been made – how do companies proceed to bring services back under their control? To answer these questions, we will look at two different companies: MediaCorp, a multinational CD/DVD manufacturer, and ITServiceCorp,1 an international IT services provider. Both companies made the decision to backsource services from India, but for very different reasons, and each faced different risks and challenges in the backsourcing process. The backsourcing trend Ever since outsourcing and offshoring became popular amongst multinationals and small and medium-sized enterprises, the number of cases where companies took outsourced services back in-house has increased steadily. This phenomenon is known as ‘backsourcing.’ Backourcing describes a process that can only follow after an outsourcing or offshoring decision is made and implemented. Outsourcing, as defined by Oshri et al. (2011), describes the ‘act of contracting with a third-party service provider for the management and completion of a certain amount of work’ with set time, costs, and levels of services. The same authors define offshoring as referring to either setting up a wholly owned subsidiary or contracting a service provider in another country. The important difference between offshoring and outsourcing is, therefore, the location of the service provider or subsidiary. Backsourcing may occur when an outsourcing or offshoring initiative is terminated by either the client or the vendor, or when the contractual end date has come. If the client company decides that from this point the best option is to recall the outsourced operations back in-house, then it can be referred to as backsourcing (Kern and Willcocks, 2001). A study by Deloitte Consulting reports that about 70% of all outsourcing clients have had negative experiences with outsourcing, and over 25% brought outsourced activities back in-house (Veltri et al., 2008). Dibbern et al. (2004) proposed that backsourcing will be the next big development in business trends and strategies. Companies that enter outsourcing agreements will typically face situations where they could prolong their existing vendor relationship, switch providers, or bring outsourced services back in-house once again. These situations come up when the original outsourcing contract is terminated or when the client wishes to terminate the agreement early. A classical example is JP Morgan Chase, who decided to end a 7-year, five billion dollar outsourcing contract with IBM after only 2 years (Overby, 2005). Subsequently, all outsourced services, data centers, help desks, and data and voice networks were taken back in-house and managed by internal company resources. The unstable world economy and market uncertainty have pressured companies to refrain from engaging in longterm outsourcing agreements. Furthermore, companies tend to choose smaller deal sizes and outsource less strategic activities in order to minimize the risk of failure and potential loss (Cohen and Ridder, 2010). A recent survey suggests that approximately 75% of all companies have had cases of backsourcing (Mucisko and Lum, 2005). For example, in 2004, JP Morgan Chase terminated a five billion

dollar contract with IBM over data centers, help desks, distributed computing, data and voice networks, and 4000 staff after only 21 months because of a change in the organizational structure at JP Morgan Chase and a perceived loss of control (McLaughlin and Peppard, 2006; Wong, 2008). After a merger with Bank One, the management decided to handle the technology infrastructure themselves in order to ensure long-term growth and success (Overby, 2005). Many of the affected JP Morgan employees had been taken over by IBM when IT services first were outsourced, but they returned to JP Morgan once the services were backsourced. This back-and-forth transition and lack of management continuity created an uncertain and unstable environment for the affected employees, who lost faith in and commitment to their employer. In this case, the low level of employee motivation was affected further by the announcement that the company would lay off 12,000 staff following the merger with Bank One (Overby, 2005). For JP Morgan Chase, the entire backsourcing endeavor resulted in substantial costs, including the initial outsourcing costs, premature contract termination, and restructuring and reinvesting in staff and hard- and software for the IT department. Similarly, Halifax Building Society cancelled a 10-year outsourcing contract with IBM, worth over 700,000 British pounds, for providing IT operational services (McLaughlin and Peppard, 2006). Again, the company cites structural change as the official reason for backsourcing, which resulted when Bank of Scotland merged with the Halifax Building Society (Veltri et al., 2008). From the day of contract formation, the outsourcing agreement had been viewed as one of Europe’s largest ever, yet it failed. The backsourcing process has not been described further in this case. Sainsburys cancelled a 10-year, almost two billion British pound contract with Accenture in 2005, after just 2 years, and decided to backsource its IT operations. Officially, both sides mutually agreed to terminate the contract and neither side initiated legal action. Six months later, all activities had switched back in-house successfully (Accenture, 2006). In 1996, Continental Airlines ended collaboration with its outsourcing partner, EDS, after 4 years of successful work together. Continental wanted to improve their reservation system to enable more efficient fleet capacity usage and better ticket pricing (Pearlson, 1996). Since EDS was not familiar with the air flight industry, nor with Continental customers, Continental decided it was preferable to run these IT developments in-house. Ultimately, Continental Airlines re-evaluated the strategic importance of the outsourced IT functions and managed to build up an innovative online business on its own that improved customer satisfaction and attracted new customers without the help of any third-party supplier (Veltri et al., 2008). Reasons for backsourcing So far, academic research on backsourcing has mainly focused on the factors that lead companies to opt for backsourcing. For example, Akoka and Comyn-Wattiau (2006) developed a framework for understanding backsourcing decisions by analyzing 13 backsourcing cases. Similarly, McLaughlin and Peppard (2006) examined nine backsourcing cases to propose an end-to-end model of

