my_third_work

Salford Business School IT Management Outsourcing management: Smart or Natural Smart Albert Poghosyan (a.poghosyan@pgt.salford.ac.uk) Course: MSc eGovernance Lecturer: Paul Spedding (p.r.spedding@salford.ac.uk) December 2006 Albert Poghosyan 13/12/2006 Content Introduction ............................................................................................................................. 3 1. First Chapter - Outsourcing System Management............................................................. 4 2. Second Chapter - Management: Smart or Super smart? .................................................. 7 3. Third Chapter – Natural (biological) outsourcing ............................................................... 9 Conclusion - Comparing Systems......................................................................................... 11 References ........................................................................................................................... 12 2 Albert Poghosyan 13/12/2006 Imagination is more important than knowledge… Albert Einstein (1879-1955) Introduction The quote “Rather than jumping into outsourcing everything, many companies prefer to start slow” made by Tony Macina from IBM Global Services clearly indicates the attitude of modern business towards outsourcing. (Lacity and Willcocks, 2000) While the world was changing polarity, in some places even geo-political situation, the trend to globalization broke out from USA and United Kingdom spreading ideas all over the world. Nowadays globalization reached its top: not only organizations or companies are recognized like managerial or producing, but countries or even continents can already be labelled in exactly the same way. Whole world has been separated into different camps or, to put it more precisely, different departments, from one side - managerial west and from another - producing east, where the simple idea of competition is modified and localized into competition between outsourcing companies and companies that search for better outsourcing. Both these roles have not only been integrated into these nations and countries but also have received their faces and full characteristics. (Krugman and Venables, 1995) In a while companies and organizations understood that outsourcing in the world of globalization is the only effective way to cut down expenses and have effective production. Since the 90’s the world jumped into varieties of outsourcing strategies implementing them anywhere and anyhow to heighten effectiveness and to cut down production expenditures. Outsourcing has been implemented especially in digital production and information technologies. The whole industry sprang up in one decade when the United States and the United Kingdom, together with other European countries started to outsource their IT production and services to Eastern countries. This sphere of industry demands a lot of labour and managerial control thus now it appears to be the number one headache for each top manager of a large company and organization. Examining any strategy applied by companies and organizations we find Total Outsourcing as dominant. According to www.infoserver.com, the survey conducted by Outsourcing Institute within 1200 companies indicates that all companies whose IT budget is more than $5 million decide mainly to outsource all processes and services. (Lacity and Willcocks, 2000) Even now most of large companies and organizations try the total outsourcing and according to the same book (Lacity and Willcocks) they outsource 70-80% of all their IT activities. Thus, total outsourcing became the major and dominant strategy of outsourcing and at the same time it brought up lots of problems and faults in outsourcing. Meanwhile outsourcing strategies were also developed and now we observe many outsourcing types that provide IT managers or Top management multitude possibilities. The main types of outsourcing strategies are (Currie, 1999): a) total outsourcing b) multiple supplier or selective sourcing c) joint venture or project sourcing and insourcing. All these types have their advantages as well as disadvantages, but in prospective of presenting managerial relations between host organization and outsourcing company the most notable is multiple supplies or selective sourcing. This type of outsourcing gives a chance to focus on deep managerial problems with outsourcing, define the needed outsourcing low level strategies for particular companies and even go to more complicated analyse of whole outsourcing system at all. This limitations and focus allows also to analyse 3 Albert Poghosyan 13/12/2006 certain pure nature outsourcing systems and compare them with existing systems to define the level of right management for global systems. The problems within outsourcing management are complicated and complex. There are many factors influencing the decision maker in case of multiple suppliers sourcing but the question whether the project, product or service should or should not be outsourced is already insignificant for researching. Companies and organisations think more about the ways of low level strategies on managing the outsourcing rather than whether they should be outsourced or not. (Knights, 2006b) They trend towards selection of multiple suppliers on infrastructural level to develop mutually beneficial relations. Many companies using total outsourcing come to a conclusion that long lasted 7-10 year contracts tend to fault. They try to implement a strategy that builds up comfortable relations with outsourced companies and limits contracts exceeding five years in duration. Suppliers are encouraged to make alliances and compete with one another, which allowed Host Company to take control and develop new competitive technologies improving innovation. And the difference between this type strategy and total outsourcing is huge. (Currie, 1999) And of course this strategy has the most important disadvantage: difficulties in managing and coordination of different suppliers. (Papp, 2004) Hence, in this perspective, the issue of management is the most important and the deep we try to discover all issues and hidden problems, the thorough we analyse the case and particularly the system of multiple supplies sourcing. 