IS 483 Information Systems Management James Nowotarski 29 May 2003

IS 483Information Systems Management

James Nowotarski

29 May 2003

• Recap IT outsourcing • Finish procurement• Understand Financial Analysis

Today’s Objectives

Topic Duration

• Recap IT outsourcing 25 minutes

• Quiz 15 minutes

• Finish Procurement 35 minutes

• *** Break 15 minutes

• Financial Analysis 60 minutes

• Assignment 2 reports 10 minutes

• Assignment 3 free time 30 minutes

Today’s agenda

Topic Duration


• Quiz 15 minutes






Today’s agenda

IT Outsourcing

• Cost reduction -- Perception of IT as a cost burden coupled with availability of cheaper sources of services (e.g., near-shore and offshore)

• Cost predictability

• Require improved performance levels (e.g., speed of delivery, customer satisfaction, quality, etc.)

• Refocus on corporate core competencies

• Desire to have in-house IT resources focus on strategic systems and/or technology

• Lack of in-house skills and/or people

Information technology (IT) outsourcing is the use of a third party to provide services rather than using those in-house.

Drivers

IT Outsourcing

“[g]et rid of context and focus on core” - Billy McCarter, former CIO of Fireman’s Fund, who reduced IT staff from 1,100 to 600 with much of the work outsourced to offshore workers

A desire to focus on core competencies is frequently the strongest driver to outsource

“[a]llows me and my staff to focus on fun areas . . . be more productive, more visible to the business, understand what the business needs versus worrying about whether one of the servers needs additional RAM” - Daniel Sheehan, CIO at Advo, Inc. (InformationWeek, 4/14/03)

IT Outsourcing

• Data center operations

• Network operations

• Application maintenance

• Desktop workstations

• Help desk/Support

• Application development

• Business process execution

What parts of IT to outsource?

most common IT activities to outsource

IT Outsourcing

Consider business, economic, and technical factors in deciding whether to outsource

Business Considerations

Outsource

Insource

Commodity Differential

Critical

Useful

StrategicImportance

Potential for Differentiation

IT Outsourcing

Consider business, economic, and technical factors in deciding whether to outsource (cont.)

Economic Considerations

Outsource

Insource

Subcritical Critical

Leading

Lagging

ManagerialPractices

In-House Economies of Scale

IT Outsourcing

Consider business, economic, and technical factors in deciding whether to outsource (cont.)

Technical Considerations

Low High

High

Low

Degree of TechnologyIntegration

Degree of Technology Maturity

Outsource

Insource

IT Outsourcing

Give examples of applications that would be good candidates for insourcing and outsourcing based on technical considerations

Technical Considerations

Low High

High

Low

Degree of TechnologyIntegration

Degree of Technology Maturity

Outsource

Insource

IT Outsourcing

• Transitional Outsourcing

• Selective Outsourcing

• Total Outsourcing

To what extent should you outsource?

most common approaches

IT Outsourcing

What is it• Outsource legacy systems• Focus in-house staff on development of “new world”• Outsourced activity may return in house at some point

Transitional Outsourcing

Advantages• Legacy systems are well-understood, facilitates

specifying outsourcing contract terms• In-house organization moves on to next new thing (Tarzan

grabbing the next rope in the IT jungle)• Contract may be shorter termDisadvantages• More vulnerable to vendor manipulation of pricing,

maintenance costs• Vulnerable to loss of vendor support if new system is

delayed

IT Outsourcing

What is it• Select the best-of-breed for an activity

Selective Outsourcing

Advantages• Creates a competitive environment to overcome

organizational impediments & motivates performance • Provides flexibility to adapt to changes • Less risky than total outsourcing

Disadvantages• Overhead cost associated with multiple evaluations,

multiple contract negotiations, and multiple vendors to manage and coordinate

• Depth of relationship with vendors may not be as good as with total outsourcing

IT Outsourcing

Selective Outsourcing Example: AT&T

Service Provider Deal Scope

Computer Sciences Application support• Billing• Credit and collections• Ordering• Provisioning

IBM Global Services Data centers (incl. 2000 employees)

Accenture Customer service

Telemarketing

IT Outsourcing

What is it• Use one vendor for many activities

Total Outsourcing

Advantages• Consistency and stability with same vendor for many

activities• Lower transaction costs because there is only one vendor • Creates a competitive environment

Disadvantages• More vulnerable to vendor manipulation of pricing,

maintenance costs• Vulnerable to loss of vendor support

IT Outsourcing

Survey Results

Type of sourcing Success Failure Mixed

Total outsourcing 38% 35% 27%

Selective outsourcing 77% 20% 3%

In house 76% 24% 0%

Source: Study of 116 companies by college professors Mary Lacity and Leslie Willcocks, Computerworld, 10 May 1999

