The Outsourcing Dilemma - The Search for Competitiveness.pdf

the outsourcing alternative 29
profits from the new company. Thus the service provider can fully exploit its systems
development potential, with the client sharing the development costs of new software
products. At the same time, the joint venture benefits from the client’s specialized knowledge
of their marketplace. Some joint venture products and services have been developed
over time from opportunities that have arisen out of full outsourcing arrangements
already in place.
Equity stakes
Some outsourcing relationships have been strengthened by
either the client or the provider taking an equity stake in
the other. Where it is the provider taking this step, it may
be seen as a demonstration of their commitment to the
best interests of their client. Where it is the client taking
the equity stake in the provider on the other hand, it is
often seen as a form of security. This was the assumption
made by the outsourcing market at large when Swiss Bank
signed an outsourcing deal with a provider, Perot Systems,
taking a 24 per cent stake in Perot. However, the deal also
demonstrated that the bank must have been impressed by
some outsourcing
relationships have
been strengthened
by either the client
or the provider
taking an equity
stake in the other
what Perot had to offer. A similar event occurred in September 1997 when the
Commonwealth Bank and EDS Australia signed what was then claimed to be the world’s
largest financial services outsourcing IT contract. The deal was worth $5 billion over ten
years and involved the Commonwealth Bank taking a $240 million, 35 per cent share in
EDS Australia.
The development of outsourcing
In the 1990s, some management theorists argued that the
important factor in maintaining competitiveness was differentiating
between core and non-core functions and
then transferring all non-core functions to a specialist in
that function. This was not a particularly new idea but it
was certainly one ‘whose time had come’. As discussions
on the subject increased and evolved, the concept of the
virtual organization was born. The theory behind the virtual
organization is that any function that is not core
should be transferred to an external specialist in that function.
In addition, however, it argues that there are bound
the theory behind the
virtual organization is
that any function that
is not core should be
transferred to an
external specialist in
that function