1. First Chapter - Outsourcing System Management “The decision to outsource is not something to be taken lightly – it is fundamental to an organization’s strategy and business model”. (Muir, 2006) That is why if the outsourcing arrangement is not set properly the project will fail. Many companies treat outsourcing as a part of procurement and give the function of selecting and tendering to the procurement department. (Vowler, 2006) Meanwhile, outsourcing is much more global. The real management of selection and transaction of services or products to outsourced company does not finish in that processes, but moves forward to governance of all the rest stages to ensure project’s success. Before making any arrangement the outsourcing company should, of course, be sure that after the contract will be signed there is still a way back. More flexible contracts and partnerships are not the only requirements that need be filled in. There is a much more deep governance process that should be reviewed and monitored all the way. Let’s see the outsourcing lifecycle pictured by Mr. David Muir in his article. All cycle consists from 6 stages of governance in prospective of better management of the whole system. The stages of Muir’s outsourcing cycle aggregate the detailed process which starts from Strategy Formation and goes through possible fault of project. The stages go in following consistency: Strategy, Feasibility, Transaction, Transition, Optimization and Renegotiation. (Muir, 2006) Consequently this is why the starting point for this chapter is the theory and experience of Grand Metropolitan Information Services (GMIS) in strategy construction – the basement for whole outsourcing system management. (Currie, 1999) Strategy construction: GMIS The example of Grand Metropolitan is exciting. Within a few years they became the owners of 3 main businesses and developed separate governance bodies who were conducting any outsourcing activity for them. The major 3 businesses of Grand Metropolitan are Pillsbury, International Distillers & Vintners (IDV) and Burger King. All these three companies were able to conduct any procurement and outsourcing by themselves but this 4 Albert Poghosyan 13/12/2006 special body: Grand Metropolitan Information Services (GMIS) developed perfect strategy for the three of them. Companies paid the GMIS to receive these qualified services. Historically it appeared that GM has operated a separated business selling IT to internal and even external Market. (Currie, 1999) Working for the three companies GMIS developed lots of special vendor selection guidelines, but when they examined the system’s functionality they understood the required measurements for comprehension of what the system can deliver and what is required as ITenabled business solutions. (Currie, 1999) GMIS spent almost one year on developing the special strategy for outsourcing, which was based on high level of prudence. The company spent a lot of time on discussions of issues with suppliers and benchmarking from British Aerospace, Chase Manhattan Bank and others. Eventually GMIS developed a model that looking the potential benefits and risks concerning the outsourcing with particular suppliers. They decided that some IT areas can not be outsourced as it could harm the Information Security. For example, they kept data centres in houses as it could pose too many risks at one time. They describe this strategy as “smart sourcing” rather than general outsourcing based on comparison of single supplier and multiple suppliers. So, if in single supplier situation the management is too busy with core-business activities they can decide to get out the problem from business, to give it to someone else. To choose the single supplier who will do this for them, meaning that they take out not only process but also the management of process. But in case of emergency the management will not have ability to change single supplier. But in situations when they outsource activities to multiple suppliers it is more manageable. But of course provided that they will keep some management of problems with them… (Currie, 1999) But following the opinion of Bob Carlson “Sourcing is not a strategy in itself – it has to be the business strategy that drives the sourcing decision,” we should declare that even smart sourcing should be founded on strong top managerial decisions. (Vowler, 2006) There is an important fact: Outsourcing strategy should be so much flexible to allow the company itself be enough flexible to take radical changes to adopt to changing market. Also the company should define the main or core business activity for itself and never turn the outsourcing into panacea for every problem. Sometimes for making a big problem from a small one it is enough just to