Rethinking ERP-Outsourcing Decisions for Leveraging Technological and Preserving Business Knowledge

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1 /02 $17.00 (c) 2002 IEEE 1 Rethinking ERP-Outsourcing Decisions for Leveraging Technological and Preserving Business Knowledge Jens Dibbern, Lars Brehm, Armin Heinzl Department of Information Systems (BWL VII) University of Bayreuth, Bayreuth, Germany {Jens.Dibbern Lars.Brehm Heinzl}@uni-bayreuth.de Abstract During the selection, implementation and stabilization phases, as well as the operations and optimization phase of an ERP system (ERP-lifecycle), numerous companies consider to utilize the support of an external service provider. This paper analyses how different categories of knowledge influence the sourcing decision of crucial tasks within the ERP lifecycle. Based on a review of the IS outsourcing literature, essential knowledge-related determinants for the IS outsourcing decision are presented and aggregated in a structural model. It will be hypothesized that internal deficits in technological knowledge in comparison to external vendors as well as the specificity of the synthesis of special technological and specific business knowledge have a profound impact on the outsourcing decision. Then, a classification framework will be developed which facilitates the assignment of various tasks within the ERP lifecycle to their respective knowledge categories and knowledge carriers which might be internal or external stakeholders. The configuaration task will be used as an example to illustrate how the structural model and the classification framework may be applied to evaluate the outsourcing of tasks within the ERP lifecycle. 1. Introduction The markets for ERP systems and external IS services have demonstrated impressive growth rates during the last decade. These market developments may have been mutually dependent. ERP software packages are developed according to the general requirements of a business sector (e.g., industry or business type), not according to the specific requirements of an individual company. The resulting standardization promotes the development of software markets, followed by the formation of service markets. Before a company can utilize an ERP package, the software must first be configured in accordance with the company s individual organizational processes and structures. The configuration consists of the setting of parameters within the limits of functionality provided by the ERP producer [3, 23]. Configuration problems may arise, however, when the functionality of the ERP package fails to meet the requirements of the company s business processes [8]. In this case three alternative solution strategies might be appropriate. First, the business processes may be adapted to suit the software. Second, the source code of the ERP package may be changed; the term modification applies in this context [23, 28]. Third, adjunct software modules (satellite systems, e.g., Legacy Systems) may be used in conjunction with the ERP system [23]. Each of these activities requires not only knowledge of the product and functional characteristics of the ERP software, but also knowledge of the company s requirements. Both types of knowledge possess varying degrees of relevance in the selection of an appropriate ERP package as well as in the implementation, the subsequent stabilization, and the operational phases of the ERP system (phases of the ERP-Lifecycle). With regard to the acquisition of software knowledge external service providers have recognized that they are capable of realizing specialization advantages compared to a firm s internal IS department. There are, at present, numerous ERP service providers available, e.g., systems integrators or consulting firms, which likely are cooperative partners with the ERP producers. Whereas these providers are familiar with the ERP system and have specialization advantages with regard to product and functionality, the clients possess the specific business knowledge [21, p. 285f.]. Based on this asymmetry of knowledge, various forms of interfirm division of labor have developed during the execution of tasks which arise during the phases of the ERP lifecycle. In the following, these sundry forms of demands of the service market are understood as variants of IS outsourcing.

