Service multinationals and forward linkages with client firms:

the case of IT outsourcing in Argentina and Brazil1

Marcela Miozzo and Damian Grimshaw

Manchester Business School
The University of Manchester
Booth Street West
Manchester M15 6PB
Tel.: +44 (0)161 306 3423/3457
Fax: +44 (0) 161 306 3505
marcela.miozzo@manchester.ac.uk
damian.p.grimshaw@manchester.ac.uk

Key words: service multinationals, IT suppliers, IT outsourcing, linkages, client, mobility,

Argentina, Brazil

Abstract
This is an exploratory attempt to identify the effects for client firms in (middle income) less
developed countries of outsourcing business functions to a new kind of global service
suppliers. Drawing on case studies of IT outsourcing in Argentina and Brazil, we show that the
triggers and nature of forward linkage effects with global services suppliers take particular
forms in Argentina and Brazil due to economic and institutional conditions. The ability of
clients to benefit from linkages is contingent on their absorptive capacity, especially their
expertise in designing and operating IT outsourcing contracts. An additional effect on linkages
is that IT services suppliers are able to move between countries not only their own operations
but also the execution of contracts with clients. These practices relocate clients’ outsourcing
from suppliers initially located within a domestic economy to suppliers located outside it,
facilitating consolidation and regionalisation of business segments of (multinational) clients,
making client firms themselves more ‘footloose’ and weakening linkage effects.

Introduction
Until recently, service multinationals were regarded as less capable of providing advanced
technologies and linkages to domestic firms than manufacturing multinationals. This
perception has changed, and multinationals in services are now seen as transferring new
technologies - if this is defined broadly to include organisational, managerial and information
processing/analysis skills and knowledge (Dunning 1989) - and as improving the availability of

1
competitive services inputs, helping domestic firms to become internationally competitive
(Markusen et al. 2005). In particular, the expansion of international outsourcing and
subcontracting of business processes has contributed to the growth of a new kind of (especially
US) multinational that supplies services to other firms, much like contract manufacturers in
manufacturing (UNCTAD 2004: 157). This is true in the call centre industry, with leading
firms Convergys, ICT group, Sitel and Sykes, but also in the IT services sector, with leading
firms IBM Global Services, EDS and Accenture. As these sectors consolidate, the advantages
of global presence, established links to US customers and global integration with locational
advantages make them potentially better equipped than smaller service suppliers to manage
outsourced functions effectively and cost efficiently across geographical areas for larger
contracts.
This paper identifies the effects for client firms in (middle income) less developed countries of
outsourcing business functions to these new kind of global service suppliers. It is an
exploratory study, drawing on qualitative data collected through detailed case studies. The
paper investigates the forward linkage effects on client firms in Argentina and Brazil, exploring
the potential for complex IT outsourcing2 contracts to provide a mechanism for technology and
performance improvements in the client firms. For that purpose, section one surveys the
literature on service multinationals and linkage effects on clients. Section two describes the
research method. Section three discusses the empirical evidence in the light of the questions
that arise from the literature review, namely, the particular triggers and nature of forward
linkages with IT services multinationals, the effects of variations in ‘absorptive capacity’ of
client firms in benefiting from linkages, and the effect on linkages of global location decisions
of IT services multinationals and client firms.

1. Service multinationals: linkages, absorptive capacity and mobility

Many theoretical and empirical contributions argue that the entry of large multinational firms
in less developed countries may bring technology and productivity improvements in domestic
firms as multinationals demonstrate new technologies and exert competitive pressures, provide
technical assistance to domestic suppliers and customers, and train workers and managers that

1
We gratefully acknowledge support from the British Academy award LRG-37268.
2
IT outsourcing is the largest and fastest growing segment of the software and IT services sector in many
countries and is one dominated by multinationals. It is the use of a third party vendor to provide information
products and services that were previously provided internally. IT outsourcing has grown in recent years to
include multiple systems and significant transfer of assets, leases, and staff to a supplier that assumes profit and
loss responsibility. Computer services suppliers provide a number of services, including IT infrastructure

2
may subsequently be employed by domestic firms. Such claims depend on a deeper argument
that multinationals have specific advantages that enable them to overcome the higher costs of
operating across national borders and still be competitive (Hymer 1976, Dunning 1990).
Nevertheless, while there is much evidence in support of the existence of firm-specific assets
of multinationals (Markusen 1995, Caves 1996), the empirical evidence on spillovers from
multinationals is more mixed; studies which suggest spillovers have not taken place include
Cantwell (1989), Haddad and Harrison (1991) and Aitken and Harrison (1991).

In general, the focus is on backward linkages, and the literature identifies the transfer of
technology from multinational buyers to upstream suppliers. This may include assistance in
setting up production facilities to prospective (domestic and foreign) suppliers, diffusion of
knowledge and skills to assist in upgrading technological and managerial capabilities,
assistance in the purchase of raw materials and intermediaries, and support in the market
diversification of domestic suppliers (Lall 1980, Watanabe 1983, UNCTC 1981). The
importance of backward linkages for less developed economies has been shown to apply not
only for domestic suppliers but also for foreign affiliates. For affiliates, the ability to source
locally can lower production costs, increase specialisation and flexibility and lead to a faster
adaptation of technology and products to local conditions (UNCTAD 2001). The improvement
in the performance of suppliers can have positive indirect spillovers for the host economy:
demonstration effects, mobility of trained labour, spin-offs, competition effects and increase in
the local integration of multinationals (MacDougall 1960, Blomstrom and Kokko 1998, Kugler
2001, UNCTAD 2001). Nevertheless, linkages with multinationals can also have negative
effects. Multinational affiliates may form linkages in protected industries, with little incentives
to upgrade technologically; or may practice anti-competitive practices and enforce unfair terms
and conditions on suppliers in oligopsonistic markets; or transfer pressure onto supplier firms
where terms of employment and remuneration may be less formalised; or appropriate markets
from domestic producers (ILO 2001, Altenburg 2000, Aitken and Harrison 1999, Harris and
Robinson 2004). Although the literature mentions the growing importance of forward linkages,
especially with local distributors and sales organisations (McAleese and McDonald 1978,
Blomstrom 1991, Aitken and Harrison 1991), there is a neglect of detailed assessment of the
importance and effect of linkages to clients. Nevertheless, lessons from the literature on
backward linkages may be relevant. One important lesson from this literature is that the ability

(hardware and operating systems), applications development and support and helpdesk in exchange for a fee and
according to a detailed contract.

3
of firms to internalise spillovers is dependent on their own absorptive capacity (Lapan and
Bardhan 1973, Cohen and Levinthal 1989) or the extent of the ‘technology gap’ between
foreign and domestic (Findlay 1978, Wang and Blomstrom 1992, Glass and Saggi 1998,
Kokko et al. 1996). Indeed, many authors stress the importance of the characteristics of the
domestic firms to assimilate these spillovers (Blomstrom et al. 2001, Kugler 2001 and
Kinoshita 2001).

