Docstoc

Sourcing IT

Document Sample
Sourcing IT Powered By Docstoc
					         Sourcing IT

          Ken Peffers
       UNLV February 2005
“Sell the mailroom.” Peter Drucker, 1989, WSJ
        Outsourcing Data
 14.8% of operations outsourced as
  of 2001
 Outsourcing growing at 19.6% per

  year
 IT 10% of global outsourcing
              Global Outsourcing Spending

9
8
7
6
5
                                            $ Trillion 2.09
4
3
2
1
0
1998   2000     2002   2004   2006   2008
         OUTSOURCING IT
CONTRACTING:
   COMPUTER CENTER OPERATIONS
   TELECOMMUNICATIONS NETWORKS
   APPLICATION DEVELOPMENT
    TO EXTERNAL VENDORS
                  *
        OUTSOURCING
WHEN TO OUTSOURCE:
 IF FIRM WON’T DISTINGUISH ITSELF
  BY DEVELOPING APPLICATION
 IF PREDICTABILITY OF
     UNINTERRUPTED SERVICE NOT
  IMPORTANT
 IF EXISTING SYSTEM IS
     LIMITED, INEFFECTIVE,
     INFERIOR
               Generic Businesses
   Supply Chain Management
     • Acquiring resources
     • Dell, Walmart, FedEx
   Operations
     • Producing the product or service
     • UNLV
   Infrastructure
     • Maintaining the underlying systems
     • Sprint
   Research and Innovation
     • Coming up with value creating new products and services
     • Intel, Microsoft
   Customer Relationship Management
     • Delivering the product to the customer and extracting value
     • Starbucks
   Which Business is Your Firm In?
     • Other businesses candidates for outsourcing
      Sourcing Alternatives
 Development
 Development and Operation

 Operation

 Service
           Development
 Obtain resources unavailable within
  firm
 Obtain additional resources
    Development and operation
 Focus on core competencies
 Management attention
             Operation
 Obtain operational expertise
 Reduce costs
              Service
 Avoid investment in non-strategic
  activities
 Reduce costs

 Achieve superior service
        Outsourcing Types
 Total outsourcing
 Joint venture/strategic alliance
  sourcing
 Multi-supplier sourcing

 Insourcing
        Total Outsourcing
 Outsource 70% or more of IT to
  single supplier
 Long term contract

 Partnership between vendor and

  client
    Total Outsourcing motivation
 Enable client to concentrate on core
  business
 Client recoups capital investment

  from sale of IT assets
 IT perceived as support function

 Eliminate IT function
    Multiple-supplier sourcing
 Contracts with a variety of suppliers
 Outsourcing as commercial
  relationship
 Medium term contracts

 Suppliers compete for the business

 Fixed costs become variable costs

 Difficulties in managing a variety of
  contracts
Joint Venture/Strategic Alliance
 Shared risks and rewards
 Create new company as supplier

 Reduced risks of single supplier or
  multiple supplier
 Client owns large share in supplier
             Insourcing
 Retain large IT staff in-house
 Short term contracts for some staff
  to manage variance in personnel
  needs
                          Risks
   Total outsourcing particularly risky (80%
    of IT budget outsourced)
    • Of 116 outsourced contracts
          38% successful
          35% failures
          27% mixed results
    • For selective outsourcing (15-25% of IT
      budget outsourced)
          77% successful
          20% failures
          3% mixed results
      Top 10 Reasons for Failure
1.    Treating IT as undifferentiated commodity
     ... needs and service levels differ
2.    Incomplete contracting
     …inviting opportunistic behavior
3.    Lack of active management of the supplier
     …contractors require day to day and long term
        management and supervision
4.    Failure to build and retain in-house skills
     …necessary to manage the vendor, prepare new contracts,
        and negotiate subsequent investments
5.    Power asymmetries accruing to supplier
     …who has the bargaining power?
       Top 10 Reasons for Failure
6.     Difficulties in adapting deals to changing
       conditions
      …system needs 5 + years out hard to anticipate
7.     Lack of contracting experience
      …need for intermediary?
8.     Outsourcing for short term financial
       restructuring or cash injection
      …cash benefits gone in 1-2 years.
9.     Multiple objectives with unrealistic expectations
      …financial, performance, expertise, development resources
10.    Poor sourcing
      …vendor mismatch
Treating IT as an undifferentiated
           commodity
• Differentiate between what is core to
  the firm and what is a commodity.
• Keep core processes inside the firm.
  Retain business knowledge and logic
• Be clear about what IT, if any, provides
  a strategic advantage
    Vendor Selection and Contracting
   Be clear about the vendor requirements
    for experience, resources, etc.
   Quality of resource critical, more so than
    cost. Lowest bid selection invites
    opportunistic behavior
   Understand the systems to be outsourced
   Stable systems first, then outsource
   All development has a business case and
    approved by senior management
     Incomplete Contracting
 Complete contract
 3-5 year initial contract

 Regular review

 Notice thereafter

 ‘Smooth termination’ guarantees
    Active Supplier Management
   Internal staff assigned to monitor
    supplier performance
    • Daily performance management
    • Regular management reviews
    Retaining Essential IT Resources
   Core IS capabilities necessary to run
    any IT sourcing regime effectively
    • Relationship building
    • Business systems thinking
    • Technical architecture
    • Technology adaptation
    • IT governance
    • Informed buying capabilities
    • IT strategy
       Unrealistic Expectations
   Careful delineation of what can be
    achieved by outsourcing
       Power Asymmetries
 Stable software makes switching
  costs lower
 Retained ownership of software

  assets and data
 Carefully delineated performance
  expectations
Lack of Contracting Experience
 Staged 3 to 7 year contract
 Competitive price terms

 Keep key capabilities in-house
         Successful Outsourcing
   Selective (vs total) outsourcing to achieve cost
    savings
    • Select most capable or efficient service for each function
   Sponsorship by Sr. general mgmt and IT, rather
    than either alone to achieve cost savings
    • Sr mgrs often make decision based on short term
      finance considerations
    • IT mgmt evaluation defensive
   Inviting bids from both internal and external
    vendors to achieve cost savings
    • Internal departments can achieve savings if they can
      overcome political resistance.
       Successful Outsourcing
   Short term contracts for cost savings
    • Estimate term during which
      requirements will be stable
    • Renewal term creates good incentives
      for vendor
Detailed fee-for-service contracts to
       achieve cost savings
   Fee-for-service contracts specify fees in
    exchange for provision of specified
    services
    • Standard
    • Detailed—specify service scope, service levels,
      performance measurement, penalties
    • Loose
    • Mixed
   Strategic alliance/partnership—significant
    resources pooled from two or more
    organizations
   Buy-in—client buys in to vendor
     Successful Outsourcing
 Recent contracts achieved cost
  savings more than older ones
 Size of IT group not material

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:13
posted:1/21/2012
language:English
pages:36