2 /02 $17.00 (c) 2002 IEEE 2 The term IS outsourcing may be explicated by means of the dimensions range, duration and ownership structure. The range of IS outsourcing is determined not only by the object, but the degree of outsourcing as well. Research has differentiated between various IS functions: e.g., applications development and tailoring of standardized software; maintenance and support of application systems and hardware; system operations / data center; design, operations and maintenance of networks; telecommunication centers; user support and training; as well as IS planning and management [41]. For the execution of tasks relating to each of these functions, physical and human resources are necessary in various degrees. These resources can be either selectively or completely assumed by an external service provider and/or be made available by them. If only the physical resources remain in the ownership of the client, it is referred to as facilities management. Yet another distinctive form of outsourcing which relates in particular to ownership involves the transition of IS functions to a pure (100%) subsidiary. In this case, it is referred to as a spin-off [20]. Given mutual capital, it is a joint venture. The contractual relationships with the external service provider may be long or short-term (e.g., limited to the project or hourly). When an ERP system is introduced into a company, various IS functions will be affected. Within the function of applications development, a shift from developmental to tailoring activities occurs [21]. If a clientserver-based infrastructure is not in place at the firm introducing the ERP system, vast networking planning and implementation efforts need to be undertaken. Furthermore, training must be provided for users, and the help desk must be prepared for the new line of inquiry from users. In principle, the introduction of an ERP system can bring about changes in all IS functions. With each and every change, the question arises of whether resources and capabilities are sufficient to carry out the individual tasks internally. If knowledge deficits become obvious two questions arise: (1) Which risks might result from outsourcing these tasks? (2) Could these risks be alleviated through appropriate outsourcing arrangements, contractual design or relationship management? This paper analyses the outsourcing decision, with special consideration to technological and businessrelated knowledge, which is necessary to varying degrees within the specific tasks of the ERP lifecycle. With this purpose in mind, the influence of knowledge on the IS outsourcing decision, as established by prior research, will first be examined. Reference will be made, in particular, to the theoretical core of the previous research. The critical tasks within the ERP lifecycle will then be explored and used to create a classification framework. The framework will allow the assignment of the tasks to the various knowledge categories and to entities responsible for the tasks, henceforth referred to as task carriers, which might be internal or external stakeholders. Finally, the outsourcing decision will be illustrated via situational analysis of the tasks configuration and operation of the ERP system. 2. The Importance of Knowledge in IS Outsourcing The knowledge aspect has been addressed in many empirical studies that examined the determinants of IS outsourcing. The majority of this research investigates the necessary and sufficient conditions for an organization to outsource IS functions to external service providers. Two major arguments of the outsourcing decision may be distinguished [13]: 1. Organizations compare the production and transaction costs for internal and external provision. The cost differences are dependent upon the characteristics of the IS functions (Transaction Cost Theory [44]). 2. Organizations evaluate their own IS resources and capabilities in comparison to the market, giving consideration to their strategic potential. The discovery of deficits within the company leads to consideration of market utilization with regard to complimentary resources and capabilities [19, 40] (Resource-based Theory [5]) Transaction Cost Theory Within the framework of Transaction Cost Theory (TCT), the knowledge aspect is associated with human asset specificity. According to Williamson one can differentiate between necessary and sufficient conditions of human asset specificity. The intellectual capabilities of employees serve as a necessary condition. Sufficient criteria poses the question of whether or not the knowledge for the performance of tasks can only be achieved through a learning by doing process. As an example, Williamson states, [K]knowledge of a particular firm s filing system (...) can be highly specific (nontransferable) [44, p. 563]. A possible organizational form for the development of this type of knowledge is teamwork [1, 44]. If an IS function poses a high degree of human asset specificity this leads to specific investments on the part of the external service provider. The external supplier