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issues and options for evaluating outsourcing decisions. Many more authors assessed backsourcing motives, such as Whitten and Leidner (2006), Veltri et al. (2008), and Wong (2008). Essentially, the main reasons for companies to backsource include high outsourcing cost, poor service quality, loss of control, changes in management, or changes in company strategies. One important aspect reported in numerous studies is that the reasons for outsourcing failure are often uncertain and hard to uncover (Veltri et al., 2008). Considering that the nature of a failure implies negative publicity for all the parties involved, it is understandable that only a few firms share honest justifications outside closed doors. Generally, authors differentiate among categories of reasons for companies choosing to backsource. Wong (2008) lays out nine factors that motivate backsourcing decisions: costs, service quality, loss of control, IT resource accessibility, changes in strategic directions, changes in IT role, changes in organizational structure, power and politics, and changes in vendor organization or strategy. Similarly, Martens and Teuteberg (2010) choose the same nine categories but place them into three major categories termed expectation gap, internal changes, and external changes. McLaughlin and Peppard (2006) differentiate between problems in the contract or failure in achieving objectives, a desire to regain control, and a change of business environment, technology, or management as reasons for companies to backsource. Since the structure presented by Veltri et al. (2008) provides the most complete and clear overview of the backsourcing reasons, it will be explained in more detail below. Veltri et al. (2008) define the three major categories of reasons for backsourcing as contract problems, opportunities from organizational changes, and opportunities from external environmental changes. Previous studies found cost considerations to be critical in backsourcing decisions (Lacity and Willcocks, 2000), and ‘the quality of the relationship and service and product quality are also’ fundamental. Both of these factors can be associated with contract problems (Veltri et al., 2008). Internal organizational changes provide potential strategic improvements to better reach customers. External environmental changes can be consequences of external business changes or pressure from outside (Veltri et al., 2008). Contract problems The costs involved with outsourcing initiatives tend to be substantially higher than planned because hidden costs tend to be overlooked and are hard to identify, as they grow over time (Raiborn et al., 2009). Furthermore, cost savings are often overestimated by the client company and tend to vanish eventually as the client adds outsourcing activities to the outsourcee and increase expectations (Fowler and Fox, 2006). Another important factor associated with contract problems is the gap between the received service levels and the expected service levels, which is referred to as poor service quality. Along with Veltri et al. (2008), poor service levels are typically perceived as a result of poor responsiveness, a lack of professionalism, and delays in service deliveries by the vendor. At this point, the outsourcing client has the option to backsource; however, as discovered