• Losing skills in functions/processes that are outsourced– Don’t give best work to outsiders

• Culture clash between outsourcing firm and client– Ideally, can’t tell difference between employees of the two

• Loss of control over quality and responsiveness• Overbilling/Underperforming (“shirking”)• Provider may sell or leak buyer’s solutions to competitors (“poaching”)• Overpricing on contract additions/extensions• Remote management by service provider, thus limiting face-to-face

communication and jeopardizing coordination

There are several risks to be managed

IT Outsourcing

Risks

• Assign in-house manager to manage the relationship• Clearly specify terms of relationship and expected service

levels in a contract and service level agreement (SLA)• Consider using an RFP to get competitive bids

– Note that this can require substantial time

There are several risk mitigation strategies

IT Outsourcing

Risk mitigation strategies

• Reduce cost– 40-50% savings, according to Merrill Lynch CTO

• Higher quality/capability– Approximately 50 out of 70 CMM Level 5 systems

development organizations are in India

Cost and quality are the two main reasons for going offshore

IT Outsourcing: Offshore

• Highly capable workforce

• Focus on process and product quality

• Low labor and infrastructure costs

• Government commitment and support

• English (and other) language skills

India is the leading location for offshore sourcing

Reasons


• English or language difficulties• Time difference• Political• Lack of industry-specific knowledge• Distrust• Communication/Coordination

– “Outsourcing is prone to failure because of breakdowns in communications between outsourcing providers and their clients, according to Gartner” (InformationWeek, 3/31/03)

Need to manage risks of offshore outsourcing

Potential Risk Areas


Topic Duration


• Quiz 15 minutes






Today’s agenda

Topic Duration


• Quiz 15 minutes






Today’s agenda

Procurement - Process

RFP Process

1. Pre-RFP

2. RFP

3. Proposal Submissions

4. Proposal Evaluations

5. Vendor Selection

6. ProcurementMethod

7. ROI Analysis

8. NegotiateContract

Objective: Identify best solution to meet stated business need while minimizing cost and risk

5. Vendor Selection

• Vendor site visits

• Weighted score method

• Final cost, value, and risk analysis

– Benefits

-- one-time vs. recurring

-- fixed vs. variable

-- tangible vs. intangible

– Costs

-- one-time vs. recurring

-- fixed vs. variable

-- tangible vs. intangible

6. Procurement Methods

• Purchase

– not that popular because of fear of obsolescence

– longest-term commitment of these 3 methods

• Rent

– usually less than 1 year in duration

– only need to give 30 days’ notice to cancel

– more expensive than purchase or leasing

• Lease

– usually 12-36 months in duration

– often done with an option to buy

– middle of the pack in terms of cost and ability to get out

7. ROI Analysis

• Must be able to calculate the income stream in $

• Not usually able to calculate for:

– Strategic investments

– Informational investments

– Infrastructure investments

• Usually able to calculate for:

– Transactional investments

investment Totalinvestment on Earnings

ROI

8. Contract Negotiation

• Do’s

– Include vendor responses to RFP in the contract

– Keep lawyers at bay until Statement of Work is complete

– Leverage outside expertise in negotiations

– Provide incentives/penalties

• Don’ts

– Buy vaporware instead of proven solutions

– Purchase low bid unless the value is there

– Settle on final offer prematurely

The way you interact at the negotiating table may foreshadow ongoing relationship dynamics


• Agreement between firm and vendor

• Was outlined in the RFP, now it gets finalized

• Includes

– Software characteristics

– Implementation plan

– Technical architecture

– Training strategy

– Maintenance and support

– Service levels (SLA items)

– Cost schedule

Statement of Work

Approach to qualityDefinition of quality metrics

Statement of Work

Approach to Quality and Measurement

Plan

Do

Check

Act

1. Identify quality standards and goals

2. Measure project performance

3. Compare metrics against goals 4. Conduct quality reviews, e.g., peer reviews5. Test for defects

6. Eliminate causes of deficient performance- fix defects- fix root causes

Statement of Work

Quality Metrics

Progress Measures the amount of work accomplished by the development team in each phase

Quality Evaluation Effort Measures the percentage of the development effort spent on internal quality evaluation efforts

Test Coverage Measures the amount of the software system covered by the testing process

Defect Detection Efficiency

Measure percentage of the actual defects originating in a stage of the project that were actually detected in that stage

Requirements Traceability Measures the percentage of the requirements that have been addressed by the system

Defect Removal Rate Measures the number of defects detected and removed over time

Defect Density Identifies defect-prone components of the system

Customer Satisfaction Measures customer satisfaction using objective surveys.