3 /02 $17.00 (c) 2002 IEEE 3 has to acquire the company specific knowledge to perform the tasks. Based on the assumption that the vendor will behave opportunistically, he will attempt to overcompensate for these investments during the life of the contract. In order to avoid this behavior, considerable costs are incurred for the planning, adapting, and monitoring task completion within the individual IS functions (transaction costs). Moreover, external vendors, in this case, are unable to realize any cost advantages in performing the tasks within the IS function(s) (production costs), i.e., realize economies of scale; thus, a cost comparison that favors external provision is unlikely. In the confirmatory research reviewed, asset specificity often is measured as a mixture of human and physical asset specificity. In addition human asset specificity is regarded to both business knowledge and technological knowledge. In constructs that focus primarily on the specificity of hardware and software components [26, 33] or on the functional complexity [2] (physical asset specificity), no influence on the degree of outsourcing could be determined. However, a negative impact on the degree of IS outsourcing was ascertained in operationalization relating to tacit technological knowledge [33], technological and business process specific knowledge [2] or the necessity of company or division specific knowledge, an approach custom tailored to the company and costliness of outsourcing or changing providers [35]. In a study concerning small and mid-sized firms, no correlation between the asset specificity of human capital in IS functions (necessity of knowledge regarding working procedures in and between departments as well as team and project work extending beyond the department) and the degree of outsourcing could be determined [14] Resource-based Theory The study conducted by Dibbern and Heinzl [14], however, confirms the hypothesis that small and midsized firms increasingly outsource IS functions given resource deficits - gaps in present performance and future knowledge - compared to the market [14]. This causality is based on Resource-based Theory (RBT). With regard to deficits in the quality of personnel and IS support it has already been proven by the research of Teng et al. [41]. There is also a series of studies, which, though not explicitly referring to RBT, cite similar arguments. Loh supports the hypothesis that advantages are associated with IS outsourcing via access to new technology, expert knowledge, and the promotion of innovative use of IS (technological imperative) [26]. The result is a higher degree of IS outsourcing. The findings of the work by Poppo and Zenger confirm that companies will outsource IS functions, the more comprehensive the demands for personnel with extensive knowledge and skills are [35]. Nelson et al. show that software development projects which are based on specific technology and advanced development environments, are either more likely to be outsourced or are connected to the acquisition of standard software [34]. Nam et al. show that strong systems heterogeneity is associated with a higher degree of outsourcing of IS functions [33]. Further indications for the fact that companies outsource IS functions in order to get access to state of the art skill sets and technological know-how, can be found in the exploratory works of Clark et al. [9], DiRomualdo and Gurbaxani [15], Lacity and Hirschheim [24], McLellan et al. [30] and Fowler and Jeffs [18]. The fact, however, that companies outsource IS due to their own knowledge deficit is also critically reflected in the literature. Based on their case research Lacity et al. warn: Most of the companies in our study that outsourced emerging technologies experienced disastrous results because they lacked the experience to negotiate sound contracts and evaluate supplier s performance [25, p. 91]. Whereas Lacity et al. refer primarily to the risk of higher post-contractual costs than originally expected, that partially result from opportunistic behavior of the external provider [25], some conceptual work emphasizes the risk of losing innovative capabilities within the company [7, 17, 29]. In her conceptual study Duncan maintains that external service providers often show strong technological knowledge with regard to the specification and functionality of information systems [16]. They are, however, lacking the firm knowledge necessary to make use of the full potential of the technology. Yet, at the same time, technological knowledge within the company is important in order to recognize the firm s value increasing potential in the future. Duncan adds, The key reason firms support an internal IS department is the perceived value in cultivating employees who combine both knowledge of technology and knowledge of the firm [16] p. 681]. Filling knowledge gaps over the shortterm with the help of an external provider brings the danger of long-term erosion of knowledge, control, and flexibility in the recognition of IS potential. According to Duncan this goes beyond the danger of opportunistic behavior which plays a central role in TCT. In contrast, Quinn and Hilmer argue that the accessibility to superior technological resources is not limited to the internal innovative process [36]. Although they do not deny that outsourcing involves strategic risks such as the loss of technological capabilities and corresponding control opportunities, they maintain that these risks can be minimized through appropriately structured contractual relationships. They do not, however, discuss how these contractual relationships should be formed,

4 /02 $17.00 (c) 2002 IEEE 4 nor do they consider the costs that would be incurred thereby Structural Model of IS Outsourcing The knowledge related logic of TCT and RBT may be summarized in a structural model that explains the varying degree of outsourcing IS functions (Figure 1). The literature survey shows that knowledge is not perceived as a single construct. This is due to the fact that for the completion of tasks within the IS functions, different kinds of knowledge are necessary in varying degrees, e.g. in applications development on the one hand knowledge is essential to understand the requirements of the business units. On the other hand knowledge about modeling, construction and programming is needed to actually build the application. In the following both types of knowledge will be distinguished as business functional knowledge and technological knowledge. The central element responsible for characterizing knowledge as to be specific is reflected by the degree of knowledge that can only be acquired through a