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

Strategic Importance

Company’s Skills Related to Best External Source

Low

Low

High

High

Equal

Buy/Outsource Make or Buy/Out.

Tend to make

Tend to make MakeStrategic Alliances

Rands (1993)

Make or buy decision

Business strategy IT application or infrastructure provides proprietary competitive advantage

IT application or infrastructure supports strategy or operations, 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

Decision Criteria Pressure to “Make/Own” Pressure to “Buy”

Sourcing Strategies

High

Low

Need for tailor made support

Low HighMarket Potential to provide the support

In-house solution

Cost sharing or strategic alliance/Selective outsourcing

True spin-Off or outsourcing

Resource Dependence Theory

High

Low

Degree of Resource Dependence

Low HighDegree of volatility

In-house solution

Cost sharing or strategic alliance

Outsource

True spin-Off or outsourcing

Strategic Choice Framework for the IT Professional Resource

Performing / Strategic Focus (Not just focusing

on cost)

Time

Insourcing / Bystander (outsourcing between 1-5% of IT. Mostly purchasing of IT functions).

Forming / experimenting stage (outsourcing between 10-20% of IT activities)

Storming / Strategic decision point (Organization leaders share conflicting ideas about outsourcing and pursuing different strategy to provide IT services)

Norming / Proactive Cost Focus (Beginning to form norms and actively focusing and proactively using outsourcing for cost saving including offshore. Outsourcing 20-40% of IT activities)

5

4

3

2

1

Stages

Accounting for Information Technology Costs

Unallocated Cost Center Allocated Cost Center Profit Center

Allocated Method Description AdvantageDisadvantageUnallocated cost

center

All IS costs are considered an organizational expense

Experiments with technology can occurUser can request the development of new systemsIS can develop systems regardless of economic benefit.

Costs can get out of control.IS professionals cannot easily allocate their budget among conflicting requests.

Allocated cost center

IS department allocates costs to departments that use its services.

User request only beneficial services.It works well in organization where changes are made regularly to all internal customers

IS can have problems determining allocation of costsFriction among user departments and between them and IS can occurIS has no reason to operate efficiently.Profit center IS charges internal

and external users the same and attempts to get both kinds of business.

Users can choose who will perform their IT service.IS department has incentives to operate efficiently.

Outsourcing may become more common.Fees may be higher than with other methods.

Accounting for Information Technology Costs

Staffing the Technical Functions