Decision-Making Support in IT Services Sourcing Management Through a System Dynamics Model

Aligning corporate support functions, such as Information Technology (IT), with business objectives is a good strategic practice. To spread risks and reduce costs, a company may contract some services to outside providers – in what is known as outsourcing, while insourcing some other services, by leveraging its own capabilities. Deciding on sourcing options to add business value is not trivial. It requires knowing and leveraging the company’s own capabilities and effectively managing sourcing customer-provider complex dynamics. Said dynamics are often subject to varying degrees of feedback and delays that evolve from outsourcing contracts. Such complexity causes managers’ decision making to be usually ill-informed about implications to the business. The specialized literature offers little insight on how and with what to assess such implications. This paper contributes to the literature by presenting a System Dynamics (SD) simulation model for the interactions among the customer’s capabilities and those of the provider. The model breaks down complexity by offering complementary SD views, allowing for what-if analysis to inform decisions on sourcing options that favor intended business results. The model aligns sourcing strategies with the business through (dynamic) Balanced Scorecard concepts. The paper assesses how capabilities of Contract Monitoring and Service Delivery affect the earned business value of IT service outsourcing orders. Validation of the model was carried out in a multi-year case study at a taxation agency in Brazil.