longterm process of learning and experiences within an organizational setting. Based on their case analysis Beath and Walker [6] argue that in case of the software acquis i- tion and implementation process, external service providers in particular hold tacit knowledge regarding the software. They can quickly adapt the knowledge about standard firm processes. However, in the case of unique processes, a significant amount of time has to be invested in understanding the work procedures. To enable this transfer of knowledge a socio-technological closure must be achieved [38, p. 156]. This reflects the communication of knowledge via group exchange of learning and experiences. In Figure 1 this interaction process is illustrated as a Synthesis between special technological and specific business functional knowledge. The technological knowledge per se can rarely be classified as firm specific. It can be learned outside the boundaries of the firm. Its use and usefulness is not limited to a specific organizational setting. It can vary in its specialty but not in firm specificity. Thus specificity of knowledge is determined by the need to acquire business knowledge, that can only be learned through a long-term learning-by-doing process or synonymously by the need to constantly interact with those stakeholders that possess the required business knowledge. Outsourcing an IS function that includes the performance of tasks requiring specific knowledge poses two different kinds of risks. Firstly there is the risk of an external supplier to behave opportunistically in overcompensating for this specific investment during the life of the contract. This reflects the logic of TCT. Secondly outsourcing a highly specific IS function increases the risk of loosing the strategic potential of that function. Strategic potential might be defined as the contribution of an IS function to reach the strategic goals of a company (e.g. cost leadership or differentiation). Based on RBT only firm specific resources can fulfill this condition as they are nontradeable and difficult to imitate and substitute by competitors [13]. Distinguishing between both types of risks, the following proposition can be deduced: P1: The more firm specific the knowledge is to perform the tasks within an IS function, the higher the risks associated with outsourcing this function. Assuming that companies are generally risk avers, the following proposition can be stated: P2: The higher the risks associated with outsourcing an IS function, the less this function will be outsourced. The analysis of a firm s necessary base of knowledge to perform the present and future tasks within an IS function might bring to light own technological knowledge deficits. These gaps can be either closed internally or through contracting with an external supplier. The more special the required technological skills are, the higher is the specialization advantage of an external supplier, as he can leverage this knowledge through a broad range of customers. It can be concluded: P3: The higher the degree of special technological knowledge to perform the tasks within an IS function, the higher is the perception of internal knowledge deficits compared to external service providers. The higher the perceived comparative deficits, the higher are the perceived costs of adapting the knowledge internally which leads to the following proposition. P4: The higher the perception of internal knowledge deficits compared to external service providers in performing the tasks within an IS function, the more this function will be outsourced. The tendency of unreflectedly outsourcing an IS function due to technological knowledge deficits might, however, be lowered if the risks associated with outsourcing are perceived to be very high. Thus it can be stated: P5: The higher the risks associated with outsourcing an IS function the lower will be the strength of P4. The perception of high risks as a response to a high degree of knowledge specificity might, however, be limited due to the awareness of ways of risk reduction.

5 /02 $17.00 (c) 2002 IEEE 5 Specificity of knowledge within IS-function(s) Risks associated with outsourcing IS function(s) Business specific knowledge Synthesis (P1+) Opportunistic behavior of external service provider ( P2 - ) Degree of outsourcing of IS function(s) special technological knowledge (P6 - ) Loss of strategic potential of IS (P3+) Internal knowledge deficits within IS function(s) compared to the market Ways of risk reduction (P5-) Legend: (P4+) Not the focus of this paper Figure 1: Structural model of the influence of knowledge on IS outsourcing In general, mechanisms that reduce the risk ex ante through appropriate contractual arrangements [4] and ex post risk management techniques that are applied during the life of the contract might be distinguished, e.g. risk might ex ante be reduced through a joint venture; ex post reduction might be achieved through trust building mechanisms (living the joint-venture). It follows: P6: Ways of risk reduction will lower the strength of P1. This moderating effect would indirectly reduce the strength of P5 3. Knowledge-Oriented Analysis of Tasks in the ERP-Lifecycle Before the structural model can be applied to analyze the ERP-outsourcing decision, the tasks that arise during the ERP lifecycle must first be determined. These tasks make up the potential objects of outsourcing and thus will substitute the term IS function within the model. In a second step the different types of knowledge necessary to perform the tasks within the ERP-lifecycle are identified. Finally the potential internal and external stakeholders are determined. The three dimensions serve as a basis for the creation of a framework, which enables the assignment of individual tasks in the ERP-lifecycle to various knowledge categories and internal or external stakeholders Tasks