Recent work on the relation between multinationals and the evolution of the domestic software
and computer services sector in countries that are ‘latecomers’ in this sector - especially in
India, Israel and Ireland - shows that multinationals’ spillovers are not automatic, that they are
influenced by country-specific factors, and depend on the absorptive capacity of domestic
firms (Giarratana et al 2004, Patibandla and Petersen 2002). In India the domestic software
sector developed in parallel with the entry of multinationals. The exit of IBM in 1977 opened
the way for the entry of other multinationals that established alliances with domestic firms,
paving the way for the development of exports of services (Heeks 1996). Investment in
domestic organisational capabilities enabled the move from the transportation of software
professionals to work overseas on low level programming and maintenance on customer sites
(bodyshopping or on-site service model) during the 1980s to offshoring in the early 2000s
(Arora et al. 2001, Athreye 2005). The establishment of Texas Instruments R&D lab for chip
design and development of chip-related software in Bangalore in 1985 marked the start of a
new successful R&D offshore model, which generated important demonstration effects for
domestic firms, through, for example, CMM certification of domestic firms (Patibandla and
Petersen 2002). In Ireland, in contrast, a combination of fiscal incentives, proximity to the
European market and an English speaking, educated population attracted multinationals (Coe
1999). Multinationals use Ireland as an export platform, subcontracting low value added, low
skilled manufacturing activities such as porting of legacy products on new platforms, disk
duplication, localisation (text translation, changing formats) for the European market and
assembly and packaging (Tallon and Kraemer 1999, Arora et al. 2004, Coe 1999).
Multinationals contributed to the development of a domestic industry by supplying skills and
reputation, but, except for a few successful firms, it is claimed that the majority of domestic
firms have not captured the potential of positive linkages with multinationals in terms of
developing technological and marketing capabilities (Giarratana et al. 2004).

4
In contrast to these two cases, in Israel, the software industry originated independently from
multinationals. An important computer hardware sector, the military complex, relations to local
universities and venture capital encouraged the development of both multinationals and local
firms (Breznitz 2005, Teubal et al. 2000), with many multinationals establishing R&D labs in
Israel (Felsenstein 1977). Unlike Ireland and India, domestic firms account for a large share of
software exports, especially of security and anti-virus software. Overall, while much attention
has been paid to the impact of multinationals on the production and export strategies of the
domestic software and computer services industry in these countries, less attention has been
paid to the impact on clients (and ultimately on the host economy) of their relation to a small
number of global IT services suppliers that dominate the world markets.

An important contribution to the understanding of the role and capabilities of different actors
involved in international production is the work on global commodity chains and global
production networks (Gereffi and Korzeniewicz 1994). This combines an analysis of core-
periphery relations within the framework of multinationals and their networks of production
relationships. Gereffi (1994) differentiates between ‘producer-driven’ and ‘buyer-driven’
commodity chains. Producer-driven chains characterise industries with scale economies, such
as cars, computers and semiconductors, and are driven by multinationals that may outsource
production but keep R&D and final goods production within the firm. Power is concentrated in
the headquarters and flows downward through the dispersed subsidiaries and value-added
flows back up the commodity chain. Buyer-driven commodity chains, instead, characterise
mainly consumer durables such as apparel, footwear and toys. The global commodity chain is
driven by large retailers, that do not undertake manufacturing themselves, but may do design
and marketing. Corporate power originates with the retailer/brand holder and, although it can
be dispersed by independent ownership of manufacturers, value-added stems from the branding
and marketing functions. These categories have been extended in attention to the rise of new
modular product architectures and the importance of contract manufacturing, to a typology of
global value chain governance that includes hierarchy, captive, relational, modular and market
governance (Gereffi et al. 2005), which depend on the complexity of transactions, the ability to
codify transactions and the capabilities of the supply base. These characteristics, in turn,
depend on the technological characteristics of products and processes, the power and
capabilities of industrial actors, and the pressures around the development and adoption of
standards and other means of codification. Although most of the literature focuses on the
relation and power of buyers and first tier suppliers, it recognises the importance and power of

5
users: ‘highly knowledgeable users can play a significant role in determining the attributes and
innovative trajectory of the products and services that global chains churn out, as they do in
many complex service industries such as enterprise computing’ (Gereffi et al. 2005: 98).

The strength of the global production networks literature is its explicit focus on cross national
forms of economic organisation and the influence of different actors on the trajectory of
production. However, it gives little attention to how national institutional and economic
conditions continue to exert a significant influence on the international structure of economic
activities (Whitley 1999). While the important role of services in the viability of global
production networks is widely recognised (Rabach and Kim 1994), less attention has been paid
to the role of large and powerful multinationals that are global suppliers of intermediate
services – partly reflecting their focus on the manufacturing sector. In sum, therefore, both the
literature on linkages and that on global production networks neglect attention to a) services
(and particularly powerful multinational suppliers of services), and b) the consequences for
clients, rather than suppliers, or sales and distribution organisations, of their market-based
interactions with powerful multinational suppliers.

A final key concern with regard to multinationals and linkages is their mobile nature. Mobility
of capital grants multinationals advantages over states: it increases multinationals’ range of
strategic options, enabling them to rank locations hierarchically, and invest more or carry out
higher value added operations in some locations rather than in others; it allows multinationals
to exercise credible threats to pull out if their demands are not met; it diminishes the power of
state sanctions over firms; it transfers the burden of providing proper infrastructure and
facilities to regional and national governments; and it enables multinationals to move to areas
of the world where there are weaker unions and labour legislation, allowing them to keep their
labour costs down, often at the expense of worker rights (Thomas 1997, Chesnais 1992). There
is some evidence that foreign investment in services is more ‘footloose’ than in manufacturing
because of lower capital intensity and sunk costs as well as weaker linkages to domestic
suppliers (UNCTAD 2004). There is also evidence of a major increase in the global relocation
of service jobs, away from higher-cost areas of the world to those areas where wage levels are
lower and where employment conditions and employment rights may be poorer. It is the
offshoring of IT-enabled services, particularly to India, which is receiving much attention. This
process is being compared to the relocation of manufacturing jobs to China, but it has been
pointed out that the relocation of services can occur at a faster rhythm due to the fact that the

6
‘objects that are being relocated are pixels and electronic pulses that can be transmitted by
photons and radio waves’ rather than requiring the closing of factories and setting up of new
factories (Dossani and Kenney 2004: 40).

In summary, the literature on linkage effects of multinationals suggests three issues that appear
relevant for the understanding of the relation between the small number of powerful
multinational IT services suppliers that dominate the world computer services market and the
possible effects through IT outsourcing for clients and less developed host countries. First,
forward linkages with multinationals may bring technology and performance improvements to
clients, however, the trigger for these linkages and their eventual nature depends to some extent
on particular host country institutional and economic conditions. Second, positive linkage
effects are not automatic and are contingent on the ability of clients to internalise these
improvements - through their absorptive capacity. Third, evidence of mobility of service
multinationals, particularly due to the ease of relocation of services, may impinge a particular
character to the linkages with clients.

2. Research method
This paper draws on the results of a comparative research project carried out during 2004-
2005, which involved case studies of three large IT services multinationals, IBM, EDS,
Accenture, and the investigation of ten IT outsourcing contracts of these firms in Argentina and
Brazil. For each contract, interviews were conducted with a senior manager from the IT firm
and the client firm. Interviews were undertaken in Buenos Aires, Sao Paulo and Rio de Janeiro.
In addition, background data were collected through meetings with representatives of trade
associations and domestic IT services firms in both countries, as well as secondary data on the
three IT services firms and on the computer services sector in general from company reports,
industry consultants and government reports.