outsource it. (Vowler, 2006) It is important to understand the whole process of business in prospective of reengineering. While we are preparing to outsource some functions to someone and as soon as we look in the core of all processes it is an appropriate time for understanding the all stages. Maybe it is possible to cut some stages on the process of transaction and transition. (Vowler, 2006) Such flexible outsourcing strategy should be built at first on analyse and experience of other companies. So it is important to make benchmarking and comparison of different systems. (Grembergen, 2003) Creative contracting The inseparable part of strategy construction is contracting. The flexible is contract, the flexible are relations in selecting sourcing. A good example of creative contracting in multi-sourcing is the contract of Harvard Business Review which owns the strategy to make alliance of suppliers with preparing one contract for the three suppliers. They were against receiving all our IT needs from a single supplier as some companies had done. Instead, they sought a solution that would allow them to buy IT services from multiple suppliers and to have pieces delivered as if they came from a single supplier. This is not the only example of multi-sourcing. The same strategy has been implemented by JP Morgan in 1996 and DuPont in 1997. Both examples show the importance of contract that fixes the mutual obligations and benefits of suppliers and motivates them to be much more dynamic and competitive. (Lacity and Willcocks, 2000) 5 Albert Poghosyan 13/12/2006 There are some components of creative contracting in multi-sourcing that can potentially impact on relations. The first important component is Request for Proposal (RFP) in attachment to the contract. While the contract is validating all legal part of the deal, the real validation of the whole process could be RFP. The deal of Elf Alochem Company with its IT suppliers can serve as an example of this type of contracting. (Lacity and Willcocks, 2000) Another component of contracting is competitive bidding. Interests in competitive bidding is illustrated by host company customers, who wants to be sure that all outsourced activities were made on competitive way to ensure supplier motivation and low pricing. (Lacity and Willcocks, 2000) This contributes also into integrated suppliers relations and high outcome from suppliers. The flexible prices in contracting must also be mentioned. This is an essential part of contract that keeps the contract prices in mutual level - set properly. (Knights, 2006a) Any contract, of course, should be aimed to set long-term relations even over shortterm contracts. The long-term relations with outsourcing company are more important for supplier than any short term high value contracts. So, in this term, we need to maintain more flexible and controlled environment to be able to go through future supplies and mutual benefits. (Grembergen, 2003) Process governance While preparing for outsourcing the important idea is probably the readiness for complicated managerial processes since multi-sourcing strategy will for sure require it. A little deeper analyse of all systems and processes of management is made by Cullen and Willcocks in book called “Intelligence IT Sourcing”. They collected all important knowledge and planning stages into one big system with 3 main phases. (Cullen and Willcocks, 2003) The first phase is Architect Phase which consists from: • Block 1 – Discard the myths • Block 2 – Prepare the strategies • Block 3 – Target the services • Block 4 – Design the future The second phase is Engage Phase which consists from: • Block 5 – Select the suppliers • Block 6 – Make the transition The third phase is Govern Phase which consists from: • Block 7 – Manage the outsourcing • Block 8 – Reconsider the options (Cullen and Willcocks, 2003) The Govern Phase is the most interesting for us now. Analyzing both blocks in this phase these are routine managing of every day outsourcing processes targeting the achievement of the planned result and reconsideration of the options. The key outputs for these two blocks are: • Payments • Variations • Reviews, audit and evaluations • Future planning and forecasting • Administration and record • Relationship management • Continuous improvement • Industry and market review • Options analysis and business cases • Implementation plans. (Cullen and Willcocks, 2003) 6 Albert Poghosyan 13/12/2006 “By virtue of outsourcing’s radical shift in governance locus, new mechanisms are required for mutual understanding and trust, potential goal divergence and opportunism, redistribution of authority and decision-making, and criteria for performance appraisal.