by Whitten and Leidner (2006), companies that backsource generally experience lower service levels and quality than companies that switch providers. A major factor critical in many backsourcing decisions, Veltri et al. (2008) discuss the loss of control of certain functions that were key in creating strategic value. Mostly, this involves Information Systems functions that are outsourced and later identified as a key contributor to gaining or maintaining a sustained competitive advantage. Outsourcing these types of functions in the mistaken belief that they lack strategic value occurs in about 25% of cases (McLaughlin and Peppard, 2006). With the merger of Bank One and JP Morgan Chase, as described above, in addition to perceiving new strategic opportunities, it was the management’s desire to regain control over all company functions that led the client to terminate the outsourcing arrangements with IBM and backsource all the services. The loss of control component causes a lock-in feeling, which may result from a know-how mismatch where the vendor ‘knows more’ than the outsourcer. Vice versa, the vendor might not be familiar enough with the outsourcer’s industry and to provide adequate services (Veltri et al., 2008). The above-mentioned example of Continental Airlines’ outsourcing arrangements with EDS is a good example demonstrating such a lack of understanding. Internally generated opportunities Changes in executive management within the outsourcing company are generally combined with shifts in the power distribution. When companies introduce new executives, these new members are three times more likely to provoke changes (Tushman and Romanelli, 1985). Most especially, new CIOs and CEOs often ‘reconsider the value being obtained from the IT outsourcing contract’ and might find a different strategic value of the outsourced activities and backsource accordingly (McLaughlin and Peppard, 2006). New management and other environmental changes can lead to a repositioning and restructuring of internal and external competencies by recognizing a new role for IS (Veltri et al., 2008). At JP Morgan Chase, for example, a new management team, including a new CIO, clearly influenced the decision to backsource services (McLaughlin and Peppard, 2006). Externally generated opportunities Most backsourcing companies report structural changes just before the backsourcing decision is made. These changes constitute external business changes and include mergers, divestures, and acquisitions (Veltri et al., 2008). The JP Morgan Chase merger with Bank One, and the Halifax Building Society’s merger with Bank of Scotland, are both examples of externally induced structural changes that led to backsourcing decisions. In the case of Bank One, the outsourcer had terminated their outsourcing relations with IBM in 2002, and by backsourcing several IT functions, they had set their IT strategy accordingly, which influenced JP Morgan Chase’s decision to backsource IT functions from IBM after the merger (Veltri et al., 2008). Many outsourcers have multiple reasons to backsource. It is impossible to state which factor is the most influential or which factors are more important than others

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(Veltri et al., 2008). The reasons for companies to backsource can be explained utilizing the seven factors mentioned above; however, the process of actually arriving at that decision has not yet been explained thoroughly, nor was the backsourcing process itself explained in terms of reintegrating outsourced activities. The decision to backsource has several significant implications for an organization, as it requires the organization to manage organizational change, reintegrate knowledge, and develop new capabilities and competences. Taking into account there is very limited empirical evidence on how to successfully accomplish the backsourcing process (e.g., Bhagwatwar et al., 2011), two case studies included in this teaching case offer additional insight into the process of backsourcing, focusing on backsourcing of a process (MediaCorp case) and backsourcing of a product development project (ITServCorp case). By studying the approaches taken to the backsourcing process by these two companies, one can evaluate and analyze both the risks and success factors inherent in the process itself. Case studies Introduction to case studies The following case studies describe two essentially different examples of backsourcing. The first case study (MediaCorp) deals with the example of backsourcing IT hosting services, which is considered a business process, whereas the second case study (ITServCorp) talks about bringing an IT product development back in-house. However, regardless of the nature of the backsourced activity, these two cases allow deeper understanding of the process through which the backsourcing initiative has been implemented. Therefore, while each case can be used separately to analyze different aspects of backsourcing, they can be analyzed in a comparative manner to better understand the process of backsourcing. Case study of MediaCorp Background of the company MediaCorp is a multinational CD&DVD manufacturing company headquartered in Western Europe with about 8000 employees. Throughout the last decade, the industry has suffered from market shrinkages. The company has enacted multiple cost-saving programs in order to remain profitable in the market. MediaCorp is part of a larger group of companies that have been treated increasingly as independently operating companies. Business relations within the company group were historically strong, but not uncommonly, they competed with external companies on requests for proposals for service deals within the company group. MediaCorp was supported by their affiliate company, TechCorp, in some IT service areas. Among other things, TechCorp hosted the central database and provided all-around SAP hosting services. In early 2000, after many years in business with TechCorp, one 3-year outsourcing contract was about to run out. In the past, it had been renewed routinely, without much analysis or modification. But MediaCorp decided