The aim was to select client firms from as wide a range as possible of sectors of economic
activity, including private services and manufacturing (table 1) to explore cross-sectoral
differences. The literature on linkages has explored the relations of multinationals with
domestic firms. Here we explore the linkages of multinationals with client firms with different
types of ownership, including domestic firms, subsidiaries of foreign firms and privatised state-
owned firms acquired by, or merged with, a domestic or foreign firm. The rationale is that the
character of ‘domestic firms’ in Argentina and Brazil has been radically transformed by

7
important changes in ownership, especially since the 1990s, following privatisation and an
important influx of foreign direct investment, particularly cross border mergers and
acquisitions. This research can therefore shed light on the consequences of the merger and
acquisition boom, in terms of linkages with both domestic firms and firms that have been
subjected to mergers and acquisitions and their role in economic restructuring in the host
economy. The aim was to select at least two IT outsourcing contracts for each IT supplier in
each country to control for unique cases. As table 1 demonstrates, we achieved this goal, with
the exception of failing to secure access at Accenture Brazil. Also, in three contracts it was
impossible to secure access to a contract manager at the client firm, due to the sensitivity of
issues concerning restructuring; this applied to the two clients of EDS in Brazil (Banco Real
and Telefonica) and one client of Accenture in Argentina (Telefonica). Finally, another aim of
this research was to explore the experiences of a given client firm through contracts with
multinational IT firms in different countries. We achieved this for two client firms, Telefonica
and Bank Boston. For Telefonica, the data from this research sheds light on its contracts with
IBM in Argentina, with EDS in Brazil and with Accenture in Argentina. For Bank Boston, the
results of contracting with IBM in Argentina can be compared with those from IBM in Brazil.
Such data, along with other findings, enable the exploration of country and inter-firm
differences, and, in particular, reveal the nature of cross-border contracting with operations
across more than one country. Thus, the sample is not random, nor is it representative of
outsourcing contracts in either Argentina or Brazil. Rather, they reflect the aims described
above of selecting contracts of particular types to extend theory on linkages between
multinationals and client firms in differing sectoral, ownership and country contexts.3

[insert table 1]

The approach adopted for the interviews with senior and executive managers in the three IT
firms, as well as with contract managers in the IT firm and client firms, was based on in-depth,
semi-structured interviews, chosen for its capacity to facilitate iterative, exploratory discovery
between data collection and analysis (Yin 1994). In total, 27 interviews were undertaken with

3
We also note that at a preliminary stage of research design we had intended to compare the role of multinational
versus domestic IT services suppliers in the IT outsourcing market but quickly discovered that because
multinationals dominate the IT outsourcing market, the comparison would not have been illuminating. The risk is
that our reporting of the evidence potentially conflates the dual influence of IT outsourcing and the role of
multinationals. However, we would argue that since the markets for large IT outsourcing contracts in Argentina
and Brazil are dominated by multinationals, we do not believe there is value-added in seeking to disentangle these
tightly interlocked influences.

8
managers (senior executives, human resource managers and IT project managers) and each
lasted between 90 and 120 minutes (Appendix Table 1). All interviews were tape-recorded,
transcribed and coded. At the end of the project all participants received a summary report of
the findings and some participants provided feedback. With their agreement, we name the
firms involved in the research but preserve their confidentiality in the presentation of data.
Finally, we wish to emphasise that since the project was relatively small in scale, findings
ought to be interpreted as exploratory.

The three case-study firms

Before turning to the empirical evidence, we provide a brief overview of the three case-study
multinationals. Although each has very different origins (table 2), they have all subsequently
developed standard methodologies and processes in a bid for dominance in the provision of a
similar range of computer services in which IT outsourcing figures prominently.

IBM began operations in Argentina and Brazil in the 1920s, earlier than the other two
multinationals. Its reputation in selling hardware meant IBM was favoured by major clients –
especially in the banking and public sectors.4 IBM acquired the consulting firm
PriceWaterhouseCoopers in 2002 to complement its operations in the development of
information systems; its new consulting arm constituted 17% of IT services revenue in Brazil
in 2002 (IDC 2003: 78). Recent data suggest that IBM Brazil and IBM Argentina dominate the
respective country markets for computer services, with an estimated 12% share of the market
in Argentina and 15% in Brazil (table 3). Moreover, its share of the large firm market in Brazil
was estimated at 24% in 2002 (IDC 2003: 77). In both countries, clients are spread across all
sectors – including, in Brazil, manufacturing (generating US$138m in revenue), banking
(US$100m), telecommunications (US$55m), trade (US$32m) and government services
(US$33m). In Brazil, IBM was the market leader in five services areas in 2002: IT consulting;
network consulting; systems integration; network and desktop outsourcing; and hardware
support services (IDC 2003).

[insert tables 2 and 3]

4
IBM subsequently suffered major setbacks to its reputation in Argentina due to corruption scandals in dealings
with the national bank, Banco Nacion, with the customs office, Aduana, and with the tax office, Direccion
General Impositiva.

9
Accenture developed its IT services operations from a traditional reputation of selling strategic
and IT consulting. Formerly Andersen Consulting, it became a new firm in 2000. Although
Accenture started to engage in IT outsourcing only a decade ago, it rapidly became a major
part of its activities. In Argentina, IT outsourcing accounted for more than 50% of its activities
in 2004 (and more than two-thirds in terms of employment), which compares to an average of
around 25% in US and European offices of Accenture (Accenture9, IT firm manager, AR).
Accenture Argentina and Accenture Brazil dominate the market for development and
maintenance of systems. In Brazil, it was second to IBM in 2002 in the markets for IT
consulting and systems integration (generating US$31m and US$45m, respectively) and
market leader in application management services (IDC 2003).

Finally, EDS entered the Brazilian market in 1985 when General Motors acquired EDS (and
transferred 112 IT staff from GM), and the Argentinian market in 1993 when it took over the
IT assets and staff of Ciadea (locally-controlled Renault Argentina), as well as 150 staff from a
firm that developed IT systems for banks (EDS5, IT firm manager, AR). EDS originated in the
USA as a firm specialised in IT outsourcing. In 1995, it acquired the consulting firm,
A.T.Kearney, in order to develop consulting capabilities. In both countries, EDS focuses on IT
outsourcing and infrastructure management. In Argentina, its revenue mix involves operations
outsourcing (45%), applications development and maintenance (35%) and business process
outsourcing (20%) (Information Technology, Nov. 2004: 46). In Brazil, it was the market
leader in information systems outsourcing in 2002 and also strong in the area of application
development and maintenance (IDC 2003). Its main client in Brazil was still GM at the time of
this research; this explains its strong presence in the manufacturing sector, which, along with
the telecommunications sector, accounts for the bulk of its client services.

In 2004, these three firms competed for market leadership in IT services in Argentina and
Brazil. Each delivered a relatively similar bundle of services, including IT outsourcing,
development and management of applications, process reengineering and traditional
implementation of corporate systems. Each firm designs and installs IT hardware and software
and provides long-term services.5 The need to win markets with integrated solutions (Davies
2004) has blurred the boundaries between these services. The firms converge to provide IT
solutions for large business and government customers based on a proliferation and

10
standardisation of methods (Gallouj 2002); in the words of their representatives, a ‘world
methodology’ (EDS8, IT firm, BR) and ‘standardised processes’ (IBM1, IT firm, AR):
The strength of EDS is neither to promote the sale of software nor to develop software. EDS is a
specialist in the integration of applications and solutions. … EDS takes the best solutions from the
market and designs their implementation. (EDS5, client, AR).