“ the quotation shows the real importance of management and problem solving in this field. (Cullen and Willcocks, 2003) Ii is obvious that there should be the important supposition of successful management and here are some assumptions about it. First of all, the service shouldn’t be targeted on contract completion but must also be continuously improved. Secondly, all relations should be prepared on smart contracting, which is expected from both sides (host and suppliers). Thirdly, not only the host company should have a good management staff but also the supplier company. Fourthly, the relations should be very strong with team approach and focused on long-term time. In additional, both sides should control the arrangements and processes to ensure constant competitiveness. Finally, there must be ongoing and effective communication between the parties. (Cullen and Willcocks, 2003) But this system excludes two not less important components of modern IT management while archiving the main one: completing the task. It does not involve “Building the Individual” and “building the team”. Which in this context is a bit complex concept than for project and team management, but for sure it presents in outsourcing management. Let’s try to make parallels of these two concepts. If we imagine the “Building the individual” like special environment which is built for extra integrated relationship with suppers and “building the team” as special relationship strategy for inter supplier relationship as in multiple supplier outsourcing it is extremely important. The importance of these two components of management will be shown in the next chapter. 2. Second Chapter - Management: Smart or Super smart? Example of Synergy International Systems From multi-sourcing we would pass to research of a bit more complicated process that has been implemented by Synergy International Systems (http://www.synisys.com). Synergy International Systems is IT consulting and Software development company based in Washington, USA. Synergy has operational branches in Armenia and Russia with almost 100 people staff of highly professional programmers. It is a private company which has been established in 1996. The main aim of the business is the creation of database driven systems. Nowadays, Synergy is the main partner of UN Development Program and integrated over 20 different projects all over the world. But the main product of Synergy Systems is Development Assistance Database (DAD). DAD is an Aid Management and Coordination system for use in national reconstruction environments that strengthens the effectiveness and transparency of international assistance. DAD is Web-based information collection, tracking, analysis and planning tool for use by national governments and the broader assistance community, including bilateral donors, international organizations, and NGOs. Mainly it is implemented by UNDP funding and developed in support of local and international donors. (Synergy, 2006b) Interesting multi-sourcing mechanism and relations have been implemented by Synergy, while they were implementing DAD in Pakistan (http://www.dadpak.org/dadpakistan/). Synergy signed a contract about DAD Pakistan program with UNDP, where the quality of services and level of implementation and integration of product to local intranet was strictly mentioned. (Synergy, 2006a) Top management of Synergy developed a new strategy for outsourcing only in one week for some part of project to Pakistan but not to one partner but to three of them. This decision has been made on previous experience from Indian and Indonesian projects, which 7 Albert Poghosyan 13/12/2006 failed in the middle because of external suppliers. Synergy prepared three tenders for three main activities that had to be in that project. The first activities were hosting and networking services, as the servers should be placed in governmental body’s offices but access should be worldwide. Second one was hardware and software procurement tender, as there were established Information Center for data collection. And third one was the translating and consulting services, which also included localization of product and staff training. These three elements of project which were used to be offered to one supplier were then separated and given to three. But this is not the end of the strategy. Synergy systems developed new type of relationship with outsourced partners, integrated them with Synergy top and senior level management. All staff which was also managed by their managers in their companies also where directly managed by Synergy managers. The team from these three companies where integrated into Synergy development and support team and also the whole team had one legislated base – one contract. Building Individual and team SMART management in any project management is a necessary part. And this smart management is built from three main components: 1) complete the task; 2) build the individual 3) build the team. Previously we were examining the first component. Now we should go deeper in inter staff relations and even personal relations in prospective of building good outsourcing strategy and, of course, in prospective successful completion of the task. As a simple project management any outsourcing and any type of it is just a team or individual management. And if we are going to manage multi-sourcing in many companies with multi-cultural teams and do not pay attention on individual, it is at least not management. So the most important way of management this kind of complicated system is not only focusing on strategy and contracting, but also on building individual and team. (Morris, 2006) And of course all these three components are very important. Building the team is the way to be sure that task will be completed and building individual is the way to be sure that all individuals in the team will be motivated enough help the team complete the task. So, this is very important in management of any project, especially multi-sourcing projects. Smart or Super SMART tasks Being familiar with acronym of SMART when it applied to the task: specific, measurable, achievable, realistic and timely; we would like to go a little far and look at Super Smart task which is very interesting if we are looking from prospective of management multi-sourcing and even more complicated processes. (Morris, 2006) Complete the task Build the team Build the individual 8 Albert Poghosyan 13/12/2006 If we picture the three components of management the super smart task will be the task designed to sit at the intersection of all three components. (Morris, 2006) It builds the team, it builds the individual and it completes the task, and if we use a little creativity in building this kind of a system, we will build very successful inter team and inter individual relations not only in the company but in the multi-sourcing environment as well when all suppliers’ teams and individuals work together. Multi-sourcing is a perfect example where one can be super smart. 