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.
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
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
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.
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.
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
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.
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
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
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?
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 Xerox’s Global outsourcing in 1994.
“Integration could only be achived if they developed a high degree
of cooperation” Mike Reed Xerox outsourcing team
IT Outsourcing
When to Outsource IT and What could
be Outsourced?
IT Outsourcing
When do the benefit of outsourcing
outweigh the risks?
Development portfolio
A firm’s position in the market
Current IT organization
Make, Buy, Outsource
Partnership Strategies
Resource dependence theory
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.
IT Outsourcing
A Firm’s 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.
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.
Make, Buy or Outsource
Rands (1993)
Company’s Skills Related to Best External Source
Low Equal High
Low Make or
Buy/Outsource Tend to make
Buy/Out.
Strategic
Importance
Strategic Tend to make Make
High
Alliances
Make or buy decision
Decision Criteria Pressure to “Make/Own” Pressure to “Buy”
Business strategy IT application or infrastructure IT application or infrastructure
provides proprietary supports strategy or operations,
competitive advantage but is not considered strategic in
its own right
Core competence
Information/ process
security and
confidentiality
Availability of suitable
partners
Availability of packaged
software or solutions
Cost/benefit analysis
Time frame for
implementation
Evolution and
complexity of the
technology
Ease of implementation
Sourcing Strategies
High In-house Cost sharing or strategic
solution alliance/
Selective outsourcing
Need for tailor
made support
True spin-Off or
Low outsourcing
Low Market Potential High
to provide the
support
Resource Dependence Theory
Strategic Choice Framework for the IT Professional Resource
In-house Cost sharing or
High solution strategic alliance
Degree of
Resource
Dependence True spin-Off or
Low Outsource outsourcing
Low High
Degree of volatility
Stages
Performing / Strategic
5 Focus (Not just focusing
on cost)
Norming / Proactive Cost Focus
(Beginning to form norms and
4 actively focusing and proactively
using outsourcing for cost saving
including offshore. Outsourcing
20-40% of IT activities)
Storming / Strategic
3 decision point
(Organization leaders
share conflicting ideas
about outsourcing and
pursuing different strategy
to provide IT services)
Forming /
2 experimenting stage
(outsourcing between
10-20% of IT
activities)
Insourcing / Bystander
(outsourcing between
1-5% of IT. Mostly
purchasing of IT
1 functions).
Time
Accounting for Information
Technology Costs
Unallocated Cost Center
Allocated Cost Center
Profit Center
Accounting for Information
Technology Costs
Allocated Method Description Advantage Disadvantage
Unallocated cost All IS costs are Experiments with Costs can get out of
center considered an technology can occur control.
organizational expense User can request the IS professionals cannot
development of new easily allocate their budget
systems among conflicting requests.
IS can develop systems
regardless of economic
benefit.
Allocated cost IS department allocates User request only IS can have problems
center costs to departments that beneficial services. determining allocation of
use its services. It works well in costs
organization where Friction among user
changes are made regularly departments and between
to all internal customers them and IS can occur
IS has no reason to
operate efficiently.
Profit center IS charges internal and Users can choose who Outsourcing may become
external users the same will perform their IT more common.
and attempts to get both service. Fees may be higher than
kinds of business. IS department has with other methods.
incentives to operate
efficiently.
Staffing the Technical
Functions