Our services are defined at a world level, and the way of delivering each of these services also responds
to patterns based on common methodologies, on common processes and tools throughout the world…
We have to be aligned to world standards. (IBM1, IT firm, AR).

We have our own methodology; it includes applications analysis, complexity, how to take the service, the
metrics, it’s a common methodological training. (Accenture9, IT firm, AR).

3. Forward linkages with clients: the empirical evidence

This section examines the evidence concerning linkages between IT multinationals and clients
around three issues identified in the review of the literature in section one:
i. particular triggers and nature of forward linkages with IT multinationals;
ii. role of absorptive capacity (expertise of client firms in designing and operating IT
outsourcing contracts) in benefiting from linkages; and
iii. effect on linkages of global and regional location decisions of multinationals and client
firms with respect to IT outsourcing contracts.

i) Particular triggers and nature of forward linkages with IT multinationals

Forward linkages are associated with pecuniary externalities (Hirschman 1958), which take
place through market transactions. Clients derive increased productivity from using that
particular input instead of others that are less specialised and less appropriate to the specific
needs of the firm (Alfaro and Rodriguez-Clare 2003). The client firms included in this study
(both domestic and foreign-owned) were motivated in their decision to outsource by the
anticipated advantages of contracting with a global, specialist supplier of a core technology.
For these clients, outsourcing to a domestic IT firm held limited attraction. Client managers
stressed that a multinational IT firm offered the prospects of delivering the global ‘best
practice’ in IT services. The fact that multinational IT services firms have developed a widely
regarded set of distinctive ‘best practice’ capabilities, through combining ‘processes’ and
methodologies with idiosyncratic firm- and industry-specific skills, through the transfer of staff
from client firms, increases their attractiveness to client firms, especially those in less
developed countries. What the client purchases, at least in principle, is a guaranteed package of

5
Traditionally, IBM’s services were offered to maintain and operate IBM equipment. Now, IBM offers systems
integration services to design, integrate and run systems supplied by major IBM competitors such as HP or Sun
Microsystems.

11
world class IT services, based on common processes and tools as applied anywhere in the
world by these oligopolistic suppliers (Gereffi et al. 2005).

Because of the inseparability of information and production technologies (Miozzo and

Grimshaw 2005), or, in other words, because the externalised IT functions remain embedded
within the business process of the client organisation, IT outsourcing is accompanied by
transformation in the wider production system of the client firm (see table 4). This is the source
of much of the linkage effects. But the triggers to outsource IT and the nature of linkage effects
take particular forms in Argentina and Brazil due to the radical policies of liberalisation and
privatisation, the rapid increase in product market competition during the 1990s (especially
from multinationals), mergers and acquisitions by foreign multinationals, and the economic
context involving prolonged periods of severe recession.

An important linkage effect for clients flowed from the capability of IT services firms to
implement IT systems on a common platform across the different branches and offices of the
client firm (table 4). In two of these cases, the trigger to outsource IT was the acquisition by a
European firm of a newly privatised client firm in Argentina and Brazil (cases IBM1 and
EDS7). The European firm inherited entrenched organisational structures and legacy IT
systems and in response used IT outsourcing as a means to create a common corporation
approach with standard IT infrastructure and applications. The client sought to cut costs though
a single regional approach (and possibly single location) for operations in Latin America:
The demand for services in the first half of the nineties was triggered by the privatisation of utilities. In
the case of public organisations they needed to restructure in the face of a higher level of competition…
In the case of state and provincial banks, the issue was how to compete with foreign banks coming to the
country… An important shift in the second half of the nineties and a great demand for services came
from firms that arrived to Argentina as global firms and had a totally different focus on solutions from
the traditional local focus… They think of global applications and not on developing local ones, and of
alignment with headquarters. (IBM1, IT firm manager, AR).

The motivations for a common platform were different in the case of Accenture9 AR, but
nevertheless were believed to have generated significant cost savings. Faced with a new
competitive challenge due to privatisation and acquisition by a foreign firm, the client engaged
with the IT multinational on a transformation programme affecting all parts of the client firm,
from corporate offices to branches delivering frontline services. Changes included the design
and implementation of electronic and physical networks, which allowed central monitoring of
all elements of the sales operations and the use of benchmark data to keep prices competitive.

12
The new common platform also enabled client headquarters to change electronically the prices
of the product sold, in response to conditions within micro-markets (up to four times a day).

[insert table 4]

Linkage effects were also observed in evidence of cost reductions and productivity
improvements in some clients. For example, in the case of Accenture10 AR, the client firm had
outsourced a range of application management functions (including commercial sales
management, product sales management, logistics, service billing and human resources).
Productivity was believed6 to have increased due both to cost reductions and a switch in focus
from problem-solving to service improvement. Documentation produced jointly by the client
and Accenture states:
Productivity has jumped 20 percent. Internal resources now have more flexibility, and switching from
corrective maintenance to evolutionary maintenance allows [the client] to add more services to its users.

Similarly in the case of EDS5 AR, client managers claimed to have benefited from dramatic
reductions in the time taken to prepare and process bids with over 200 suppliers through a
carefully designed intranet system, contributing to an estimated 30 percent improvement in
productivity. Other examples of estimated productivity/cost improvements include cost savings
of 15-20 percent over the life of the contract in the case of IBM3 BR, and savings of 37% on
annual IT spending - largely generated through the shift to flexible on-demand IT services – in
the case of IBM2 AR.

In the case of the airline client, linkage effects were evident in improvements in a range of
business processes. Prior to the outsourcing arrangement, the airline had faced economic
difficulties because of competition from newcomers in the market, and, although IT was
considered critical to business, there had been longstanding under-investment in the area.
Again, privatisation was the trigger. The firm undertook a wide-ranging restructuring
programme with privatisation, which included a reduction of employment in all divisions (from
27,000 employees in 1987 to 15,000 employees in 2004). US consultants were hired to assist,
and recommended the outsourcing of IT services. According to client managers, IT outsourcing
contributed directly to improvements in four business functions: reservations (through switch

6
We were unable to corroborate statements by managers with hard measures of either cost savings or improved
productivity. Indeed, none of the client firms we visited had developed a system that could effectively evaluate the
costs and benefits of services delivery from the multinational supplier compared to a hypothetical control model of
in-house provision. Our results must therefore be interpreted with caution.

13
to an off-the-shelf package); finances (by increasing the speed of money transfer); engineering
maintenance for around 1,000 planes; and flight and crew scheduling (with complex
scheduling required for different pilots, different planes and strict rules about rest times).

A particularly idyosincratic type of linkage effect was associated with the Argentine banking
sector. Client managers argued that prior to the collapse of the banking system in Argentina in
2001, banks did not consider outsourcing IT services because of security risks. After the crisis,
however, banks faced severe economic problems caused by a huge increase in the number of
transactions and in regulations from the Central Bank; this followed the economic measures
taken in response to the 2001 crisis to stop the draining of bank accounts, including the
freezing of bank accounts, limitation on withdrawals and the exchange of deposits in US
dollars and large deposits in pesos by bonds. The responses from the banking sector included
downsizing of branches and workforce and the adoption of strategies to transform fixed costs
into variable costs. IT outsourcing thus emerged as a strategy to make costs variable with
changing demand. At the case included in this research, the aim was to shift from a position
where 70% of in-house IT spending was fixed, to an outsourcing contract involving 30% fixed
and 70% variable costs:
If we need more capacity for six months or we need to reduce it, we only need to pay for use. The other
way [in-house IT], we would need to buy equipment and then it would be unused, and if it is unused
three years later it is obsolete, which means we are not using our assets well. (IBM2, client, AR).