Speaking of feedback and measurement

http://www.cs.depaul.edu/MyCTI

http://www.cs.depaul.edu/MyCTI


• Do’s

– Include vendor responses to RFP in the contract

– Keep lawyers at bay until Statement of Work is complete

– Leverage outside expertise in negotiations

– Provide incentives/penalties

• Don’ts

– Buy vaporware instead of proven solutions

– Purchase low bid unless the value is there

– Settle on final offer prematurely

The way you interact at the negotiating table may foreshadow ongoing relationship dynamics

• What is co-sourcing?– Outsourcer shares risks and rewards with client– Example: AT&T wanted to reduce cost of customer service and

telemarketing from $5B to $2.6B (2003-7)• If costs are > $2.6B, outsourcer pays penalty• If costs < $2.6B, outsourcer pockets the additional savings• Prescribed customer service levels must also be met

• Why is this a good thing– It gives both firms a compelling interest in the initiative’s success

Co-sourcing arrangements share risks and rewards


Procurement - Process

RFP Process

1. Pre-RFP

2. RFP



5. Vendor Selection


7. ROI Analysis


Procurement Process

• Why use a consultant?

– Process/Methodology

– Experience

– Capacity

• Several firms specialize in procuring outsourcing services

– Technology Partners Inc. (TPI)

– Technology & Business Integrators

– Milbank, Tweed, Hadley and McCloy (law firm)

• Need to have experienced people on procurement team, regardless of whether consultants are used

Consultants can help with procurement, particularly vendor selection and contract negotiation

RFP Software Products

1) APES with INFORequestorTM Series – Completely integrated database system enabling pre-loaded or user-defined automated use requirements surveys. Business needs priority scoring, pre-loaded or user-defined RFQ, RFI, RFP preparation. Automatic generation of detail shortlist based on actual RFI responses. It is re-usable tool that will help over and over in the future. Cost is $698.00. 2)HyperRFPTM Series – Distribute RFPs by email or by Web, receive formatted vendor responses back to your designated E-Mail address & eliminate tedious copying, packaging, and mailing. Cost is $229.00. 3) On-Line Consultant - Software tool to make the process more efficient and objective. Linkage vendors’ responses with RFP questions. Quickly and easily compare and score vendors. Cost is varying


“Wilmington Trust Co. uses collaboration technology to manage the request-for-proposal process with its vendors. Most recently it used software from eRoom technology to evaluate 20 competitors vying to be the company’s sole temporary-staffing vendor, posting a set of questions in a single format.”

- InformationWeek, 7 October 2002


Network Computing web site’s RFP Builder

* http://www.networkcomputing.com/1202/1202sp3.html

http://www.networkcomputing.com/1202/1202sp3.html




For those preparing proposals (www.pragmatech.com):

The RFP Machine®

The RFP Machine® enables Knowledge Managers to build, edit, and maintain a central repository of company, product, and service information required for automated RFP and RFI creation. The software brings consistency and accuracy to the RFP response process by providing you with the tools to produce persuasive, professional documents in dramatically reduced time.

The RFP Tracking System™The RFP Tracking System™ allows users to track proposal activity, including information pertaining to the issuer of the RFP or RFI, the person responsible for the response, document turnaround time, the win/loss status, and any other important information

Topic Duration


• Quiz 15 minutes






Today’s agenda

Topic Duration


• Quiz 15 minutes






Today’s agenda

Financial Analysis

Definition: Quantitative justification of an IT investment, typically looking at costs and benefits

Financial Analysis in the SDLC

The systems development life cycle (SDLC) is a description of the phases of an information system

Planning Analysis Design Implementation

SDLC: Planning Phase

IdentifyBusinessValue

Analyze TechnicalFeasibility

Analyze EconomicFeasibility

Analyze OrganizationalFeasibility

ProjectManagement

Project Initiation

Approval Approval






ProjectManagement

Approval Approval

Deliverables SystemRequest

Economic Feasibility Analysis






ProjectManagement

Approval Approval

Deliverables SystemRequest

Economic Feasibility Analysis

Financial Analysis

• Costs

–One-time vs. recurring

–Fixed vs. variable

–Tangible vs. intangible

o Tangible - Accurately projected

o Intangible - Difficult to estimate or hidden

Costs and Benefits Review

Financial Analysis

One-Time vs. Recurring Costs

Item One-Time Recurring

• Hardware/Software purchase

• Hardware/Software lease

• Hardware/Software rental

• Hardware support from vendor

• New application development

• Training

• Research

• Help desk support


• IT HR management

• Communication charges

Financial Analysis

Fixed vs. Variable Costs

Item Fixed Variable






• Training

• Research





Financial Analysis

Tangible vs. Intangible Costs

Item Tangible Intangible






• Training

• Research





Financial Analysis

• Benefits

–One-time vs. recurring

–Fixed vs. variable

–Tangible vs. intangible

o Tangible - Measurable

o Intangible - Important but difficult to measure or translate into $$$

Costs and Benefits Review (cont.)