3. Third Chapter – Natural (biological) outsourcing According to modern encyclopaedia Wikipedia: “Symbiosis (pl. symbioses) (from the Greek words syn = with/plus and bio = life) is an interaction between two organisms when at least one benefits.” (Wikipedia, 2006) Is this an interaction or outsourcing of some living functions? This seems to be interesting question. Researching the area of management of outsourcing and especially smart management in multi-sourcing we can make a really sensational comparing. Comparing outsourcing and symbiosis we can compare the management system created by human with the almost same systems created by nature. This is very important for understanding the right and wrong positions in creating outsourcing strategy and in interaction and cooperation between organizations. But, of course, in order to make this comparison we need to limit (destroy) some information that we know about companies and organizations, which make outsourcing. We just do not look into more complicated organizational structures and look at company as a simple organism, and it does not even matter on which level of evolution is that organism. So, the symbiosis and outsourcing was firstly compared by S Ananthanarayanan in his article “Biological outsourcing”. The idea of article is just as simple as an idea of symbiosis. Mr. Ananthanarayanan compares simple symbiotic relationships between living organisms and human impulse to separate some functions to other human natures. (Ananthanarayanan, 2006) He compares mainly simple symbiosis between two organisms but recent researches in this field shows that there are much more complicated relations between living organisms. (Hunter, 2006) Definitions But first of all let’s give correct definitions of symbiosis and categories of it. Symbiosis is a close ecological relationship between the individuals of two (or more) different species. Sometimes a symbiotic relationship benefits both species, sometimes one species benefits at the other's expense, and in other cases neither species benefits. (Wikipedia, 2006) The various forms of symbiosis include the following: • Parasitism, in which the association is disadvantageous or destructive to one of the organisms and beneficial to the other. • Mutualism, in which the association is advantageous to both. And this category of symbiosis is most interesting for our research. • Commensalism, in which one member of the association benefits while the other is not affected. • Artificial symbiosis, the mutually beneficial integration between a live part and an artifact that has one cell. In some cases, the term symbiosis is used only if the association is obligatory and benefits both organisms. Symbiosis as defined in this article does not restrict the term to only the mutually beneficial interactions (mutualisms). (Wikipedia, 2006) Simple Examples 9 Albert Poghosyan 13/12/2006 A classic example of symbiosis is of the Egyptian Plower and the crocodile. This small bird is eating all bacteria and other harmful organisms from the crocodile’s jaws. For crocodile it is very important to cooperate with this bird, as he can’t do this himself and he gives free access to this bird to go into his jaws. For bird this symbiosis is food and protection, as there is not much animals who will try to attack Egyptian Plower on the crocodiles body. (Ananthanarayanan, 2006) This mutual cooperation gives both organism benefits and they manage to do this very easily. Well this is very simple example of symbiosis. Another interesting example of mutualistic relations we can meet in the plants world. Mutualistic relations between plants and fungi are very common. The fungus invades and lives in or among the cortex cells of the secondary roots. The fungus helps the host plant absorb inorganic nitrogen and phosphorus from the soil. The association is very important for both plants. Some fungi also secrete antibiotics which may help protect their host from invasion by parasitic fungi and bacteria. (Kimball, 2006) And this is also good example for symbiosis but not enough for multi-sourcing systems comparing. Multiple symbioses Good research has been done by Philip Hunter - Australian researcher who has done very interesting research in multiple symbiosis, which is already sensation in his field. The name of research is “Entente cordiale: Multiple symbiosis illustrates the intricate interconnectivity of nature”, which goes very deep in researching multiple organisms interconnectivity in the nature, based on completely new discovery from the nature. The new type of relations is not only between more than two organisms but also the organism which is from the different taxonomic groups. (Hunter, 2006) The professor of biogeochemistry state in work of Mr. Hunter that the multiple symbiosis could be much more widespread than they think before, especially in view of