Also, IT outsourcing provided greater security of information systems for banks in Argentina.
Their need for security was heightened by the down-town location, with daily protests outside
banks and by the fact that they occupied older buildings, not designed with the modern
requirements of security and air conditioning needed for data safety. Building on its IT
outsourcing agreement, one client negotiated the safe transfer of its IT activities to a software
factory with state-of-the-art security located outside the downtown area of Buenos Aires.

Other important examples of linkage effects could also be detected across the ten examples of
IT outsourcing contracts. First, access to global, specialist IT services firms potentially made
new technologies (especially packages of software applications) and, as argued by a client, the
results of international research more accessible to clients:
We created a concept that we call a Value Creation Committee, which will operate for the life of this
contract. The idea is that twice a year, top management of IBM get together with top management of [the
client] and we bring people from our research labs and from other contracts worldwide and we discuss
how the application of technology is progressing. … It could be a business meeting in Sao Paulo, or it
could be taking [the client] executives to one of IBM’s labs in the United Sates. (IBM 4, IT firm, BR).

14
Second, several client firm managers claimed to have benefited from access to an international
pool of specialist knowledge and skill:
[The IT supplier] has more than 100,000 employees in the world. They look in a database, ‘We need a
certain profile with these characteristics that knows this type of application, with this operative system’,
and 10 appear on screen. Then they simply see who is available’ (IBM 1, client, AR).

Benefits for the client firm also accrued from the greater agility of the multinational IT services
firm to redeploy staff across regions and contracts. An extreme example of the use of IT
outsourcing to exert employment flexibility can be seen in the case of IBM1 AR. During 2003,
protesting workers took over one of the buildings of the client firm, preventing it from printing
and distributing bills to its customers. While such circumstances were not specified in the IT
outsourcing contract, the IT supplier had the capacity to redeploy staff very easily and
established an alternative system within 48 hours to print off the backlog of more than one
million bills (although it took another 45 days to negotiate the price).

Third, in another example (EDS6 AR), the client firm wished to avoid employment litigations
related to contracting with the more vulnerable small- and medium-sized firms during the
Argentine crisis. The client firm had experienced difficulties coordinating the dozens of small
firms that provided IT contract labour and IT outsourcing was perceived to provide a solution.

ii) Absorptive capacity and linkages

Despite the evidence provided above of productivity and technology improvements from IT
outsourcing, there are important differences in the ability of client firms to benefit from these
linkages. Here we draw on Cohen and Levinthal (1990) who argue that a firm’s absorptive
capacity depends on prior related knowledge that confers upon it the ability to recognise the
value of new knowledge and to assimilate it. The concept of absorptive capacity has been
operationalised in many ways, using as indicators firms’ R&D intensity (Kinoshita 2001,
Barrios and Strobl 2002), their level of technology relative to best practice (Girma 2005) or an
index combining several innovation inputs to firms (Chudnovsky et al. 2005). We argue that in
the context of outsourcing of business functions, an important part of a client firm’s absorptive
capacity and of its ability to use prior related knowledge in the provision of these services in-
house, is constituted by its expertise in the design and operation of contractual agreements.
This organisational ability is a key mediator in the relation between external knowledge (in the
outsourced service) and client firm performance, enabling clients to assimilate, or absorb, the

15
new knowledge associated with the outsourced function and to leverage this knowledge into
productivity and technology improvement.

Because the core business of multinational IT firms is the sale of IT services, it is very likely
they will have greater expertise than a client firm, which may be entering such an agreement
for the first time (Lacity and Willcocks 2001). Evidence from the ten outsourcing contracts
supports the notion that multinational IT firms play a strong initial role in educating client
firms about the design and operation of an effective contract for IT services.7 The challenge for
the client firm is to use its experience in supplying these services in-house to negotiate with the
IT supplier over improvements in the information systems and to assimilate the knowledge in
the outsourced business service in a manner that leverages value-added across other areas of its
business.

We found significant differences in the degree to which client firms were able to reap the
potential benefits of linkages through IT outsourcing. In a number of cases, managers of client
firms claimed to have benefited from the careful contract design stipulated by the IT firm.
First, such contracts typically required strict monitoring and control of the quantity and quality
of IT services (including penalties for underperformance). Managers at the Brazilian airline, for
example, had to monitor more than 500 performance indicators and this contractual
requirement for quality checks (imposed by the IT firm) was believed to have generated
improvements in the areas of reservations, ticketing, boarding, airline control, crew control and
maintenance mentioned above. Second, the standard contract typically required regular
upgrading of hardware and software. At one case, the client manager explained that, prior to
outsourcing, it was nearly impossible to win the argument for regular upgrading of systems.
The outsourcing contract provided a strategic solution for client IT managers by specifying
annual IT investment over the contract duration (IBM3 BR). Also, the client in another case
had made no upgrades in its in-house IT systems in the two years following the country’s
economic crisis. Under outsourcing, the IT firm offered a contract that imposed upgrading on
the client:
Without having a contract we wouldn’t have been… obliged to update the technological equipment…
We wouldn’t have changed equipment, and in 5 or 6 years we would have had a completely obsolete IT

7
The following quote from one of the IT firm managers we spoke with is typical of the way support is offered in
the design stage of contracting:
Many times the client brings us his model contract and we tell him, ‘this model won’t work in three years
(because of this or that reason)’, and we propose ours… we also show them how to measure service level
agreements, how to tackle penalties (IBM1, IT firm, AR).

16
 park. … But now we are imposing an annual updating of equipment, which was indeed in the contract, so
that when the contract expires we have reasonable equipment and not obsolete technology. (IBM1, client,
AR).

There were cases in which the clients had made special investments to step up their contracting
expertise prior to signing the agreement. For example, at IBM2 AR and IBM4 BR, where the
client was in fact the same multinational operating in each country, the client manager in Brazil
recollected that it drew on a range of advice on legal, technical, financial and purchasing issues
provided by a consulting firm, and sought help in the drafting of the contract from the IT
director and in-house lawyer at the client headquarters offices in the US:
The focus proposed by [the IT firm] was technological competence and we changed it to business
perspective. Also, we introduced continuous improvements… that weren’t shown clearly in the [IT
firm’s] contract. Then the cost model – it was very simple, just basic components – we introduced
services on-demand. Fourth, we had an issue about liabilities/penalties. (IBM4, client, BR).

In all cases above, careful attention to the design, management and administration of the
contract was used to improve service delivery (in many cases over what was done previously
in-house) and leverage value added across the wider production system of the client. Moreover,
in some cases, their prior expertise helped them to avoid one of the pitfalls of outsourcing to a
large oligopolistic supplier – lock-in (Lacity and Willcocks 2001) – through multi-supplier
contracts (table 5). The three cases which developed a multi-supplier contract all involved the
same client firm – a multinational with operations in both Argentina and Brazil. This client
outsourced IT infrastructure in its Brazilian operations to EDS, and in its Argentinian
operations to IBM. Moreover, in both countries, it outsourced half its IT applications to IBM
and the other half to Accenture. The client thus opted for a multi-supplier strategy as a
‘counterweight’ (client firm manager, AR) to avoid becoming locked in with a single supplier.