in the ERP-Lifecycle The software or application lifecycle covers the process of software development, use, and maintenance, which eventually ends with the uninstallment thereof. Generally, the software lifecycle is described using a series of phases and the corresponding activities performed during the phases [23]. The various models that describe the software lifecycle are based on customdeveloped software. The suitability of these models for the description of the software lifecycle in organizations that employ an ERP package is, however, limited. The decision to deploy an ERP package results in a separate software lifecycle. Markus and Tanis [28], as well as Ross [37] elaborated four respectively five distinctive phases. Based on these two contributions we distinguish the following four phases: (1) acquisition, (2) implementation, (3) stabilization, and (4) operation and improvement. The acquisition phase includes the sound selection of an ERP package and the planning of the implementation project (including time schedule, budget and project leadership). During the implementation phase, activities take place, which are focused on incorporating the ERP system into one (or more) organizational unit(s) in productive operations. Following the productive start of the ERP system (referred to as going-live ), many firms exp e- rience a phase of problems and reduced productivity before stabilization occurs, i.e., before normal business

6 /02 $17.00 (c) 2002 IEEE 6 operation is achieved. The stabilization phase generally continues for several months or, at times, even years. It is followed by the operation and improvement phase, during which the ERP system is supplemented with new functionalities through the deployment of updates and new releases. The operation and improvement phase concludes with the de-installation of the ERP system or the migration to yet another information system. The general tasks of project management, which are present in all projects of this size, will not be closely examined. Based on scientific [12, 28, 39] as well as practical research [4, 27, 43], the primary ERP-related tasks for each phase are identified in Table 1. Table 1: Tasks in the lifecycle of an ERP system Phases 1) Acquisition (several months) 2) Implementation (6 months to 3 years) 3) Stabilization (up to 6 months) 4) Operation and Improvement (10-15 years) Tasks Define specification Select an ERP package Define target concept, including a detailed description of the business processes to be supported (potentially after reengineering) Install IT-infrastructure and ERPsoftware package Configure and possibly modify the ERP package; also documentation Build interfaces to other systems & data conversion Test and rectify errors Train end-users (including user documentation) Roll-out and switching to productive operations Rectify errors in ERP system (within the configuration or modification) or IT-infrastructure Modify business routines Improve systems performance (e.g., via expansion of hardware) Repeat training or provide additional training Implement updates or new releases Support users and provide delta training Operate ERP-system (IT-infrastructure and ERP-Basis) Continuous process improvement and respective system tailoring The tasks related to the ERP system are often subdivided into technical or functional, i.e. application related tasks [4, 27]. Technical tasks, on the one hand, relate to the IT infrastructure, e.g., the installation and maintenance of the server (including the operational system, hard drive memory, etc.), the computer at the workplace, and the network. On the other hand, they consist of tasks directly related to the operation of the ERP system, e.g., the monitoring and optimization of the database, upon which the ERP system is based, memory management, user management, as well as printer and spool management. In SAP R/3, the latter are considered as socalled basis activities. Functional tasks are related to functionality provided by the ERP system and its use. They include the configuration of the ERP package, possible modifications, integration and tests of the ERP system, training of the end user, and organization of roll-outs. Functional tasks are often organized according to individual mo dules Knowledge Categories in the Lifecycle of the ERP System In order to be able to analyze the knowledge necessary to perform the tasks within the ERP lifecycle, it is useful to subdivide this knowledge into categories. Based on the authors own findings from 25 personal interviews with IS representatives in 15 companies, this paper suggest seven different knowledge categories: 1. IS-Infrastructure and ERP Basic Knowledge: This knowledge category refers to the technical tasks in the ERP lifecycle. Knowledge of hardware (e.g., server, computers at the workplace, and networks, software included) and basis services of the ERP package (data bank, ERP core, user management, among others) are essential. This knowledge is dependent upon the IS infrastructure and the ERP package used. With the exception of certain tricks, it can be learned through training. 2. Programming Knowledge: This category includes knowledge of the programming language of the ERP package (e.g., ABAP/4 in SAP R/3) and the architecture of the ERP software. This knowledge is necessary in order to be able to modify the ERP package. It can be learned in respective handbooks and courses. 3. ERP-Functionality Knowledge: This knowledge refers to the functionality available in ERP software packages that reflects the reference processes depicted in the software. It includes knowledge of the full rang of parameters and their setting for configuration. This knowledge is highly dependent on the ERP package in use. Although it is partly documented by the ERP producer, actual application requires a learning process due to the complexity of the ERP package.