the symbiotic systems involving different organizational levels, for example between bacterium, nematode and insect, or bacterium, protozoan and insect. (Hunter, 2006) Obligate mutualism The most known case of multiple mutualism involve relationships in which two of the partners are at the same organizational level—usually two bacteria that might be interacting directly - but are both essential for the survival of the host. Good example of these relations is glassy-winged sharpshooter (Homalodisca coagulata) and two bacteria: Baumannia cicadellinicola and Sulcia muelleri. These bacteria give some simple amino acids without which the sharpshooter can’t survive. This is the first example of a tightly coupled three-way symbiosis in which the genomes of the two lesser partners have been fully sequenced. (Hunter, 2006) But there are examples of three-way mutualistic symbioses in which all the partners are at different organizational levels. Good example is nematodes. Nematodes often have mutualistic relationships with bacteria and, in turn, are common parasites of many larger organisms, including insects. So now, even not going to more complicated biological terms and descriptions, we can see that there are very complicated systems in the nature that can be easily compared with multi-sourcing relations. And important part of this comparing with natural system is obligated mutualism, which is coming from exactly multiple mutualism. In these relations all part of systems is relatively free, but still motivated in one task of survival they obligated to stay together and contribute to each other. 10 Albert Poghosyan 13/12/2006 Conclusion - Comparing Systems So looking into multi symbiotic relations in multi-sourcing we will find lot of same level complicated relations as in mutualistic symbiosis. First of all if we state that different organisational levels of organism in projection for outsourcing will be mean the size of organization and even the type of it. So if the organisation is outsourcing the products or services it could be seen as host organisation and all other suppliers will be seen as simply other level organisms. This will allow us to focus on relations which benefits not only host organisation but also suppliers. In the perspective of comparing the systems we will see the mutualistic relations between both systems. Same relations exist in mutualistic obligated symbiosis. Besides that the aim of any organisation is to get benefits. And in any outsourcing systems the target to complete the task means to get the mutual benefits and from to viewpoint of host organisation this important fact is not taking into consideration. Meanwhile this is the most important part of obligated mutualistic relations between partners. What about management? It is obvious that team building and individual motivating in all process is the most important part of managing whole system. And this concept also can be used in another way. It means that if we look at the organizations participating in multisourcing as individuals – so our focus should be on motivating these organisations. But also we should have obligating factors, which should keep these organisations together. In example of Synergy systems one contract control all three suppliers and all they where obligated at first within each other and only then for host organisation. This is very important for multi-sourcing relations and establishing mutualistic obligated relationship system. So the mutualistic obligated relations are the key in whole system of outsourcing management and strategy creation. And maybe in the near future this type of relations will be overwhelming majority in all cases of outsourcing, as far as all big organisations will understand the importance of smart sourcing and setting mutual obligated relations. Albert Poghosyan Comments: albert@poghosyan.com Information: www.albertpoghosyan.com 11 Albert Poghosyan 13/12/2006 References ANANTHANARAYANAN, S. (2006) Biological outsourcing. Deccan Herald. CULLEN, S. & WILLCOCKS, L. (2003) Intelligent IT outsourcing: eight building blocks to success, Butterworth-Heinemann. CURRIE, W. (1999) The Global Information Society, John Wiley & Sons, Inc. New York, NY, USA. GREMBERGEN, W. (2003) Strategies for Information Technology Governance, Idea Group Publishing. HUNTER, P. (2006) Entente cordiale: Multiple symbiosis illustrates the intricate interconnectivity of nature. EMBO reports - The European Molecular Biology Organization. KIMBALL, B. P. O. (2006) Symbiosis. http://users.rcn.com/jkimball.ma.ultranet/BiologyPages/S/Symbiosis.html. KNIGHTS, M. (2006a) Expand your outsourcing horizons. Computer Weekly. KNIGHTS, M. (2006b) A more sophisticated approach. Computer Weekly, 32-33. KRUGMAN, P. R. & VENABLES, A. J. (1995) Globalization and the Inequality of Nations. National Bureau of Economic Research Cambridge, Mass., USA. LACITY, M. C. & WILLCOCKS, L. (2000) Global Information Technology Outsourcing: In Search of Business Advantage, John Wiley & Sons, Inc. New York, NY, USA. MORRIS, J. (2006) Smart or super smart? ITNOW, 14-15. MUIR, D. (2006) Why, when and how to outsource. Computer Weekly. PAPP, R. (2004) Outsourcing systems management, Idea Group Pub. SYNERGY (2006a) DAD Pakistan. www.dadpak.org/dadpakistan/. SYNERGY (2006b) Synergy International Systems. Washington, www.synisys.com. VOWLER, J. (2006) Identifying the right outsourcing strategy. Computer Weekly. WIKIPEDIA (2006) Symbiosis - Wikipedia, the free encyclopedia. http://en.wikipedia.org/wiki/Symbiosis. 12