Information Technology Sourcing

1
Information Technology Sourcing

• Rudy Hirschheim
• ISRC
• Bauer College of Business
• University of Houston

2
History of IT Sourcing

• insourcing
• outsourcing
• insourcing
• selective sourcing
• partnerships / alliances
• backsourcing
• services provided from inside
• after outsourcing bid evaluation

3
Insourcing (old)

• IT insourcing is the use of the internal IT
  department to provide products and services
• operations, applications development, telecomms,
  PC support, etc.
• purchase extra expertise from consultants as
  needed
• allocate costs among business units (i.e. users)

4
Outsourcing

• Information technology outsourcing is the use of
  a third - party vendor to provide information
  products and services
• Outsourcing on a minor scale has occurred since
  the 1960s
• 1966 - H. Ross Perots EDS formed
• 1969 - Blue Shield (Penn.) first outsourcing deal
• Four stage history of outsourcing
• 1. facilities management
• 2. systems integration
• 3. outsourcing
• 4. mutual equity stakes relationship
• source Morton Meyerson, CEO Perot Systems Corp.

5
IT Outsourcing Timeline
EDS wins Blue Shield of Penn account facilities
mgmt, contract programming, systems
integration,service bureau, time sharing
1966
1973
GM outsources to EDS
EDS involved in financial outsourcing deals
-Continental Airlines -First City Bank
-Enron IBM announces ISSC
Mid 80s to late
Kodak..outsourcing is legitimized (The era of the
megadeal begins)
1989
BP, KF Group (Sweden), Canada Post (Outsourcing
becomes international) Alliances, partnerships
grow Cosourcing EDS Outsourcing moves beyond
simple cost savingsvalue -based sourcing/equity-b
ased outsourcing, business process outsourcing
Best of Breed Pinnacle Alliance - JP Morgan
1993
Creativity in deal Making, cf. South of Australia
Mid 90s
Other functions look to be outsourced, IT is seen
as the leader Lots of renegotiating of
contracts
Late 90s
70 of companies outsource some piece of
IT selective sourcing is totally accepted as
sound business practice
Web and eBusiness helping to drive
outsourcing especially ASP
1999 2001
The emergence of ASPs
Net sourcing
6
Why the interest?

• focus on core competencies
• cost savings
• skills shortage
• alliances formations
• bandwagon effect
• outsourcing is now part of everyday parlance

7
Types of functions being outsourced

• initially non-core, non-strategic
• custodial, cafeteria, etc.
• has moved to non-core but strategic
• information technology the most visible
• accounting, HR, legal, risk assessment, etc.
• whats next? core and strategic?
• exploration and production in the oil and gas
  industry
• teaching at universities

8
Whats happening in IT sourcing?

• Growing megadeals ( billions)
• New players, new niches
• Leveling of the playing field
• Partnering, alliances, equity holding deals
• Lots of experience (not all good!)
• IT perceived as the leaders in outsourcing
• Business process outsourcing
• ERP software co. alliances
• Outsourcing not just for big companies
• ASPs

9
The Industry

• Since 1989, over 100 big (gt200m) outsourcing
  contracts have been signed and the number
  continues to grow
• World-wide growth, not just the US
• IT skills shortage is driving a significant
  portion of this growth
• 70 of companies have outsourced IT to some
  extent
• IT services market in 1999 was 324 billion
  growing at 19.6 rate ? by 2004 the market will
  be 792 billion. The outsourcing percentage in
  1999 was 60 (194 billion) growing to 67 by
  2002 (531 billion). Dataquest 2000
• ASP market to grow from 7m in 1999 to 7
  billion by 2004 from 20k users in 1999 to 30
  million by 2004

10
IT Outsourcing Margins

• Number of megadeals is on the rise, but the
  profit margins they are commanding is dropping
• CSC, EDS, IBM are reporting single digit profit
  margins
• EDS reportedly spent 10 million to win BellSouth
  deal
• Gross margins for IT outsourcing rose through
  1997 but have been on the way down since. (eg.
  26.1 in 1997 vs. 24.5 in 1995)
• Vendors crave megadeals because
• prestige, high-profile, credibility
• long-term cash flow. looks good on the balance
  sheet
• Higher profit margins come from add-ons

