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Processual View of Managing Change Related to Offshore IT Outsourcing Implementation
2008 Annual Meeting of the Academy of Management,
Anaheim, CA
T.R. Ramanathan, DBANewcastle Business School
Northumbria University
August 8-13, 2008
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Agenda
Introduction
Theoretical Perspective
Methodology
Findings
Conclusion
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Introduction
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Business Problem and Strategy
Large pharma business environment has changed
Drug development costs have increased ~3.5 times to $802M in 15 years (DiMasi, Hansen & Grabowski, 2003)
Declining R&D productivity - from 53 new drugs in 1996 to 17 in 2002 (WSJ, 2004)
Blockbuster business model is expected to deliver just 5% return on investment, lower than the industry’s risk-adjusted cost of capital (Gilbert, Henske & Singh, 2003)
Two main challenges for generating growth
Controlling costs
Improving R&D productivity
Various change initiatives to address these issues
Companies recognize offshore outsourcing as a key trend in IT
PharmaCom (pseudonym), a global company, initiated a company-wide offshore initiative in 2003 targeting the IT departments of the different business units
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Research Question and Study Propositions
How do IT organizations manage change associated with offshore outsourcing of information technology services, and what lessons can be learned from their experiences?
a) To explore the environmental forces (internal and external) that either foster or hinder the adoption and use of offshore outsourcing
b) To identify the organisational factors that either contribute to or prevent successful change management
c) To understand the effects associated with offshore outsourcing, as perceived by the organisational members involved in this change
d) To contribute to a better understanding of the problems and possible solutions related to managing change for offshore outsourcing with a view to improve professional practice
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Theoretical Perspective
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Social Systems Theory
Open systems view of organization (Scott, 1992) Organization is in constant interaction with the environment, processing inputs into
outputs
System maintains itself through a process of exchange with its environment
Organizational survival depends on being able to adapt to the environment
Notion that there is no “one best way” to organize is central to this approach
In the open systems view, organizational change is A rational formulation of long-term goals based on a strategic analysis of the
environment
Used to propel growth and development
Something human agents are able to bring about in a predictable and controlled manner
A process that unfolds over time
One needs to look at both inside and outside the system to understand the process of change
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Theoretical Framework
The processual approach (Dawson, 2003) is a useful method for explaining this organizational phenomenon
Represents movement over time from present to future state of organization
It deals with the scale or scope of change
Generic process model proposed to understand the change process
It is based on the significance of four components (Context, Diagnosis & Planning, Implementation, and Institutionalization)
It enables data organization and empirical analysis of the characteristics of the change process components
Used only as a starting point for the inquiry
Context:External FactorsInternal Factors
Diagnosis& Planning
Implementation Institutionalization
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Methodology
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Research Methodology
Research Strategy Qualitative Case Study Multiple Case Design (replication logic)
Data Collection Semi-structured Interviews (taped and transcribed) Direct Observation (recorded as field notes) Document Analysis
Unit of Analysis 3 IT Departments of PharmaCom (R&D, Sales & Marketing, Corporate) 3 embedded levels analyzed within each case: Sr. Managers (5), Middle
Managers (5) and Non-Managerial Employees (11)
Purposive Sampling Case organizations, Study Participants
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Research Methodology contd.
Analysis Strategy Template Analysis (King,1998)
Combines deductive and inductive approaches A priori template of codes is first derived based on literature Template is subsequently modified as analysis proceeds Ensures critical issues are covered in the analysis
Coding Tool: EZ-Text Software Within-Case Analysis (Miles & Huberman, 1994) Cross-Case Synthesis (Yin, 2003)
Validity and Reliability Multiple Cases Analytical Generalization (Yin, 2003)
Results generalized to broader theory Data Triangulation, Peer Consultations Case Study Protocol, Case Study Database
Ethical Considerations Informed Consent Pseudonyms used for case organisations and the study participants Non-release of data that may potentially cause harm to participants
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Findings
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Context
Interviewee Perspectives [The pharma] Industry is under economic and financial pressures… [It is driven by the] Lack of internal resources to complete the tasks, high costs
associated with [local] contractors, budget constraints together with the demand for increased productivity, and the need to disengage from low-value tasks such as maintenance and monitoring…
[It is driven by a] Decrease in willingness to spend on technology…
Category Change Process Components Case 1 Case 2 Case 3 External Forces:
Economic Political/Legal Technology
Internal Forces: Leadership
CONTEXT
Resources
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Diagnosis & Planning
Interviewee Perspectives …you need strong leadership and vision to implement changes of this kind. …we should have a clear, long-term oriented offshore strategy. Our ability to get our internal business partners ready for this change is also critical… We have created a [Change Management Team]...if [senior managers of the IT
departments] are on board as evangelists, there is a better chance of success.
Category Change Process Components Case 1 Case 2 Case 3 Diagnosis of the Need for Change:
Establish a sense of urgency Develop a vision for change Data gathering and analysis
Strategy for Change Change Implementation Planning:
Change management team Benefit identification and delivery
Stakeholder management Resource allocation Education and training Feedback mechanisms Vendor selection and sourcing
DIAGNOSIS AND
PLANNING
Performance measurement
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Implementation
Interviewee Perspectives A continuous focus on communication [is needed]… …people need time to work through the emotions [i.e. transition] required from this
change. It is better to start small [i.e. pilot projects] and then move on to bigger projects so that
the organization gets assimilated successfully. Resistance should be expected and addressed… …offshoring is all about change in culture.
