Strategic Perspective on IT Outsourcing And IT OperationsManagement

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Strategic Perspective on IT OutsourcingAnd IT
Operations/Management

• IS 577
• Chapters 8, 9 and 10
• DePaul University - CTI
• John Fisher

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Final Paper IT Audit

• Background of Company
• IT Department
• Structure, Organization, etc.
• Major Issues facing company/IT Department
• Role of IT Dept. ? Outsourcing
• Corporate Culture ? Emerging
  Technology
• Alignment with business ? Value Chain
• Use the various chapters in the text
• Analysis of the situation
• What is their situation
• What are they doing right/wrong
• Recommendations
• Your opinion based on findings

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What we will cover today

• Questions from last class?
• Final Paper and Presentations Nov. 13th
• Major points from
• Chapter 8 Outsourcing
• Chapters 9-10 IT Operations/Management
• Case Study Singapore Unlimited

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Major Points for Chapter 8

• What is IT Outsourcing?
• Why do organizations outsource IT?
• Outsourcing contracts
• Suitable allies
• Employee concerns
• Continuing CIO responsibilities

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What is IT Outsourcing?

• Contracting with another organization to provide
  one or more IT services
• Hardware
• Data Center Processing
• Network Operations
• Acquisition/maintenance of PCs, etc
• Software development
• Software maintenance
• Special projects

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Why do organizations outsource?

• Why do it?
• Financial Considerations
• Lower cost Gains from selling
  IT assets
• Variable costs to fixed cost Increase
  buying power
• Quality Considerations
• Overcome poor IT performance Quick IT
  improvements
• Business Considerations
• Overcome internal bias IT is not
  a core competency
• IT competency is not strategic for the business

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Why do organizations outsource?

• Why wouldnt you do it?
• Strategic Factors
• IT is a strategic asset IT is a core
  competency
• IT is critical for success in the industry
• Organizational Factors
• Function is widely dispersed
• Outsourced piece is woven closely with other
  units
• Project Related Factors
• Requires additional coordination - adds
  complexity
• Requires closer proximity
• Its often not less expensive

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Outsourcing Contracts

• Typical contract 10 years
• Outsourcer wants longer contract
• Able to spread out costs
• Profits increase over time
• Company outsourcing wants shorter contract
• Costs rise over time
• Initial costs are often lower because of asset
  sale
• Negotiation issues
• Xerox example

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Finding a suitable ally

• Should have successful track record
• Strong company (remember 10 year contract)
• Similar culture or different culture?
• Depending on reasons for outsourcing
• Similar to a marriage
• Sometimes opposites attract
• Sometimes they dont

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Employee Concerns

• Any change presents risk of losing key employees
• People want to know What will happen to me?
• Communicate, Communicate, Communicate
• Publicize plans as much as possible
• Variety of compensation plans
• Stay bonus
• Move bonus
• Compensation for various benefit plans

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Ongoing CIO Responsibilities

• Operating
• Contract management
• Coordination of efforts
• Performance monitoring
• Continually selling the idea
• Strategic
• Monitoring of external market
• Adaptation to market changes
• Long term planning
• Assessment of emerging technologies

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Examples

• Continental Bank
• CNA Insurance
• Xerox
• Others?

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Make, Buy or Outsource
Rands (1993)

• Companys Skills Related to Best External Source

• Low

• High

• Equal

• Low

Buy
Make or Buy
Tend to make

• Strategic Importance

Strategic Alliances
Make
Tend to make

• High

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Sourcing Strategies
Need for tailor made support
In-house solution
Cost sharing or strategic alliance
High
Acquire standard package
True spin-Off or outsourcing
Low
Market Potential
Low
High
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Resource Dependence Theory
Strategic Choice Framework for the IT
Professional Resource
High
In-house solution
Cost sharing or strategic alliance
Degree of Resource Dependence
Acquire standard package
True spin-Off or outsourcing
Low
Low
High
Degree of volatility
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Major Points for Chapters 9-10

• IT Operations
• The other side of IT
• Day to day operations
• IT Management Services
• How should IT activities be managed?
• How should the COST of IT be managed?

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Levels of IT Management

• Measuring operations
• Budgeting
• Cost unit cost reduction
• Maintenance fixes
• Service-level agreements
• Customer satisfaction

• Run investments
• Utilities (power, water, TCO)
• Maintenance contracts
• Disaster recovery

Run the Business
Grow the Business

• Grow investments
• Software upgrades
• Incremental capacity
• Skills evolution training

• Measuring expansion
• Financial analysis
• Investment planning
• Enhancements
• Delivered information value
• Customer loyalty

Transform the Business

• Transform investments
• New business (e.g., MA)
• Business process outsourcing
• Major initiatives requiring new application
  packages

• Measuring innovation
• Time to innovation
• Innovation value
• Brand
• Innovation results

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Glass House Concerns

• Performance
• Up time and response time
• Capacity Planning
• HW and SW
• Changes in Technology
• Unix, Linux, WindowsX, Mainframe, Midrange
• Security
• Privacy

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Enterprise Simplification

• Making things more simple can improve IT
  operations dramatically
• Databases
• Operating Systems
• Network Hardware and Software
• PCs
• Development Approaches
• Development Languages

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Accounting for Information Technology Costs

• Three Basic Approaches to IT Costs
• Unallocated Cost Center
• Allocated Cost Center
• Profit Center

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Accounting for Information Technology Costs
Allocated Method Description
Advantage Disadvantage
Experiments with technology can occur User can
request the development of new systems IS can
develop systems regardless of economic benefit.
Costs can get out of control. IS professionals
cannot easily allocate their budget among
conflicting requests.
All IS costs are considered an organizational
expense
Unallocated cost center
IS can have problems determining allocation of
costs Friction among user departments and between
them and IS can occur IS has no reason to operate
efficiently.
User request only beneficial services. It works
well in organization where changes are made
regularly to all internal customers
IS department allocates costs to departments that
use its services.
Allocated cost center
Users can choose who will perform their IT
service. IS department has incentives to operate
efficiently.
IS charges internal and external users the same
and attempts to get both kinds of business.
Outsourcing may become more common. Fees may be
higher than with other methods.
Profit center
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How do you measure IT effectiveness?

• Some claim that IT has never increased business
  productivity
• Some IT projects can never have a definable ROI

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Something to think about

• General Rule
• Every company gets the IT system it deserves
• There are three basic components to any business
• People
• Process
• Technology
• Which one is the most difficult to implement?

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Wrap up

• Case Study
• QA
• In the News