7 /02 $17.00 (c) 2002 IEEE 7 The ERP producers offer training for these three knowledge categories. Nonetheless, substantially more experience is required to be able to effectively apply this knowledge. 4. Legacy-System Knowledge: This knowledge refers primarily to custom-developed applications. Knowledge of the specifications is typically attributed to an individual and is poorly documented. During ERP implementation, data from the old system is often converted. It is also possible that Legacy-Systems work together with the ERP system productively. 5. Best-Practice Knowledge: This category includes the knowledge regarding the best standard procedure for business processes and the appropriate organizational structure within an industry or business type. Many consulting firms maintain that they have acquired, refined and implemented this knowledge via numerous business process reengineering-projects within companies. 6. Business Process Knowledge: This knowledge includes the unique manner in which business processes are performed within an individual firm. It is often attributed to an individual or a group within the firm and involves a high degree of knowledge from experience. Knowledge of relationships beyond departmental boundaries is especially pertinent. 7. Usage Knowledge: This category consists of the knowledge regarding the correct use of the ERP applications. It is vital to the achievement of the desired results in the daily use of the ERP package. It is acquired by end users primarily through training and learning-by-doing and often accessible in application documentation Classification Framework To illustrate the initial situation in the ERP-sourcing decision, the separate tasks and knowledge categories are confronted with the alternative internal and external stakeholders, i.e. task/knowledge carriers. Regarding firm internal stakeholders, the employees of the IS department are the first to be considered. In large companies these employees usually are assigned to individual IS functions based on a division of labor. Accordingly they may be assigned to specific tasks in the ERP lifecycle. Furthermore, it is possible that IS comp e- tency may have shifted to user departments while the IS function has enfolded throughout the organization [21]. Task define specification select an ERP package install IS-infrastructure & ERP package configuration modification interfaces to other systems & data conversion... Operation of ISinfrastructure & ERP basis Continuous process improvement ERP functionality Programming IS-infrastructure & ERP basis Hardware supplier former ISdepartments Freelancer Generic outsourcer Legacy System Consultants Best Practice Systems integrators Business Process Technical IS-employee Usage Functional IS-employee Keyuser Knowledge categories End user Stakeholders external internal Figure 2 Classification framework

8 /02 $17.00 (c) 2002 IEEE 8 In the ERP context, one speaks of key users which are to be distinguished from the average end users. The external stakeholders may be subdivided into various types. According to the findings of the extensive research of Mitchell and Fitzgerald [31], there are five different IS service companies, namely (1) consultants, (2) systems integrators, (3) hardware providers, (4) former IS departments, and (5) generic outsourcers. A sixth category, (6) freelancers [22], should also be taken in consideration. Figure 2 illustrates the manner in which tasks may be classified according to knowledge category and internal or external stakeholders. Using the task of configuration as an example, a possible classification scenario is presented. Both knowledge of the functionality of the software and of the business processes, is necessary for the establishment of parameters in the configuration task. It is assumed that the required knowledge is distributed asymmetrically. Whereas ERP functionality knowledge is located at a consultant, functional employees in the internal IS department and key users hold the business process knowledge. 4. Application of the Framework and the Structural Model The aforementioned example, however, leaves open the question regarding the implications of the division of knowledge on the sourcing decision. The causal relationships presented in the structural model in Figure 1 may be used to answer this question. In the following, the application of the model will be outlined using the examples of configuration of the ERP system. It is assumed that during the acquisition process the choice is made for a certain ERP package. In the case of configuration, the previously described initial situation is to be taken into consideration, i.e., internal deficits exist in the ERP functionality knowledge. The structural model indicates that when knowledge deficits are present, outsourcing takes place (P4). However this tendency will mitigate when the risks associated with outsourcing the configuration task are rated as to be high (P5). The question then arises, which risks result from outsourcing the performance of this task to an external supplier. To answer this question, the specificity of the configuration task must first be assessed. ERP functionality knowledge, per se, cannot be classified as to be specific. It is of a technical nature. However, it has to be kept in mind that the configuration requires a synthesis of ERP functionality knowledge and knowledge about the requirements of the business (business processes). The latter here are classified as unique to the firm. The understanding of the processes and the needs of the clients would require