to analyze the vendor market before moving forward. The yearly costs for the IT services TechCorp provided accounted for a high, six-figure cost for MediaCorp. A market analysis showed that MediaCorp could achieve substantial cost savings if it switched to another vendor. The head of IT explained that a well-known, highly reputed vendor offered to take over IT hosting services for about one-third less than MediaCorp’s affiliate company (TechCorp). As a result of this market analysis, MediaCorp CEO hired an outsourcing consultancy to advise decision makers what they should consider contractually when outsourcing to another vendor. According to the CIO, during one of the meetings where sourcing strategies for SAP hosting services were discussed, a consultant commented that, ‘Of course the do-it-yourself option is the cheapest one, plus you seem to have the skills and infrastructure to do it, but apparently that is not an option in your scope.’ A first analysis estimated that backsourcing would be cheaper than changing vendors. It would be a risky option though, considering that the entire business depended on a functional SAP environment. Delays and interruptions in service would be disastrous for business. As the backsourcing project manager recalls, TechCorp did not provide an appealing enough price reduction for the services provided. This figured prominently into the reasons why MediaCorp did not renew the contract. MediaCorp strongly considered the option of changing vendors, and decision makers thoroughly discussed and reviewed proposals they received from interested third parties. However, after IT managers developed a scenario matrix to help internal stakeholders analyze the benefits and risks of backsourcing versus other alternatives, it was clear that the advantage lie in building their own data center and employing internal staff to handle SAP hosting. This type of analysis assured company stakeholders that backsourcing was not only feasible but beneficial. As one staff member said, ‘We knew we could do it.’

MediaCorp backsourcing project The backsourcing process starts once the decision is made. The reasons for the backsourcing decision were multifaceted in this case. Infrastructural requirements already existed, as MediaCorp ran and maintained servers as an additional service to external companies. Once a complete IT environment had been build up internally, updates and system changes could be performed in-house for a fraction of the cost charged by a vendor company. As one IT manager explains, ‘You have to be prepared for increasing costs [from third parties] due to release updates, maintaining costs, and an overall increasing usage of the bespoken systems.’ The previous vendor, TechCorp, would have charged for every change and increase in work; a release update would have taken multiple weeks and potentially thousands of euros. The management at MediaCorp wanted to be flexible, independent, and have the ability to control their own IT hosting. Like most business decisions in times of market shrinkages, the decision to backsource was primarily driven by costs. As there were no quality issues in the services provided by TechCorp, perceived cost

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reductions played an even more vital role in selecting the backsourcing course as the right sourcing option. One issue to come up was MediaCorp’s ability to maintain current staffing levels and labor costs with the backsourcing option. One of the project team members recalls the challenge involved in reassuring the senior management that it could be done without further staff additions. MediaCorp had an advantage in this area in that the IT department was organized within a project environment, and collectively, staff had ample time to dedicate to taking on the new SAP hosting services project. The actual project began in August 2006. Paul Davis,2 an experienced project manager from Siemens involved in multiple SAP migration projects, had been contracted as the backsourcing project manager. The project team included MediaCorp IT managers, project management assistants, and dedicated staff; an in-house IT manager from the American plant, which already had implemented its own database; and two employees from TechCorp to help migrate services and train staff. MediaCorp IT staff was confident that it had the resources and skills needed to take on the additional day-to-day workload, in addition to migrating SAP services from TechCorp. Pieter, the head of IT, explained that his departmental staff had been fighting to get SAP hosting back in-house, because they were keen to learn and to diversify their workload. Thus, the IT staff members were extremely motivated in their approach to this project, striving to provide better and more costeffective service than their previous supplier. One team member stated that even though they faced a lot of extra hours, including weekends, motivation was high at all times throughout the project. The IT department became the biggest backsourcing champion within the company. To simplify migration from TechCorp back to MediaCorp, Paul opted for the same HP hardware as TechCorp was using. The company contracted an HP consultant to help build up the database and to give advice on the technical side. MediaCorp employees had never built a database of this scale and importance. According to the technical lead, every data center has particular processes to ensure a stable, functioning Enterprise Resource Planning (ERP) system; understanding and copying each of the thousands of jobs that run every hour was one of the major challenges his team faced. It required support from the vendor and a high willingness and retentiveness by the in-house staff to build up the database. In December 2006, the hardware environment was finally ready. Extensive testing was conducted to ensure a smooth migration phase. Throughout the backsourcing project, only a few TechCorp people were present and approachable. One MediaCorp IT staff member recalls, ‘You could feel that they were unhappy and unwilling to transfer knowledge and documentation back to us, especially knowing that their job will probably not exist afterwards.’ The vendor was not contractually obliged to be actively involved in work transfer processes. ‘They are doing just as much as they absolutely have to, more forced than willing though,’ was one of the comments frequently heard throughout the backsourcing team. Once a complete IT environment had been build up internally, updates and system changes could be performed in-house for only a fraction of the charges of a vendor

