Outsourcing of IT Functions

1
Outsourcing of IT Functions

• Traditional Outsourcing removing IT from a
  function for a long term (10 years)
• Transitional Outsourcing using outside services
  to move to a new environment over a short term
  (1-3 years)
• Product Acquisition purchasing functionality
  rather than building it

2
Outsourcing Difficulties

• Contracts are structured for long periods
• (10 years is normal)
• Early benefits are clear for the customer late
  benefits to the outsource supplier
• (When the benefits start building for the
  outsourcer, the customer starts wanting change)
• Few outsourcers large enough for big projects
• (EDS, CSC, IBM, ATT)
• Technology evolution changes strategic IT
  relevance

3
Historical Examples

• 1960s-80s Service Bureaus
• Package products with standard options for small
  and medium sized firms ADP and GEISCO
• 1970s-90s Software consulting firms
• Custom consulting and turnkey systems Andersen
  Consulting
• 1980s-current Package products
• Prewritten customized products SAP,

4
Drivers for OutsourcingPre 1990

• Cost effective access to specialized or
  infrequently used power and skills
• Avoidance of building in-house skills (especially
  small and low-tech companies)
• Special functional capabilities, primarily
  peripheral
• Most large companies focused on in-house
  capabilities and did not subscribe to outsourcing

5
Outsourcing in the 1990s

• More than half of all firms are considering some
  sort of outsourcing activity
• Acceptance of strategic alliances
• Win-win alliances in many business areas
• ITs changing environment
• Focus on networking and integration places
  extraordinary pressures on legacy and state of
  the art systems management

6
Outsourcing Drivers

• Management concern for cost and quality
• Breakdown in IT performance
• Supplier pressures
• Simplified management agenda
• Financial Factors
• Corporate culture
• Eliminating an internal irritant
• IT management advantages

7
Cost and Quality

• Overhead and fringe benefit control
• Lower cost labor pools
• Ability to re-qualify current employees
• Economies of scale
• Management of excess hardware capacity
• Software license management
• Control over response times and inventories
• Hustle and professionalism of outsource companies
• Leaner management structures

8
IT Performance

• Failure to meets user expectations of service
• Unsuccessful performance of IT in previous
  projects
• Stagnant and out of data IT cultures

9
Supplier Pressures

• Aggressive sales from outsource service vendors
• Industry practice mentality
• Technical competence
• Weve done this before, you havent

10
Simplified Management Agendas

• Focus on core competency in companies where IT is
  not strategic
• Mechanism for obtaining benchmark for internal IT
  group

11
Financial Factors

• Convert capital investment in computers into cash
• Convert fixed cost operation to variable cost
  structure
• Discipline of real hard dollar expenditures
• Liquefy intangible assets before divestiture or
  restructuring

12
Corporate Culture

• Internal loyalties may make it difficult to make
  appropriate changes, outsourcing has no political
  loyalty
• If existing culture is alliance-friendly, may
  facilitate outsourcing

13
Eliminate an Internal Irritant

• Tensions between IT and corporate cultures
• Technical jargon
• (Not a competency issue)
• Motivational and development differences

14
IT Management Advantages

• Retain better employees
• Obtain scarce skills part time
• Increased energy and commitment
• Large existing infrastructures
• Overcome limitations in training and size
• Increased flexibility and responsiveness

15
When to Outsource IT

• Position on strategic grid
• Development portfolio mix
• Organizational learning
• Position in the market
• Current IT organization

16
Position on Strategic Grid

• Strategic Grid

Strategic IS
Factory
YES
Dependence on Information
NO
Support
Turnaround
YES
NO
-

-
Importance of IT Innovation
17
Position on Strategic Grid

• Development Portfolio

High
YES
NO
Technology Level
YES
NO
Low
High
Low
Project Structure Definition
18
When to Outsource IT

• Organizational learning
• Flexible organizations find outsourcing easier
• Position in the market
• Firms in Stage I or II can use outsourcing to
  speed growth
• Current IT organization
• Companies with a separate IT culture find
  outsourcing easier

19
The Alliance

• Flexibility
• Standards and Control
• Areas to Outsource
• Cost Savings
• Supplier Stability and Quality
• Management Fit
• Conversion

20
Managing the Alliance

• CIO Function
• Performance Measurement
• Mix and Coordination of Tasks
• Customer-Outsourcer Interface