11
The IndustryBillion Dollar Outsourcing Deals

• Customer Vendor Value Year
• General Motors EDS 38 1996
• US Military EDS 7 1999
• DuPont/Conoco CSC/Andersen 4.2 1997
• Commonwealth Bank-Australia EDS 3.8 1997
• Bell South EDS/Andersen 3.2 1998
• Xerox Corp. EDS 3.2 1994
• Swiss Bank Corp. Perot Systems 3 1997
• McDonnell Douglas ISSC 3 1992
• General Dynamics CSC 3 1991
• Delta Airlines ATT 2.8 1994
• Continental Airlines EDS 2.1 1991
• JP Morgan CSC 2.1 1996
• Lufthansa Airlines EDS 2 1995
• Bank One IBM/ATT 2 1998
• Banca di Roma EDS 1.5 1998
• Inland Revenue EDS 1.5 1994
• British Aerospace CSC 1.5 1994

12
Sample Outsourcing Deals
Vendor(s) Client MCI Systemhouse Amoco
Canada 5 yr deal, (multimillion ), HR
information systems (payroll administration and
management) CSC, UNISYS, US Federal
Govt SunGard Computer Services 10 yr
deal, 6 billion, for virtual data center
services CSC DOD 4 yr deal, 200
million Business Process Reengineering services
EDS Rolls Royce 500 million EDS share,
theyll manage 2 billion of IT services
...co-sourcing deal, global in scope,
strategic in intent, risk/reward sharing EDS,
Andersen Bell South 10 year, 3.2
billion EDS Commonwealth Bank 10 year, 5
billion (AUS) CSC General Motors Locomotive 5
yr contract worth in excess of 100
million EDS Navy 5 yr contract to
manage Navy/Marines intranet (7 billion)
13
Outsourcing Arrangement

• The keys to the kingdom type of outsourcing
  replaces an internal IT department with a third
  party vendor
• Sell information assets to vendor
• Transfer leases and license agreements
• Transfer information technology employee
• Pay a fixed fee for baseline services
• Transfer profit and loss responsibility to the
  vendor
• Commit to the outsourcing vendor for 5 to 10 years

14
IT Sourcing Trends

• CIO increasingly the initiator of sourcing
  evaluations
• Deals are getting bigger and more complex
• Deals are getting more strategic and more
  creative
• Even the largest vendors are partnering
• no one vendor can be best of breed in everything
• Clients (and even vendors) are looking to
  renegotiate
• Vendor are becoming short of key personnel and
  skills
• More emphasis being placed on how the deal will
  be managed ? need for a project executive (PE)
• The industry is going through a maturing phase
• lots of re-negotiations taking place
• suppliers struggling to upgrade skills and
  capabilities
• companies need to learn how to better manage
  sourcing

15
Success in Outsourcing not all that easy to find

• Gartner Group and Coopers Lybrand recent
  studies paint a sobering picture
• 2/3 of outsourcing contracts fail
• 24 of companies will terminate their contracts
• Reasons for failure (Gartner Group)
• poorly defined contracts lack of attention to
  detail
• bad deal management
• unrealistic expectations
• turnover in vendor and customer staffs
• lack of committed resources

16
Other reasons for failure

• inflexible contracts
• unmeasurable objectives
• poor contract management
• lack of communication
• customer wont allow the vendor to make a
  reasonable profit on the contract
• h/w is going down, but people costs are going up
• lack of transition planning
• customer left with no IT skills

17
Insourcing (new)

• IT insourcing is the use of the internal IT
  department to provide products and services based
  on a competitive bid against third - party
  vendors
• Cost cutting measures are adopted to allow the
  internal department to successfully compete with
  outside vendors
• automation
• chargeback
• data center consolidation
• department reorganization
• just-in-time resources
• standardization (hardware software)
• negotiations
• service elimination

18
Selective Sourcing

• Select outsourcing candidates from IT portfolio
• Classify IT activities as differentiators or
  commodities
• Compare in-house provision with vendor offerings
• Outsource those activities which do not add value
  to the operation of the business
• 30 - 70 of IT budget is outsourced