In contrast to the above, in two cases, clients admitted that they failed to use their accumulated
expertise in providing the service in-house to design and operate a sophisticated contract that
could secure technology and performance improvements (EDS8 BR and IBM3 BR). At IBM3
BR, the client was very slow in resolving a contractual issue about the extent to which the IT
firm, or the client, was responsible for provision of appropriate infrastructure, such as buildings
and air conditioning, and human resources to deal with changing circumstances. Its weak
expertise in contract negotiations led to three years of protracted discussion, obstructing
services improvements during this period.

[insert table 5]

17
There are three cases, however, where despite clients having the necessary prior related
experience in the supply of services in-house, and the ability to design and operate IT
outsourcing contracts that would afford them technology and performance improvements, they
had opted for less sophisticated ‘bodyshopping’ contracts in response to pressures for cost
control in an unstable economic environment (table 5). The case of EDS6 AR is illustrative. As
with the other two cases, client managers were especially concerned to manage the IT services
through highly detailed terms and conditions to control costs. The contract provided a
minimum guarantee of work for 40 persons with 60 days notification of any change or ‘exit
clause’. Based on a detailed list of professional IT workers, the client made requests based on
an hourly price for a specific level of skill. As such, no overall value was agreed with the IT
supplier. IT firm managers argued that the client’s reasons for contracting this way were
because the client regarded itself as a) a South American based firm subject to great
uncertainty and unable to predefine all the IT support it needed in a long-term plan; and b) not
sufficiently mature to handle complex contracting with the IT supplier. Representatives of the
IT supplier considered this form of contracting as problematic:
This is a form of contract where both sides lose... [The IT supplier] recommends switching from paying
per hour of labour to function points and is training [the client] staff in this system. What we would like
to happen is that we stop counting specific hours… yours or mine… to saying ‘for this package of hours,
for this application support, I charge you a fixed price and I guarantee certain productivity per contract’.
(EDS6, IT firm, AR).

It seems that potential mutual benefits were lost at the expense of cost control. But it is notable
that all three cases of bodyshopping were found in Argentina. Clearly, as argued in the section
above, in a context like the Argentine economy in the years immediately after the economic
crisis, it may be no surprise that client firms suddenly became very interested in cost control, in
the midst of collapse in product markets. At Accenture9 AR, the client’s contracting strategy
quickly changed following acquisition of the newly privatised client firm by a Spanish
multinational. While prior to outsourcing, it operated ‘like an American firm that outsourced
many activities’ (Accenture9, IT firm, AR), subsequently it was reluctant to sign long-term
contracts and switched to using time sheets for greater control:
When [the client] was bought by the Spanish firm, there was a shift to the Spanish model of less
outsourcing and smaller contracts under our management … There is a lot of distrust – that if we had an
external supplier we would lose control, we would lose power … (Accenture9, client, AR).

Also, at EDS5 AR, the use of bodyshopping was implemented as a transition strategy towards
gradual insourcing of IT services, again following the acquisition of the Argentinian-owned
client by a foreign multinational. Delegates from the new multinational firm quickly

18
questioned the client’s prior longstanding IT outsourcing arrangements and identified several
areas of conflict between the client’s needs, especially how it figured in a newly imposed
strategy of global restructuring (see below), and the capabilities of the IT supplier. The client
did not renew some parts of the contract, preferring instead to invest in new technical support
staff in its Brazilian operations, and transferred the remaining contracts to bodyshopping
contracts. In both cases, IT firm managers argued that these divergences from IT outsourcing
contracts reduced their ability to provide best quality IT services. Client firm managers, on the
other hand, argued that such contracts traded off greater performance improvements against a
degree of control over costs in an unstable economic environment.

The above suggests that there are significant differences in the mechanisms, especially the
preparation, design and operation of contracts, that client firms put in place to benefit from
linkages with IT services multinationals. Furthermore, unfavourable economic conditions
present an additional obstacle to leveraging positive linkage effects.

iii) Global location decisions of IT multinationals and linkages

Linkages are also dependent on the global strategies of multinationals. Dunning (1993) and
Zimny and Mallampally (2002), argue that service multinationals also pursue integrated global
organisational strategies like manufacturing multinationals, breaking up services into
components that can be produced where it is more efficient, or assigning one or more affiliates
a global (or regional) mandate each to provide a particular service or function to other
affiliates, to the parent firm or other affiliates that specialise in other functions. The findings
from this research cast further light on this by showing that there are potential problems
regarding the integration into the complex global strategies of affiliates of IT services
multinationals in less developed countries, which weakens linkage effects. We show below that
IT services multinationals move between countries both a) their own operations, and/or b) the
execution of their contracts with clients. These practices relocate their clients’ outsourcing
from suppliers initially located within a domestic economy to suppliers located outside it, and
are detrimental to linkages between clients and suppliers.

The three IT services multinationals pursue global strategies. The new software factory of IBM
in Argentina supplies 25% of its maintenance and development of applications to clients
located abroad, especially USA. Also, EDS follows what it calls a ‘best shore’ strategy, with
the most convenient locations – defined as lower cost and more appropriate skills - as

19
recipients of work from other locations. While this only involved 30 to 40 workers in
Argentina at the time of the interviews, this strategy was growing, with a new contract to
provide applications to the USA and Europe, which would lead to the hiring of an additional
100 workers. Moreover, EDS classified its staff into three levels: level 1 included basic
operators who earn lower salaries and tend to be hired in the host country; level 2 included data
centre operators working on UNIX, mainframes and Windows NT, whose work can be done at
a distance; and level 3 included high-level experts, whose very specialised work is best done at
a distance in skilled and lower cost locations. EDS representatives interviewed argued that the
firm was moving into a complex integration strategy in South America, with Argentina
focusing on a centre of experts in UNIX and AS 400 IBM and Brazil on mainframes, Linux
and communications. Similarly, Accenture representatives argued that it had an important
income from offshore services to US and European clients in 2002. Therefore, although the
strategy of the different multinationals varies, there is evidence in all cases of a global strategy:
The strategy of IBM and EDS are different, IBM is physically located almost everywhere, and EDS not
necessarily…. EDS functions with what it calls ‘anchor accounts’. If it obtains an outsourcing contract, it
automatically establishes offices in the country and builds from there. It grows through having a client.
(IBM 2, client, AR).

Despite evidence of a global, intra-firm division of labour, the interviews revealed a number of
obstacles regarding the potential integration into the complex strategies of multinationals of
affiliates in less developed countries, and especially those in countries with macroeconomic
uncertainty. For example, despite the fact that Accenture Argentina could offer high skills and
lower salaries for the provision of certain specialised services to Spain, instability in the
Argentine economy was regarded a barrier for establishing a policy for offshoring work there.
Also, the US headquarters developed a new policy in 2003 that reduced profits in Argentina
from offshoring. The introduction of a ‘revenue sharing scheme’ meant that revenue was
collected in the country where the client was located - referred to as the ‘profit centre’- rather
than in the location of the employees doing the work:
As an example, if AT&T in the USA wants work to be done offshore, the revenue goes to the New Jersey
Accenture office, not to the office that does the work. (Accenture 9, IT firm, AR).

An additional obstacle is the lack of weight of Latin American affiliates for the global strategy:
EDS in Brazil has more weight than EDS in Argentina, and IBM has more important weight in Argentina
than in Brazil so that affects decisions. (IBM 2, client, AR).