an exchange of knowledge between internal IS employees and key users, as well as external consultants. This means a specific investments by the external provider which he will strive to overcompensate during the course of the contract. Thus, the risk of opportunistic behavior on the part of the external consultant and accordingly the danger of high transaction costs does exist (P1). To reduce this risk (P6) contractual arrangements alone might not be suffcient. Incentives can be used to motivate the consultant to a voluntary exchange of knowledge. The ideal situation occurs when the consultant is able to utilize knowledge gained, e.g., special industry knowledge, at other client sites [6]. In this case, the consultant has the opportunity to use the client as a reference. This is a win-win situation, as the client also has the opportunity to absorb the ERP functionality knowledge of the external provider (= transfer of knowledge) and thus becomes more independent of the consultant. In this case the external supplier would only temporarily be engaged to overcome internal deficits and absorb the technological knowledge. As a consequence the strategic potential remains within the company and gets even strengthened through increasing its ability to absorb future technical and functional innovations. Yet another scenario is conceivable, namely the assumption of the former internal IS employees being transferred to the external provider. The considerations in the aforementioned case apply to this case as well -- with one exception: the client enters into a long-term, dependent relationship with the external consultant and loses owners of his specific process knowledge. Both the risk of opportunistic behavior of the supplier and losing strategic potential appear in this situation. This risk could be minimized via an interest in / equity share with the external provider (= joint venture). Currie and Willcocks found the supplier s motivation to develop sector specific knowledge to be associated with the building of a joint venture [11]. In this case, however, one must be cognizant of the fact that the former internal IS employees now support external clients as well; thus, an erosion of firm specific process knowledge can hardly be ruled out. 5. Conclusion In summary we believe, that a differentiated analysis of knowledge that is required to perform the tasks within the ERP life cycle has a significant impact on the decision to outsource these tasks. A review of the IS outsourcing literature showed that knowledge is not perceived as single construct. In particular technological and business knowledge can be distinguished. Depending on the tasks within the ERP lifecycle both types are

9 /02 $17.00 (c) 2002 IEEE 9 required in varying degrees. Different kinds of technological knowledge are needed in all tasks, e.g. knowledge of the software functionality in the configuration task. This type of knowledge can be differentiated according to its specialty. Often the external market is perceived as to be superior in providing this type of knowledge. The need of business knowledge varies from task to task. Its variance can be determined by the degree of its specificity which is reflected by the need to acquire business knowledge that can only be acquired through a longterm learning-by-doing process within the company. The specificity of knowledge plays a major role in both TCT and RBT. However its impact on the sourcing decision differs in both theoretical lenses. According to TCT it increases the risk of opportunistic behavior of the vendor. Based on RBT it increases the risk of loosing strategic potential of IS. The higher the perceived risk the less a risk avers company would outsource an ERP task. However, there might be various strategies of risk reduction. These techniques were not the focus of this contribution and need further examination. Surprisingly view detailed information can be found in prior research about the arrangement of service level agreements as well as the role of ownership in contractual arrangements and of incentive systems to mitigate risk. This paper concentrated on the analysis of different tasks within the ERP lifecycle. This reflects the selective outsourcing behavior in practice. Implicitly it is assumed that these tasks are independent of each other. In future research potential task interdependencies that in turn could result in knowledge interdependency need to be considered [42]. Studies are needed that carefully investigate the knowledge exchange behavior between different task carriers within the IS function. Even though employees that perform technical tasks do not require business knowledge, they might be important internal sources of knowledge to evaluate new technological developments in the market. The emergent market driven application service provider (ASP) software delivery model serves as one of the more recent examples. Both ERP producers as well as IT service companies already offer ERP software via a ASP solution [10]. However, how can a company evaluate the option to provide the ERP applications via a standard browser without having competent employees internally? Too easily in a case of missing internal technological knowledge it gets neglected that ASP can also be established within the boundaries of the firm. A risk analysis might be needed that investigates the ASP model at first independent of the outsourcing option. Secondly the (leveraged) risks need to be determined that arise by realizing ASP through an external supplier. 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