company. In the past, MediaCorp was charged for the daily operation of the database, testing and implementation of new releases, and each additional user. Pieter, the head of IT, reported that the outcome of the project was even more successful than initially estimated: ‘We didn’t have to hire new people, we didn’t have to buy muchynew hardware, and the size of the systems grew drastically with all the additional sites being taken on.’ Furthermore, the strategic value of providing SAP hosting in-house is emergent. As ERP systems are becoming increasingly important and complex, it can be a distinguisher to competition, especially when it comes to the value chain in providing goods and services, one of the IT staff members acknowledged. SAP hosting is a 24/7 job with an increasing user base, connecting more and more plants to the database at MediaCorp headquarters. The SAP hosting team, which consists of only three employees, is now successfully hosting SAP systems in many other plants around the world. While the original intention was to provide these services only to European sites, this unexpected expansion in services is another reason why the initial backsourcing decision paid off more than the company anticipated. The IT manager sets forth the three requisite conditions that need to be in place once a backsourcing decision has been made: Firstly, a technical in-house team has to be skilled and ready to take on the challenge; secondly, you should secure such transitions with contracts as soon as possible to ensure commitment; and thirdly, systems have to be set in good and clean conditions before migration. Taking over chaos is never a pleasure! Another factor pointed out by the project manager was MediaCorp’ close monitoring of all involved employees during the transition phase. Monitoring and reporting helped mitigate the potential for knowledge loss from reluctant or less than enthusiastic TechCorp employees. The backsourcing project successfully concluded in April 2007. In this particular case, MediaCorp continued to maintain business relationships with its affiliate company TechCorp who still provide some IT services to MediaCorp, which stresses the importance of keeping up a positive, communicative dialogue with service providers, even after a terminated contract. Case study of ITServCorp Background of the company ITServCorp is an international IT services provider with headquarters in Western Europe. It is a medium-sized firm with about 1500 employees and yearly revenues of about 200 million euros. The company is part of a large company group that, in turn, is part of a large corporation with dozens of smaller companies. ITServCorp offers consulting, conception, development, and implementation of IT systems of any scale. It has a strong network of freelancers and suppliers, which gives them a flexible position in a rather unpredictable and fluctuating market. The long-term goal of the company is to become the third largest provider

