IT Outsourcing

1
IT Outsourcing

• Until 1990, the major drivers for outsourcing
  were
• Cost-effective access to specialized or
  occasionally needed computing power or systems
  development skills
• Avoidance of building in-house IT skills and
  skill sets, primarily an issue for small and very
  low-technology organizations
• Access to special functional capabilities.
  Outsourcing during this period was important but,
  in retrospect, largely peripheral to the main IT
  activities that took place in mid-sized and large
  organizations.

2
IT Outsourcing

• Contracting ?
• Contracting is the purchasing of goods or
  services when the buyer owns the process.
  Bendor-Samuel
• If the buyer owns a process but purchases time,
  products or services to facilitate that process,
  then the buyer is in a contractual relationship.
• Outsourcing?
• Outsourcing takes place when an organization
  transfer the ownership of a business process to a
  supplier Bendor-Samuel
• . The key is the concept of transfer of control
  or transfer of ownership.
• This is why IT outsourcing is very challenging
  and often a painful process.

3
IT Outsourcing

• What drives Outsourcing
• Concern for cost and quality
• Can we get our existing services for a reduced
  price at acceptable quality standard? (cost
  reduction)
• Can we get new systems developed faster?
• Breakdown in IT performance
• Access to capabilities not otherwise available
• Intense Supplier pressure
• To free internal resources for other purposes
• Simplified GM Agenda
• Concentrating on core competence?
• Improved company focus
• Financial factors (make capital available)
• E.g. General Dynamics received 200m for
  transferring its hardware/software to EDS.
• Cash infusion

4
IT Outsourcing

• What drives Outsourcing
• To reduce cycle time
• Some kind of process improvement (BPR/TQM)
• Corporate culture
• Turn fixed cost into variable cost
• Eliminating Internal Irritant
• Engage an outside agent in the change process.

5
IT Outsourcing

• Disadvantages of IT Outsourcing
• Can Increase Costs
• Locks Company to a Provider
• Switching Costs in outsourcing vs. contracting
• Terminating charges
• Resume responsibility for process itself
• Rebuild infrastructure
• Recapture the process expertise
• Removes Knowledge of Processes from the Company
• Time and materials, and other capital investments
• Decreases Ability to Use Information Technology
  Strategically
• Losing control over process
• Risk involved in establishing IT process group
  from scratch

6
IT Outsourcing

• Why Outsourcing Alliances are so Difficult
• Length of relationship
• Long term contracts (8-10 years.) in fast moving
  technical and business environment. A deal that
  make sense in the beginning might make less sense
  three years after and requires adjustments to
  functions
• Resulting into negotiation and misunderstanding
• Outsourcing is relatively easy but in-sourcing
  again is very difficult
• Initial process ownership investment, ?, etc

7
IT Outsourcing

• Difficulties with IT Outsourcing
• Measuring results
• In the first year the outputs closely resemble
  those anticipated in the contract. In subsequent
  year, however, the contract payment stream
  becomes less and less tied to the initial set of
  planned outputs as the world changes
• Supplier power
• The longer the outsourcing-relationship
  continued, the more the power shifts to the
  supplier, why?

8
IT Outsourcing

• When do the benefit of outsourcing outweigh the
  risks?
• Development portfolio
• Organizational learning
• A firms position in the market
• Current IT organization
• Make, Buy, Outsource
• Partnership Strategies

9
Development Portfolio

• The higher the percentage of the systems
  development portfolio in maintenance or
  high-structured projects, the more the portfolio
  is a candidate for outsourcing
• Outsourcers with access to high-quality, cheap
  labor pools (e.g. in Russia, India or Ireland)
  and good project management skills can
  consistently outperform, on both cost and
  quality, a local unit that is caught in a
  high-cost geographic area and lacks the
  contacts, skills and confidence to manage
  extended relationship
• The growth of global fiber-optic networks has
  made all conventional thinking on where work
  should be done obsolete
• Research have pointed out that more than 150,000
  programmers are working in India on software
  development for US and European countries
• Large, low-structured projects pose very
  difficult coordination problems for outsourcing.

10
IT Outsourcing

• Organizational Learning
• Many times people will change just the structure
  and the reporting relationships. But if you want
  to change a company, youd better change more
  than that. Theres the formal structure and then
  theres the way the company really works. You
  have to change the way it really works Allaire
  Xerox CEO 1992
• The more experience the firm has had in
  implementing redesign the easier the outsourcing
  will be
• Process reengineering seeks to install very
  different procedures for handling transactions
  and doing the firms work. Responsibility for
  such development work (low structure by its very
  nature) is the hardest to outsource.
• A significant component of many firms
  applications development portfolios comprises
  projects related to business process
  reengineering or organizational transformation.

11
IT Outsourcing

• A Firms Position in the market
• The further a company is from the network era in
  its internal use of IT, the more useful
  outsourcing can be to close the gap
• Firms still in the DP era and early micro era do
  not have the IT leadership, staff skills, or
  architecture to move ahead
• The outsourcer, by contrast, cannot just keep its
  old systems running, but must drive forward with
  contemporary practices and technology.

12
IT Outsourcing

• Current IT Organization
• The more IT development and operations are
  already segregated, in the organization and in
  accounting, the easier it is to negotiate an
  enduring outsourcing contract.
• A stand-alone differentiated IT unit has already
  developed the integrating organizational and
  control mechanisms that are the foundation for an
  outsourcing contract.
• Separate functions and their ways of integrating
  with the rest of the organization already exist.

13
Make, Buy or Outsource
Rands (1993)

• Companys Skills Related to Best External Source

• Low

• High

• Equal

• Low

Make or Buy/Out.
Buy/Outsource
Tend to make

• Strategic Importance

Strategic Alliances
Tend to make
Make

• High

14
Sourcing Strategies
High
In-house solution
Cost sharing or strategic alliance/ Selective
outsourcing
Need for tailor made support
True spin-Off or outsourcing (total)
Low
Low
High
Market Potential to provide the support
15
THE OUTSOURCING PROCESS
16
STAGES OF OFFSHORE OUTSOURCING
17
Stages
Performing / Strategic Focus (Not just focusing
on cost)
5 4 3 2 1
Norming / Proactive Cost Focus (Beginning to form
norms and actively focusing and proactively using
outsourcing for cost saving including offshore.
Outsourcing 20-40 of IT activities)
Storming / Strategic decision point (Organization
leaders share conflicting ideas about outsourcing
and pursuing different strategy to provide IT
services)
Forming / experimenting stage (outsourcing
between 10-20 of IT activities)
Insourcing / Bystander (outsourcing between 1-5
of IT. Mostly purchasing of IT functions).
Outsourcing Complexity