Actually Latin America represents 2-4% of all EDS revenue, so it is very small. When EDS sets global
procedures, Brazil is not strongly represented in this. (EDS 8, IT firm, BR).

20
Evidence from this research confirms the view of foreign investment in services as ‘footloose’
(UNCTAD 2004), since multinational IT services providers are able to move their operations
from one subsidiary to another, especially during periods of economic downturn. For example,
in the years following the crisis, EDS Argentina signed important contracts with Chilean firms
including LanChile airline, Banco de Chile bank and Coca-Cola bottler Andina. Highly skilled
and experienced employees from EDS Argentina, including the director of operations, were
spending two days each a week in Chile. Also, many EDS Argentina workers were transferred
from Argentina to Chile and Brazil when EDS Argentina won the contract for Coca Cola
Bottling, involving Chile, Argentina and Brazil, and McDonald’s, involving all Latin America,
requiring a strategic shift in regional operations. In another case, when a European firm
acquired the privatised Argentinian oil firm, it retained the outsourcing contract with Accenture
Argentina, but shifted the governance of the IT outsourcing relation to the European client
headquarters, requiring frequent travel of the IT outsourcing director to Europe. While these
migration patterns of highly skilled and experienced employees contribute to the flexibility of
multinationals, it may also, in the longer term, weaken their ties with their host country,
reducing the potential of positive linkage effects with clients and the host economy.

Furthermore, this research revealed that IT multinationals are able to move not only their own
operations between countries, but also the execution of their contracts with clients. This raises
a second potential issue as these practices relocate their clients’ outsourcing from suppliers
initially located within a domestic economy to suppliers located outside it. As shown below,
this facilitates regionalisation and restructuring of the operations of (especially multinational)
client firms, weakening linkage effects with clients and the host economy. Table 6 shows that
in five out of ten cases IT outsourcing was used as a stepping stone towards regionalisation of
the multinational client. In all these cases, the change was driven by the client European
headquarters.

[insert table 6]

For example, when the automotive firm was taken over by a European firm, the new strategy
was to regionalise global operations by opening a large data centre in Brazil to handle the
Mercosur market, including accounting, administration and other operations through the
implementation of SAP by AtosOrigin in Brazil. This was not possible in Argentina since EDS
Argentina – which held the IT outsourcing contract - did not engage in SAP consulting. Also,

21
since the Brazilian subsidiary had three manufacturing factories and the Argentine subsidiary
only had one, a strategy to reap ‘economies of scale’ dictated that IT operations were in the
largest regional centre. The representative of the Argentine automotive subsidiary argued that
from the moment that decision was adopted, the Argentine subsidiary became a second-rate
player in terms of IT services expenditure and decisions:
Between 2000 and 2001 with the implementation of the data centre in Curitiba we started to cut services
with [the IT supplier in Argentina]… we start to transfer IT services to Brazil… instead of [the IT
supplier in Argentina], [the Brazilian affiliate of the IT supplier] bills me X a year for its service, and
synergy [by centralisation] with Brazil enables me to reduce costs by 15%. (EDS 5, client, AR).

As a result, there was a drop in IT expenditure in the Argentine subsidiary from US$12.2m in
2000 to US$3.6m in 2004, reflecting both a massive shift in IT work to the Brazilian subsidiary
(following the collapse of auto sales since 2000) and the devaluation effect. The drop is the
result of the ‘synergies’ of centralising IT operations in Brazil. In this example, the French
headquarters was driving change. While it faced obstacles to closing manufacturing plants in
Argentina, it found it easier to regionalise IT services, and move their provision to a different
country, since IT had already been outsourced to a multinational IT services firm. While
vociferous protests would have followed a ‘relocation’ of a manufacturing factory to Brazil, the
‘relocation’ of IT services to Brazil did not attract either media or workers’ attention, even
though it resulted in reduced employment and income in the IT area of the automotive firm.

Also, as shown above, following acquisitions, multinationals often seek to restructure acquired
subsidiaries. In two cases, when a European firm acquired the newly privatised clients in
Argentina and Brazil, IT outsourcing was sought as a way to facilitate plans for global
restructuring and to consolidate IT services in one location:
All [subsidiaries] were requested to have the same structure...and the same applications…To have
common infrastructure would enable us to consolidate the computer centre… Also we thought that with
strategic partners like EDS or IBM - they are in all the geographic areas where [the client] was - the
decision to outsource… was going to facilitate the process of having common platforms or in some time
to converge to one computer centre or two in Latin America, or one in Latin America and one in Spain -
one as a backup of the other. (IBM 1, client, AR).

For another client, IT outsourcing was considered as the solution that would facilitate
regionalisation. The representative of the Brazilian firm argued that it was on their agenda to
create a single datacentre that could be outsourced:
In 2001, we had a project on regional opportunities – how Brazil and Argentina and Chile could work
together to make efficiencies. We looked specifically at datacentres. Is it possible to have a single
datacentre for the region? We made this study, we used McKinsey to help us analyse this. One of the
ideas was to outsource the operation. We stopped the project with the Argentine crisis. (IBM 4, client,
BR).

22
IT outsourcing thus facilitates flexibility and firm-wide restructuring and regionalisation in the
(especially multinational) client firms. One of the implications of this is that it weakens the
linkages between the IT supplier and client firms, separating multinationals’ investment and
employment decisions from host countries. This places less developed host countries at
increasing risk, since their position of competitive advantage depends increasingly upon
multinationals’ location and linkage decisions, resulting from confidential global corporate
strategies of upgrading, downgrading and hierarchical ranking among subsidiary production
units (Chesnais 1992).

Conclusion
This research raises new issues regarding linkage effects of large multinational suppliers of IT
services and their clients in (middle income) less developed countries. First, we show that
economic and institutional features affect the nature of forward linkages to global IT suppliers
(complementing the literature on backward linkages, see Blomstrom and Kokko 1998,
UNCTAD 2001). Also, there were significant differences in the ability of client firms to benefit
from these linkages, in part contingent on their absorptive capacity (Cohen and Levinthal
1989). The data suggest that an important component of this is represented by client expertise
in the design and operation of IT outsourcing agreements. But in an economic environment
characterised by great economic uncertainty, such as Argentina in the early 2000s,
technological and performance improvements that may be achieved by the ‘best practice’
services offered by these oligopolistic suppliers (Gereffi et al. 2005), or potential forward
linkage effects, are traded off against the need for greater cost control.

The research also shows that IT services multinationals are able to move between countries not
only their own operations, but also the execution of contracts with clients. These practices
relocate clients’ outsourcing from suppliers initially located within a domestic economy to
suppliers located outside it, facilitating consolidation and regionalisation of business segments
of the (multinational) clients (Dunning 1993, Chesnais 1992). The results from this research
therefore not only confirm the proposition that global service suppliers are ‘footloose’
(UNCTAD 2004), but show that outsourcing services to these global services suppliers
contribute to making clients (or segments of the clients’ operations) themselves more
‘footloose’, weakening linkage effects. This raises important questions for less developed
countries seeking to attract and retain multinationals, as IT outsourcing brings irreversible
restructuring effects on IT employment and investment in host countries. Although these

23
findings refer to the cases surveyed, they may also be relevant to an increasing number of
routinised services previously produced in-house by large domestic and multinational firms
and increasingly outsourced or subcontracted to this new kind of global multinational suppliers
of services.