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of IT services in the European market. In the years prior to this investigative sourcing case, the company experienced a modest but steady growth in revenues and number of employees, but the top management still sought out opportunities to grow further and reduce costs. The economic crisis was not yet in sight. In 2006, the lure of outsourcing some IT activities to India was very strong. ITServCorp already had some experience in outsourcing to China and Malaysia, but the perceived cost benefits in India where overwhelming. ITServCorp CEO was reminded frequently of the cost advantages of offshoring to India during management meetings with other chief executives from affiliate companies, who were doing so successfully. As a result, ITServCorp was looking to start a business relationship with an offshoring partner in India. Many IT development projects were at stake. Supplier selection started in early 2007, comparing ten potential outsourcers that were eventually narrowed down to two. For the winner it meant a long-term partnership with an extensive service-level agreement (SLA) in multiple fields of work and for many years. Among others, the contract contained services in system development, application management, and infrastructure management. In the end, IndianITCorp with headquarters in Bangalore, made the best offer and got the deal. One team lead recalls that the decision was taken by the top management with little involvement from other employees. One of the outsourced activities was the product development of a particular scheduling tool. The tool helped businesses link different system platforms with each other in synchronizing job schedules. It was designed to run on mainframe computers, and the aim of the new development was to create a version that would run on Windows. The complex API (application programming interface) software had been a highly successful product, which ITServCorp sold and had used themselves for over two decades; yet, the new Windows version would be extremely complex to develop. The project manager, Jens Kastner, stressed that in addition to modernizing the program to function on new platforms, the new version would free ITServCorp from paying thousands of euros in monthly mainframe fees. All management activities took place at ITServCorp headquarters, together with IndianITCorp employees. The implementation phase would be conducted in India. Early in the project, ITServCorp employees started to struggle with the IndianITCorp performance. Kastner describes the situation, stating, ‘It was difficult to get them to understand the requirements, despite detailed descriptions and workshops.’ In addition, punctuality and accuracy were poor. Similar issues soon were discovered in the other services that had been contracted in the SLA. Fortunately, ITServCorp had set up the development environment inhouse, which allowed for close monitoring of IndianITCorp working progress. ITServCorp had clear evidence for the severe quality issues, and in consequence, ITServCorp cancelled the entire contract and sued IndianITCorp for compensation for damages. This process took several months, and thus ITServCorp started looking for a solution to this problem and evaluated its sourcing options. Team members sketched a modified business case from the outsourcing disaster and found that the complex API software

project was still profitable. This business case served as the basis for future decision making. Three main options were available: choose another Indian vendor, using a domestic vendor in the home country, or bringing outsourced services back in-house. Since the difficulties they had experienced were partly referable to the offshore location, choosing another Indian vendor was considered to be equally difficult, and team members knew these types of problems were hard to manage from a distance. Using a domestic supplier in the home country would certainly ease some of the problems they had experienced, but as with the India option, it would take weeks for a new supplier to understand the complex mainframe programming language and project specifications. Backsourcing would require dozens of employees to be fully available for the project, and the company would not obtain the cost benefits originally projected. Kastner remembers the urgency and motivation of everyone on the team to continue with the project. After careful analysis of all of the options, the company decided to opt for backsourcing the product development based on the complex API software. ITServCorp backsourcing project Looking at the involved costs, risks, and benefits for each option, the interview participants agreed that backsourcing was the best compromise. During the sourcing selection process, ITServCorp management’s main concern was how to avoid the same problems arising again. One team lead said, ‘I believe there were some extraordinarily capable people at IndianITCorp, on average below 25 years old, skilled and with a good grasp of the technical specifications.’ However, implementing ITServCorp’s complex development requirements among a team of 40 people, many with little experience, and working toward creating a highly complex product required superior organizational skills, which was simply non-existent with their former supplier. ITServCorp management did not believe that another supplier would be able to cope with this problem, especially an Indian supplier. Despite the relatively high costs of backsourcing program development, many ITServCorp employees were already familiar with the scheduling tool, and little further training would be required. This was a major factor in rejecting the option to use a domestic supplier as well. Any outside service supplier would still need time and training to understand the scheduling tool and its coding. The top management was also concerned with control; they wanted to have the ability to steer the project, and in-house development offered the highest controllability. The backsourcing team was led by the same managers responsible for the initial outsourcing project. However, ITServCorp was facing personnel issues by this time, because they needed up to 25 developers and programmers to effect a timely and successful result. Fortunately, another company department, situated in a different location in the home country of ITServCorp, specialized in similar type of product development and had employees available to help out. However, they lacked organization skills, and the number of available employees still was insufficient to take over this project.