19
Partnerships / Alliances

• Formation of Alliances
• Kodak and IBM (USA)
• ATT and Delta (TransQuest) (USA) busted
• IBM Canada and Bell Canada (Canada)
• LendLease and ISSC (Australia)
• Telstra and ISSC (Australia)
• Swiss Bank and Perot Systems (Systor)
  (Switzerland)
• JP Morgan
• ATT and IBM (USA)
• Shell Services International an interesting
  story
• Industry alliances, eg. Toronto Dominion, Bank of
  Montreal, Royal Bank of Canada formation of a
  joint venture

20
Partnerships / Alliances

• Industry Client Vendors Value Date
• Kodak ISSC 1 billion 1989
• DEC (5 10 years)
• Businessland
• BP Exploration Sema Group 200 million 1993
• SAIC (annually)
• Syncordia (BT)
• J P Morgan Pinnacle Alliance 2
  billion 1996
• CSC (7 years)
• Andersen Consulting
• ATT Solutions
• Bell Atlantic
• Busted, now EDS as of 1998

21
Partnerships / Alliances (new entities)

• Alliances New Entity Value / Revenue
• Swiss Bank Corp. Systor AG 6.25 (25 year)
• Perot Systems SB 24.9 interest in Perot
• Perot 40 interest in Systor
• Revenue 100m /year
• (develops and sells client/server solutions to
  the banking industry)
• Kodak Technology Revenue 700 m / year
• IBM Service Solutions
• (provides multivendor PC maintenance and support
  services in a variety of industries)
• Delta TransQuest ?
• ATT
• (provides IT solutions to the airline industry)

22
Partnerships / Alliances (new entities)

• Alliances New Entity Value / Revenue
• IVI Business Travel BTI Americas ?
• US Travel
• EDS
• (develops and sells client/server and data
  warehousing technologies for travel agent support
  and reservations)
• Mutual Life Insurance of NY ? ?
• CSC
• (markets software and services to the insurance
  industry
• IBM Australia Advanta new
• Telstra
• Lend Lease
• (management and operation of networks for
  companies in the pacific rim)

23
Partnerships / Alliances (equity holding)

• Equity Holding Deals
• Industry Client Vendor Value
• Swiss Bank Corp. Perot Systems 6.25 (25 year)
• (24.9 interest)
• Lend Lease ISSC (IBM Global Services) 400
  million (5 year)
• (35 interest)
• Telstra ISSC (IBM Global Services) 26
  interest - Telesra
• 23 Lend Lease
• 51 IBM
• Commonwealth Bank EDS 3.7 billion (10 year)
• (35 interest)

24
Backsourcing

• 1997 Delloite Touche study reports that only
  35 of outsourcees realize expected gains
• Three distinct patterns are emerging
• renegotiate contract
• repopulate an internal IS department
• terminate contract
• Examples
• Continental Airlines
• General Motors
• Enron
• Browning Ferris Inc.
• MONY
• FAI (Australia)
• Outsourcing can inhibit flexibility

25
Future Directions

• a la cart outsourcing
• IT, HR, accounting, legal, distribution ...
• alliances, partnerships, new entities
• creeping outsourcing
• enterprise resource planning led outsourcing
• virtual organization
• the swinging pendulum

26
IT Cost vs. Service Dilemma
high
Super Star
Differentiator
Service
Low Cost Provider
low
Black Hole
high
low
Cost
27
References

• Lacity, M. and Hirschheim, R., Information
  Systems Outsourcing Myths, Metaphors and
  Realities, J. Wiley Sons, 1993
• Lacity, M. and Hirschheim, R., Beyond the
  Information Systems Outsourcing Bandwagon The
  Insourcing Response, J. Wiley Sons, 1995
• Willcocks, L. and Lacity, M. (eds.), Strategic
  Sourcing of Information Systems, J. Wiley Sons,
  1998
• Hirschheim, R., Heinzl, A. and Dibbern, J.
  (eds.), Information Systems Outsourcing Enduring
  Themes, Emergent Patterns and Future Directions,
  Springer, 2002