24
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Table 1. Details of the 10 IT outsourcing contracts investigated

IT supplier Client Sector Ownership Start IT services provided Contract Initial Staff
year duration value transferred
(years) (U$S from client
millions) to supplier
IBM (ARG) Telefonica communications privatised/acquired 2000 Infrastructure and 50% of its 6.5 252 285
by foreign firm applications
BankBoston banking foreign subsidiary 2003 Infrastructure (management of 10 41 60
platforms)
EDS (ARG) Techint steel tubes domestic 2001 Helpdesk, applications Hourly 40 (total 30
manufacture development priced value to
contract date)
Renault automotive acquired by foreign 1993 Infrastructure and applications 6 43 (initial) 122
Argentina firm development and management 100
(renewed)
Accenture YPF/Repsol oil and gas privatised/acquired 2001 Helpdesk and applications 5 n.a. n.a.
(ARG) by foreign firm management 2
Telefonica communications privatised/acquired 2000 Applications management 5 30 500
by foreign firm
IBM (BR) Varig airline domestic 1997 Infrastructure, mainframe 8 200 200
operations, mid-range operations,
distributed environments (desktop
support), applications development
and maintenance
BankBoston banking foreign subsidiary 2004 Operation of datacentre, 10 90 60
infrastructure, operate and support
but only for mainframe and mid-
range operations, no distributed
desktop

EDS (BR) Telefonica communications privatised/acquired 2001 Infrastructure 5 400 300

by foreign firm
ABN Amro banking foreign subsidiary 1996 Data processing and applications 4 120 (most None
(Banco 1998 recent (developme
Real) 2003 contract) nt of new
activity by
EDS)

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Table 2. Key data on the three IT services multinationals

IT supplier Origin No. of employees Key information

IBM Hardware 2,500 (Argentina) Established in Argentina and Brazil in the 1920s.
5,000 (Brazil) Switched from hardware producer to services provider.
Expanded Global Services division by acquiring
PriceWaterhouseCoopers in 2002.
Invested US$50 million in a software factory in
Greater Buenos Aires in 2001.
Business lines include: application management, on-
demand services and consulting.

Accenture Strategic and 1,800 (Argentina Ex Andersen Consulting, became new firm in 2000.
IT consulting and Chile) Established a laboratory for SAP applications,
2,650 (Brazil) management and accountancy and logistics, employing
230 professionals in Argentina.
Established a software factory employing 150
professionals in Brazil.

EDS IT services 1,250 (Argentina) Established in Brazil in 1985 when GM acquired EDS
outsourcing 5,700 (Brazil) and in Argentina in 1993 when EDS took over IT
operations of locally-controlled Renault Argentina.
Bought A.T. Kearney in 1995. Separated from GM in
1996. Consolidated Latin American operations in 1998.
Facilities in Brazil include solutions centre (standard
CMM4), service management centre (7000m2, ISO
9001), call centre and business process outsourcing
centre.
Facilities in Argentina include service management
centre (1200m2, ISO 9001), solutions centre (CMM3)
and call centre.
From 2002, the main business lines were operations
solutions and solutions consulting.

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Table 3. Top five IT services firms in Argentina and Brazil

Argentina1 Brazil2
IT services Estimated IT services Estimated
revenue market share revenue market share
IBM US$75m 12% IBM US$489m 15%
EDS US$42m 7% Unisys US$189m 6%
Siemens Itron US$42m 7% EDS US$180m 6%
Accenture US$40m 6% Hewlett-Packard US$165m 5%
Hewlett-Packard US$37m 6% Accenture US$141m 4%

Notes: 1. 2003 data converted at US$1 to AR$2.89; 2. 2002 data.

Source: data for Argentina are from the trade journal Information Technology (Nov. 2004: 39), Buenos Aires and
Trends Consulting (personal communication, 24/11/04); data for Brazil are from IDC (2003: table 43).

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Table 4. Changes in the client’s production system accompanying IT outsourcing

Case Main changes in client’s production system

IBM1 AR Development of a common IT infrastructure and applications across different
subsidiaries of the client following privatisation and acquisition by a foreign firm
IBM2 AR Restructuring of IT budget from fixed costs to ‘pay-for-use’ variable costs, as well
as improved security
IBM3 BR Improvements in a number of business processes, including reservations, finances,
engineering maintenance and crew scheduling
IBM4 BR Improved ability to offer similar services as a large organisation and remain
specialised and small
EDS5 AR Reductions in the time to process bids with over 200 suppliers through a carefully
designed intranet system
EDS6 AR Rationalisation and avoidance of legal problems with dealings with a large
number of smaller subcontractors
EDS7 BR Development of common IT infrastructure and applications across different
subsidiaries of client following privatisation and acquisition by foreign firm
EDS8 BR Creation of new line of activity, including card processing, applications and call
centre and financial processes
Accenture9 AR Transformation programme included the design and implementation of electronic
and physical networks, which allowed central monitoring of all elements of the
sales operations and the use of benchmark data to keep prices competitive, the
new common platform also enabled client headquarters to change electronically
the prices of the product sold, in response to conditions within micro-markets (up
to four times a day).
Accenture10 AR Improvement in a range of application management functions, including
commercial sales management, product sales management, logistics, service
billing and human resources

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Table 5. Client approaches to contracting

Client firm directs Client develops a Client firm weak Client chooses a
contract design and multi-supplier influence on ‘body-shopping’
operation contract contract design and contract
operation

Case with a foreign- IBM2 AR IBM1 AR EDS8 BR EDS5 AR

owned client IBM4 BR EDS7 BR Accenture9 AR
Accenture10 AR

Case with a domestic- IBM3 BR EDS6 AR

owned client

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Table 6. Client regionalisation strategy

Strategy Cases Reasons for strategy

IT outsourcing as stepping stone EDS5 AR Size and specialisation of Brazilian
towards international affiliate operations
regionalisation (mainly in Brazil) IBM1 AR, EDS7 BR Common IT infrastructure in Latin
of multinational client American operations
IBM4 BR Failed attempt to create efficiencies
through single Latin American datacentre
Accenture9 AR Change in governance
National provision of IT IBM2 AR
outsourcing IBM3 BR
EDS6 AR
EDS8 BR
Accenture10 AR

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Appendix Table 1. Source of interview data

IT supplier Job position of interviewee Client firm Job position of interviewee

Argentina IBM Senior manager (institutional relations)
Senior manager (Bank Boston and Telefonica Bank Boston Senior executive manager (Infrastructure and new
contracts) (2 interviews) technology)
Senior manager (Telefonica contract) Telefonica Senior executive manager (IT department)

EDS Senior manager (human resources)

Senior project manager (Renault contract) Renault Senior executive manager (IT department)
Senior executive manager (Techint contract) Techint Senior executive manager (IT department)

Accenture Senior manager

Senior manager (human resources)
Senior manager (human resources)
Senior manager (Telefonica contract) Telefonica --
Senior executive manager (YPF Repsol YPF Repsol Senior executive manager (IT department)
contract)
Senior manager (IT department)
Senior manager (IT department)

Brazil IBM Senior executive manager (Varig and Bank Varig Senior executive manager (IT department)
Boston contracts)
Bank Boston Senior executive manager (IT department)
Senior manager (IT department)

EDS Senior manager (human resources)

Senior project manager (Banco Real contract) Banco Real (ABN Amro)
Project manager (Banco Real contract)
Senior project manager (Telefonica contract) Telefonica

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