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As the decision to backsource gained momentum, the global financial crisis set in. ITServCorp was presented with a sizable pool of skilled and experienced external specialists suddenly available in the labor market. Thus, project management decided to add freelancers to their resource pool and located the entire team at their corporate headquarters for the ensuing 3 months. IndianITCorp was also involved in the backsourcing process. After cancellation of the original contract, a backsourcing agreement had been established, outlining the time span and scope of returning and supporting the development work. Onsite employees from IndianITCorp, who were considered the bridgehead of the former project, were suddenly stuck in a truly peculiar situation. They were trying to transfer their knowledge and development documentation back to ITServCorp as part of the backsourcing contract, but also trying to save face, as one IT manager recalls. However, in the course of the lawsuits, the quality of their work was repeatedly shown to be substandard, and IndianITCorp employees at the ITServCorp backsourcing site were no longer respected in their own country or company. They did not know whether they would have a job once they returned home. This resulted in severe communication problems within the backsourcing project. To make matters worse, IndianITCorp hit the headlines by being involved in a severe fraud scandal. However, they were still legally obliged to ‘hand back’ all development work performed and standby for further inquiries for two additional months. The collaboration between both companies ended abruptly following this period. As one ITServCorp team lead remarks, this did not turn out to be much of a problem since ‘there was not much knowledge to be transferred anyways.’ Kastner, the backsourcing project manager, speaking about the quality of work by IndianITCorp, stated, ‘We got a patchwork back, which we had to renovate painfully, piece after piece.’ Not much of the material delivered could be utilized during the backsourcing effort. This required team members to work long hours and during weekends to cope with the workload. One team lead felt that the entire team build up a remarkable spirit and ambition to succeed throughout this period. The top management of ITServCorp took many opportunities to stress that the success of the project was extremely important for everyone involved. Potential clients were buying alternate products, and the monthly costs of using the mainframe to run the current complex API software ran about 10,000 euros per month. ‘A failure of this project would have resulted in frustrated employees, working with an alternative product with less functionality, and severe financial damage,’ Kastner stated. Overall motivation was good, and one team member thought that seeing progress in development after a short time period and actually talking about those immediate successes was very motivating. The project of developing the complex API software was completed successfully in-house by 2009. The company incurred development costs of about six million euros until the first release was brought to market. The initial estimated costs of two to three million euros by outsourcing product development were thus doubled or tripled. Due to the contract breach, IndianITCorp had received no money from ITServCorp, and thus there were no outlays for the

initial outsourcing decision. It is clear in this case that development costs played less of a role in the decision to backsource than they did in the initial outsourcing decision. ITServCorp is now extremely cautious when it comes to outsourcing. Offshoring IT activities to locations like India, where labor costs are low and skills are available, takes good management skills and organization in order to benefit from such advantages. Nevertheless, ITServCorp still counts many offshore partners in the Far East, such as China and Malaysia. Finally, the project manager attributes the great success of this project to securing the backsourcing process contractually, setting up in-house development environments for close supervision, and attracting knowledgeable and motivated staff for a backsourcing challenge. Questions for discussion 1. Analyze (and compare) backsourcing decisions at MediaCorp and ITServCorp. 2. What is involved in the process of backsourcing? How does a company manage the process of backsourcing? a. Consider backsourcing process from the lifecycle perspective. b. Consider backsourcing process from change management perspective. 3. Which critical success factors can be associated with backsourcing at MediaCorp and ITServCorp? Try to identify and explain similarities and differences between the two cases. Notes
1 We use MediaCorp and ITServiceCorp (and later TechCorp and IndianITCorp for their vendors, respectively) to preserve confidentiality of the real companies based on which these cases are written. 2 All names in this case study have been anonymized to protect identity.

References
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About the authors Julia Kotlarsky is Professor of Technology and Global Sourcing at Aston Business School, UK. Her research and consultancy work revolves around outsourcing and offshoring of services, globally distributed teams, knowledge and innovation. Kotlarsky is a regular presenter in international conferences and conventions. She has published her work in numerous academic and professional journals including The Wall Street Journal, Communications of the ACM, European Journal of Information Systems, Journal of Information Technology, Journal of Strategic Information Systems, Information & Management, Journal of Information Systems, MISQ Executive, Cutter Consortium and others. Kotlarsky has published seven books, among them ‘Knowledge Processes in Globally Distributed Contexts’ and ‘The Handbook of Global Outsourcing and Offshoring.’ She is the co-founder of the annual Global Sourcing Workshop (www.globalsourcing.org.uk). Her personal website is www .juliakotlarsky.com. Lars Bognar graduated from Warwick University in 2011 with Distinction in MSc Information Systems and Management. In his dissertation, he examined the process of backsourcing in a case study approach and proposed an applicable backsourcing activity guide. Currently, Bognar is working for Google Ireland in Online Marketing.