Preparing for utility computing: The role of IT architecture and relationship management by J. W. Ross G. Westerman In this paper we examine the likely impact of utility computing on information technology (IT) outsourcing. Drawing on a set of eleven outsourcing cases and on IT outsourcing literature, we identify four risks that lessen the potential benefits of IT outsourcing. We consider two approaches to outsourcing: selectively managing a network of outsourcing partners and managing large-scale exclusive partnerships. The firms in our sample introduced a number of popular relationship management practices in order to counter the risks of outsourcing. We describe their practices but then observe that, in addition to the capability of managing their vendor relationships, the firms’ ability to generate value from outsourcing depends on the maturity of their IT architectures. We discuss the implications of both vendor relationship management and architecture design capabilities as firms seek the benefits of utility computing, and conclude that both continue to play key roles. We close with some recommendations as to how firms can use relationships to build effective architectures and how an effective architecture built around standards-based technologies and business process components can enable a firm to capitalize on the strategic agility that utility computing offers. In recent years, outsourcing has become an impor- tant consideration in every organizationɅs informa- tion technology (IT) strategy-making process. Eco- nomic uncertainties and rapidly changing market conditions are driving firms to assess how they ap- ply knowledge, assets, and resources to create stra- tegic opportunities and respond to competitive threats. 1 Executives are being urged to combine in- ternal and external competencies to deliver new and improved services to customers. 2 They are being told that outsourcing, particularly offshore outsourcing, can reduce their costs significantly. 3 Recently, new technologies such as utility computing and its close relative, Web services, promise to reduce costs fur- ther, while simultaneously increasing each firmɅs IT agility. 4 Consequently, most experts anticipate that increas- ing numbers of firms will outsource increasing num- bers of services in the coming years. 2,5,6 Although the outcomes of most early IT outsourcing initiatives were disappointing, 7,8 recent research suggests that firms are improving their capabilities related to man- aging outsourcing relationships. 9 Despite the fact that firms continue to report difficulties with their outsourcing arrangements, 10 outsourcing has emerged as an important IT tool, with its own set of specialized management practices. As outsourcing is becoming more mainstream, new outsourcing models are emerging. For example, IT professionals in countries such as India and China are offering high quality, low cost IT outsourcing ser- vices. 3 Web services are promising to breathe new life into business process outsourcing. 11 Enterprise Copyright 2004 by International Business Machines Corpora- tion. Copying in printed form for private use is permitted with- out payment of royalty provided that (1) each reproduction is done without alteration and (2) the Journal reference and IBM copy- right notice are included on the first page. The title and abstract, but no other portions, of this paper may be copied or distributed royalty free without further permission by computer-based and other information-service systems. Permission to republish any other portion of this paper must be obtained from the Editor. IBM SYSTEMS JOURNAL, VOL 43, NO 1, 2004 0018-8670/04/$5.00 © 2004 IBM ROSS AND WESTERMAN 5