Changing IT Providers in Public Sector Outsourcing: Managing the Loss of Experiential Knowledge Maria Alaranta Sirkka L. Jarvenpaa Helsinki University of Technology University of Texas/Helsinki Univ of Technology Maria.Alaranta@tkk.fi Sirkka.Jarvenpaa@mccombs.utexas.edu Abstract Although outsourcing of IT services has become a standard business practice in both the private and public sector, little is known how clients manage the change over from an incumbent, or prior vendor, to a new vendor. The current literature touts how the risks of knowledge loss and disruption in operations prevent many client firms from switching to a new vendor even in the case of less than satisfactory performance. We report on a longitudinal, descriptive case with a public organization in Finland that involves the process of switching a long- term IT vendor to a new IT vendor. The switching was motivated not by unsatisfactory performance but by the public procurement process that requires public tendering of outsourced services every four to six years. The case is significant as it allows us to advance insight how in fact the client and the new vendor manage the loss of learning by doing-knowledge (experiential knowledge) that the client no longer has. The case suggests that several elements were especially critical in facilitating the transfer or learning including the lost experiential knowledge: modularization of work, use of external sources, joint client-vendor collaboration, and personal identities at work. These elements allowed the inter- organizational project teams to minimize the disruptions in IT services to the client's user communities. The case findings provide insight to managing transfer of learning in inter-organizational groups in ad hoc dynamic relationships. Keywords: IT outsourcing, knowledge transfer, IT outsourcing, switching costs 1. Introduction In many public and private sector organizations, information technology (IT) outsourcing has become critical for achieving lower operating costs and high quality IT services as well as greater strategic flexibility in dynamic environments [1]. Similar to [2, p.289], we define IT services outsourcing as “turning over to a vendor some or all of the IS [information systems] functions.” These functions may include network management, help desk, software development and maintenance. Although outsourcing has enabled client organizations to reap many benefits, an ever growing question is the loss of critical internal capabilities and skills at the client organizations and the ramifications of such loss [3]. This question is pertinent to relationships of all degrees of outsourcing from total outsourcing to selective sourcing [3-4]. The extant literature argues that one key ramification is the increased dependence on the provider [5]. The dependence reduces the power of the client and can negatively impact on the overall goals of outsourcing including jeopardizing the client’s strategic flexibility, increasing fees and costs, and declining service quality [6]. A second ramification of loss of knowledge is that the transition to a new vendor is highly risky. The challenges and costs of switching vendors [7-8] and a phenomenon related to it, namely backsourcing, have gained more attention in the information systems (IS) literature. However, we know virtually nothing about what type of mechanisms best facilitate the switching of vendors. Critical to the success is the transfer of the knowledge of the client’s environment and processes. Poor knowledge transfer may result in disruptions of operations, lowered service levels, and frustrations and dissatisfaction among the client’s and the new vendor’s employees. Generally speaking, knowledge transfer refers to the “recipient” group to identify and reuse relevant knowledge residing in a “source” group either in the same or different organization [9]. This paper explores the question of how knowledge transfer takes place when the client is changing a vendor in an outsourcing relationship. The context of our study is a switch of a vendor providing IT infrastructure services to a large public 1 Proceedings of the 43rd Hawaii International Conference on System Sciences - 2010 978-0-7695-3869-3/10 $26.00 © 2010 IEEE