Financial Analysis

One-Time vs. Recurring Benefits

Item One-Time Recurring

• Increased sales

• Improved customer service

• Reduced inventory costs

• Improved productivity

• Improved time to market

• Staff reductions

• Offer services that competitors offer

• Better information for decision-making

•

•

•

Financial Analysis

Fixed vs. Variable Benefits

Item Fixed Variable

• Increased sales








•

•

•

Financial Analysis

Tangible vs. Intangible Benefits

Item Tangible Intangible

• Increased sales








•

•

•

Financial Analysis

1. Break-even analysis

2. Payback analysis

3. Cash-flow analysis

4. Net present value analysis

There are four common methods of cost-benefit analysis:

Financial Analysis


Definition Breakeven point is when total cost of current system and proposed system intersect

Example Current payroll systems costs $1.25 per employee

New system costs $20,000 to implement and $0.35 per employee

Let x = number of employees

.35 x + 20000 = 1.25 x

x = 22,222 employees

If 1,000 employees processed per week, breakeven point is reached in the 23rd week of the system’s life

Financial Analysis


When to use Project justified in terms of cost savings, not benefits

Advantages Useful when business is growing, volume is key variable in cost

Disadvantages Benefits are ignored

Financial Analysis

2. Payback analysis

Definition Payback period is the amount of time it takes to recover an initial investment

Example New B2B system costs $300,000 to develop.

System handles 1,000 sales per month.

Cash inflow is $50 per sale after paying variable costs.

Payback period = initial investment / annual cash inflow

= 300,000 / (1,000 * 50)

= 300,000 / 50,000

= 6 months

Financial Analysis

2. Payback analysis

When to use Project justified in terms of tangible benefits

Advantages Simple to use

Disadvantages Ignores the time value of money

Does not consider total return beyond the payback period

Financial Analysis

3. Cash Flow Analysis

Definition Examines the direction, size, and pattern of cash flow associated with the proposed system

ExampleQ1 Q2 Q3 Q4 Q5

Revenue 5 20 25 50 75Costs (26) (27) (17) (19) (20)Cashflow (21) (7) 8 31 55Cum (21) (28) (20) 11 66

Financial Analysis

3. Cash Flow analysis

When to use Project is expensive relative to firm size

Advantages Simple to use

Disadvantages Ignores time value of money

Financial Analysis


Definition Present value - $1 received today is more valuable than $1 a year from today, which is more valuable than $1 two years from today, etc.

NPV considers the time value of both the investments and cash flows

Let p = current amount, r = interest rate

Future amount in n periods (Fn) = p(1+r)n

p = Fn / (1+r)n

Example Q1 Q2 Q3 Q4 Q5Revenue 5 20 25 50 75r = .01NPV 4.95 19.61 24.26 48.05 71.36

Financial Analysis


When to use Payback period is long or cost of borrowing money is high

Advantages Can adjust interest rate to reflect greater risk in far future versus near future

Relatively simple to explain

Disadvantages Longer the time frame, more uncertain on what NPV is

Slightly more complex than other methods

Financial Analysis

Describe a situation where a project may not meet minimum cost-benefit requirements and still be approved.

Capital Budgeting

Objective

• Determine if a depreciable asset will provide a return that will meet or exceed the original investment in the asset's acquisition

Screening vs. Preference Decisions

• Screening - Look at one proposed project

• Preference - Select from among several alternatives

Capital Budgeting

Total Cost Approach

• Frequently used in making preference decisions• All inflows and outflows for the alternatives are

considered

Cash inflows Cash outflows

Incremental revenues

Cost reductions

Salvage value

Initial investment

Repairs & maintenance

Incremental operating costs

Capital Budgeting

Question:

• When do you consider intangible benefits in capital budgeting decisions?

Answer:

• When tangible costs exceed tangible benefits, look at intangible benefits and decide if they are worth the deficit amount

Financial Analysis

When is cost-benefit analysis done during the procurement process? Why is this the most desirable time to do it? 1. Pre-RFP

2. RFP



5. Vendor Selection


7. ROI Analysis


Financial Analysis

When is cost-benefit analysis done during the procurement process? Why is this the most desirable time to do it? 1. Pre-RFP

2. RFP



5. Vendor Selection


7. ROI Analysis


range of potential costs/benefits

preliminary cost/benefit analysis

in-depth cost/benefit analysis

update cost/benefit analysis



Topic Duration


• Quiz 15 minutes






Today’s agenda

Topic Duration


• Quiz 15 minutes






Today’s agenda

End of slides

Documents

IS 483 Information Systems Management James Nowotarski 29 May 2003