Category Change Process Components Case 1 Case 2 Case 3 Communicate the vision Implementation approach
Transition management Pilot projects IT operations Resistance management
IMPLEMENTATION
Organisational culture
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Institutionalization
Interviewee Perspectives …unclear roles and responsibilities, unclear statement of work, and too much
dependence on the [offshore vendor’s] onsite coordinator. People have gained new skills (e.g. vendor management)…have more interesting
jobs…those who cannot reschool themselves into the more business-facing roles, will have a tough time being successful in the company.
…a lot of learning in the mid-term…i.e. how to better use operational processes and procedures to ensure that the changes really do deliver on the cost savings.
Change management ends when the group [i.e. internal staff and offshore personnel] works as a cohesive unit…
Category Change Process Components Case 1 Case 2 Case 3 Job roles and organisational design
Rewards and recognition Organisational learning
INSTITUTIONALI
-SATION
Sustaining the change
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Conclusion
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Summary and Study Limitations
Summary Adopting a processual view helped to examine the influence of the company’s history and internal
and external environments on the events and activities that led to offshoring Combination of internal and external pressures for change created an environment receptive to the
adoption and use of offshoring– Internal context, especially resource constraints, provided an important incentive to support the
adoption of offshoring– Further study is needed of the internal characteristics motivating change in organizations
Several organizational factors in combination are necessary for positive outcomes with offshoring– Success depends on change strategy adequately addressing these factors– Taking these factors into account during planning helps to minimize employee resistance
To be successful, senior management must make every effort to maintain high employee morale during offshoring
With services globalization emerging as an inevitable trend in today’s world economy, effective change management can positively impact the firm’s profitability and shareholder value
Limitations Results are informed by a small sample that was purposively chosen The findings represent only one pharma company and may not be generalized across the pharma
industry
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What Lessons can be Learned?
Process Model of Offshore Outsourcing Implementation A way of conceptualising the change process related to offshore outsourcing implementation Model represents what employees and the management perceived how the change related to
offshoring was managed This model is similar to the generic process model of change shown earlier
– Difference is in the emphasis on corporate vision and organisation in the proposed model– Corporate vision appeared to be a key feature because it allowed the organisation to adapt to
dramatic changes in contextual conditions– Another feature is the alignment of the organisation with the corporate vision - the top
management leveraged the vision as a tool to align the organisation with the corporate goals
External
Forces
Internal
Forces
Planning &
Design
Context
Diagnosis & Planning Implementation
Diagnosis Institutionalisation
Feedback
Corporate Vision
Implementation
Institutionalisation
Organisation
What
How
Who
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References
Dawson, P. (2003) Understanding Organisational Change: The Contemporary Experience of People at Work. Thousand Oaks, CA: Sage.
DiMasi, J.A., Hansen, R.W., & Grabowski, H.G. (2003). The price of innovation: New estimates of drug development costs. Journal of Health Economics, 22, 151-185.
Gilbert, J., Henske, P., & Singh, A. (2003). Rebuilding big pharma’s business model. In Vivo: The Business and Medicine Report, 21 (10): 1-10. Norwalk, CT: Windhover Information, Inc.
King, N. (1998). Template analysis. In Qualitative Methods and Analysis in Organisational Research, G. Symon and C. Cassell (Eds.), 118-134. Thousand Oaks, CA: Sage.
Miles, M. B. & Huberman, A. M. (1994). Qualitative Data Analysis (2nd ed.). Thousand Oaks, CA: Sage Publications.
Scott, W.R. (1992). Organisations: Rational, Natural and Open Systems. Englewood Cliffs, NJ: Prentice-Hall.
The Wall Street Journal. (2004). Researchers try to cut new path to pharmacy. January 12.
Yin, R.K. (2003). Case Study Research: Design and Methods (3rd ed.). Thousand Oaks, CA: Sage.
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Backup Slides
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Drug Development Costs
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Product Failure in Late Stage Development
Source: PharmaCom, 2003
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R&D Expenditures as Percentage of Sales - 1970-2004
Source: PhRMA, PhRMA Annual Membership Survey, 2005
0
2
4
6
8
10
12
14
16
18
1970 1980 1990 2000 2004*
Perce
nt of
Total
Sale
s
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Global Pharmaceutical Sales - 1970-2004
Source: PhRMA, PhRMA Annual Membership Survey, 2005
0
50000
100000
150000
200000
250000
300000
1970 1980 1990 2000 2004*
Tota
l Sale
s (M
illion
s of
Doll
ars)
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2003 R&D Expenditures by Geographical Regions
Source: PhRMA, PhRMA Annual Membership Survey, 2005
0.1
80.1
2.7 0.3
16.8
0.10
10
20
30
40
50
60
70
80
90
Africa Americas Asia-Pacific Australia Europe Middle East
Perc
ent o
f R&D
Exp
endit
ure
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Annual Growth in Prescription Drug Spending - 1997-2002
Source: IMS Health, Retail and Provider Perspective, 2002
14.2
16
19
14.7
16.9
11.8
0
2
4
6
8
10
12
14
16
18
20
1997 1998 1999 2000 2001 2002
Pe
rcen
tag
e