Tareas

A Decision-Making Framework for IT Outsourcing using the Analytic
Hierarchy Process
Vivek Pandey and Veena Bansal∗
October 14, 2003
• Framing the appropriate contract

Abstract Information Technology Outsourcing (ITO)
has generated considerable research interest since the historic Eastman Kodak deals of 1989. In this paper, a
model has been developed for making the ITO decision
based onthe Analytic Hierarchy Process (AHP). Two hierarchies have been developed - one for making a choice
of activities to outsource and another to choose the appropriate outsourcing methodology. The model has been
tested by applying it to an outsourcing decision made by
a leading locomotive company of India. Keywords Outsourcing activity; Outsourcing methodology; AHP technique.

1

There arecertain distinctive characteristics of IT that set
it apart from most other business processes [7]. Consequently, the issues of vendor selection and contract management also take on new dimensions in the context of
IT.
A generic model based on AHP [8] for making the ITO
decision has been proposed [9] consisting of three levels.
The Analytic Hierarchy Process (AHP) enables the decision maker toexpress his qualitative judgments in a
quantitative format.
In this paper, we present a new model based on AHP
for making the ITO decision. The model consists of two
parts - one to decide the activities, which a company
should outsource, and the other to decide the outsourcing methodology (vendors and contracts) to adopt. The
model has been validated through its application to theoutsourcing decision of a leading locomotive company of
India.
We present our model in the next section followed by its
verification in the section 3. The conclusions are presented in section 4.

INTRODUCTION

Since the Eastman Kodak deals of 1989, Information
Technology Outsourcing (ITO) has received considerable
attention from the researchers. In the 1980s and early
1990s, the companies, lackingin-house IT expertise and
technology, usually outsourced their IT activities. However of late, the companies with strong IT capabilities,
such as IBM, Microsoft and SUN, are also outsourcing
some of their IT functions. As a result, they are able
to focus on their core-activities. IT outsourcing resulted
in cost-reduction owing apparently to the economies-ofscale. Lately, outsourcing is beingdone for business impact and for commercial exploitation [3, 7].
An outsourcing decision making process starts by an assessment of the in-house IT capabilities. Analytic hierarchy process has been applied for determining key capabilities of a firm [6]. Based on this assessment, the management has to decide what activities to outsource out of
all the activities that can potentially be outsourced.Once the choice of activities to be outsourced has been
made, the next step is to select an appropriate methodology for outsourcing them. The issues involved in deciding
the outsourcing strategy of a company are two-fold.

2
2.1

THE DECISION
MODEL

MAKING

Deciding the activities to be outsourced

We suggest a set of three factors for selecting activities for
outsourcing from agroup. These factors are criticality,
stability and simplicity. These three factors cover every
aspect of IT outsourcing. The criticality captures importance of an activity to business positioning and importance of an activity to business process. In other words,
criticality includes strategic importance of an activity as
well as its importance to the business processes in general. Thecomplexity takes care of the capabilities of the
firm. Simplicity (or complexity) is a relative term and
depending on the capabilities of a firm, an activity gets
rated on a scale of 1 (simple) to 9 (complex). We use a
scale of 1 to 9 in this paper that was originally proposed

• Selecting the appropriate vendor
∗ Authors are with Department of Industrial and Management Engineering, Indian Institute...