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

• IT Outsourcing Evolution
• EDS
• Regulated, then to non regulated industries
• CSC
• First to governments then to industries GD
• ADP
• Payroll, data center, etc
• IBM
• The big bang internationalization, etc.
• Others
• (Gap Gemini, Perot Systems, Digital Equipment
  Corporation, Andersen Consulting, ATT Solutions
  etc. ?)

3
IT Outsourcing

• Recent IT Outsourcing Agreements
• Billions of
• Two factors have affected the growth of IT
  outsourcing
• Recognition of strategic alliances
• Changes in the technological environment

4
IT Outsourcing

• Acceptance of Strategic Alliances
• Finding a strong organization partner to
  complement an area of weakness gives an
  organization an island of stability in a
  turbulent environment.
• It is difficult to fight on all simultaneously on
  all fronts
• Alliances allow a company to simplify its
  management agenda safely.
• Alliance allow a firm to leverage a key part of
  the value chain by bringing in a strong partner
  that complements its skills.
• Both firms should legitimately be benefiting

5
IT Outsourcing

• IT Changing Environment
• Today, firms are not focusing IT only on
  internal processing systems but, in a network
  fashion, - integrating internal system with those
  of customers, suppliers, - to be more efficient
  in globally market place.
• This integration places extraordinary pressures
  on firms trying to keep the old system services
  running while developing the interconnections and
  services demanded by the new environment.
• On the one hand, firm are looking for low-cost
  maintenance of the old systems to ensure they
  operate reliably, while, on the other hand,
  gaining access to new skills to permit their
  transformation to new model.

6
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.

7
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

8
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.

9
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

10
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

11
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?

12
IT Outsourcing

• The Nature of IT Outsourcing Relationship
• Alliance
• Partnership
• Relationship (strategic)
• Marriage
• Integration
• The term outsourcing is inappropriate. This is
  really more of an integration of two separate
  businesses
• We wanted to take the best parts of each culture
  and put them together. The same goes for
  structure, strategy and people. Jagdish Dalal
  Head of Xeroxs Global outsourcing in 1994.
• Integration could only be achived if they
  developed a high degree of cooperation Mike Reed
  Xerox outsourcing team

13
IT Outsourcing

• When to Outsource IT and What could be
  Outsourced?

14
IT Outsourcing

• When do the benefit of outsourcing outweigh the
  risks?
• 1. Position in the strategic grid
• 2. Development portfolio
• 3. Organizational learning
• 4. A firms position in the market
• 5. Current IT organization
• 6. Make, Buy, Outsource
• 7. Sourcing Strategies
• 8. Resource dependence theory

15
Outsourcing
High

• Factory-uninterrupted service-oriented
• information resources management
• Outsourcing Presumption Yes,
• unless company is huge
• and well managed
• Reasons to consider outsourcing
• Higher -quality services and backup
• Management focus facilitated

• Strategic information resources
• management
• Outsourcing Presumption No.
• Reasons to consider outsourcing
• Rescue an out-of-control internal IT unit
• Tap source of cash
• Facilitate cost flexibility
• Facilitate management of divestiture

Current Dependence on Information

• Support -oriented information
• resources management
• Outsourcing Presumption Yes.
• Reasons to consider outsourcing
• Access to consider IT professionalism
• Access to current IT technologies
• Risk of inappropriate IT architecture
• reduced

• Turnaround information resources
• management
• Outsourcing Presumption No.
• Reasons to consider outsourcing
• Internal IT unit not capable in required
• technologies
• Internal IT unit not capable in required
• project management skill

Low
Importance of Sustained, Innovative Information
Resources Development
16
IT Outsourcing

• 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.

17
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.

18
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.

19
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.

20
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

21
Sourcing Strategies
High
In-house solution
Cost sharing or strategic alliance/ Selective
outsourcing
Need for tailor made support
True spin-Off or outsourcing
Low
Low
High
Market Potential to provide the support
22
Resource Dependence Theory
Strategic Choice Framework for the IT
Professional Resource
In-house solution
Cost sharing or strategic alliance
High
Degree of Resource Dependence
True spin-Off or outsourcing
Outsource
Low
Low
High
Degree of volatility
23
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).
Time