Pressures Faced in IT

• IT departments face growing pressure to improve their business value by accelerating the delivery of new applications and technologies and improving service to users

• At the same time, basic maintenance and support of the existing application portfolio consumes up to 50% to 80% of IT resources —posing a serious roadblock to new initiatives and services that can enhance an organization’s competitive position

Decision Making Model

Business Strategy

• It enables the business to better manage the human and financial resources required to support current applications while positioning itself to realize competitive advantage

• Acceptance of outsourcing as a business strategy extends well beyond IT, with outsourcing of business functions like customer service, human resources, and finance and administration projected to grow at 30% annually in coming years

Types of Sourcing Arrangements

Types of Projects Outsourced

• Ongoing Software Maintenance

• Software Conversion Projects (i.e. Y2K)

• Original Application Development

What is Being Outsourced?

• No area of the development lifecycle is immune to outsourcing

• In-house teams still do the majority of higher-abstraction activities, such as project management, requirements gathering, architecture, design, modeling, R&D and deployment

• However, offshore teams aren't simply being tasked with writing code

Outsourcing Literature Sources

Outsourcing Objectives

• Outsourcing arrangements are not typical purchaser/vendor relationships, and confidence that the vendor can work in a partnership is vital to a successful arrangement

• It is essential that the objectives and success criteria for outsourcing are clearly understood within the organization

Outsourcing Agreements

• Any outsourcing arrangement must be tailored to create a win/win deal that balances potential risk between the client and the vendor and creates an incentive for the vendor to work with the customer organization

• It’s becoming increasingly common for outsourcing arrangements to be structured for ‘gain-sharing’: once targeted benefits are achieved, benefits beyond the target are shared

• Arrangements such as these promote a true partnership

Characteristics of Outsourcing Contracts

• In outsourcing contracts, the client retains ownership of the IT strategy while the vendor assumes responsibility for management processes and day-to-day supervision of the resources

• A well-structured outsourcing contract makes the vendor responsible not only for a defined package of services, but for the delivery of business value from those services

Service Metrics

• Performance related service-level metrics are a key component of most outsourcing contracts

• Growing emphasis is being placed on measuring and evaluating the services’ business value

• Accordingly, metrics demonstrating continuous improvement and business value are becoming a more common component of outsourcing agreements

Service Level Agreements

• In order to offer a competitive service that, at the same time, is objectively measurable, the maintenance organization must commit itself to accomplish its services according to some indicators

• These Service Level Agreements can also be used for planning the non-plannable maintenance

Risks

• There are many good works analyzing the problem of risks once the maintenance process has started, but there is a lack of guidelines to help managers identify and estimate the risks in the initial stages of projects

• One situational factor may affect one or more risk factors, and each risk factor may affect on one or more business areas

Theoretical Foundations

6 Characteristics of Describing Software Development

1) Complexity

2) Degree of Commitment

3) Compatibility

4) Efficiency

5) Benefit

6) Risk and Uncertainty

Complexity vs Radicalness

Complexity is a measure of the number and variety of elements and their interconnections in a system

Radicalness is largely a perceptual measure which describes the perceived amount of change in the system at each level of abstraction

Developing Applications

• Internal staff already understands legacy applications, time spent transferring that knowledge would eat any potential savings

• New applications are driven by new opportunities that require rapid response, and the internal staff is too busy to provide that response.

• New projects can be started quickly because there is no need to recruit people. This lets the company respond swiftly to unexpected developments with minimal risk.

• If a new application fails to pan out, then the design cost will have been significantly less than in-house.

• If the application bears fruit, then offshore developers are in an ideal position for support, reducing the cost of maintenance.

Efficiency and Effectiveness in the Application Management Environment

• A clear picture of the desired, or ‘target’ application management environment is crucial to understanding the potential business value of outsourcing application management

• Well run environments have:– User Satisfaction– Accountability– Adequate Staffing

Maintenance

• Outsourcing of software life cycle activities is a growing business area

• Lack of planning and high costs of software maintenance invite many organizations to outsource

• Even the most unexpected organizations, such as the US Department of Defense, have decided to outsource significant portions of their Information Systems

Maintenance

• Among the activities that comprise the software life cycle, maintenance is the most costly; estimated at 67-90%

• By not planning for change, companies are faced with higher costs than if they were to imbed that cost in the original development plan

Benefits of Outsourcing Maintenance

• Employees focus on the core business

• Releasing resources for strategic developments

• Decreasing costs

• Increasing productivity

Drawbacks of Outsourcing Maintenance

• Loss of control

• Loss of a learning source

• Loss of knowledge of the software

• Dependencies on the supplier

• Variations in the product quality

• Problems among personnel

Planning the Non-Plannable

• “Non-plannable” maintenance requires urgent corrective action

• It is the more problematic type of maintenance, due to its lack of planning possibility

• The use of predictive models are used to try to determine the quantity of resources needed for error corrections.

Benefits of Outsourcing

• Competitive Advantage

• Speed-To-Market

• Improved Quality

• Overcome cultural barriers to improving methods and processes

• Access to skills and resources

According to One CIO…

• "We see little value in offshoring legacy work," Ross says. "Next-generation applications is where the payoff's the greatest."

The Quality Question

• A large percentage of respondents rated the quality of work done by the offshore team as worse than in-house efforts

• 46% of respondents considered the work of the offshore teams to be of poor quality, and an additional 14% reported that their offshore team's work was "unusable or a setback to progress."

The Quality Question

• 51% of respondents reported that their current or most recently outsourced project was critical to daily operations

• Despite the reports of poor quality, 93% disclosed that their company plans to keep using their offshore vendor

Skill Sets for the New Worker

• Teamwork and communication skills remain important, but an understanding of other cultures and languages may also be helpful in this global economy

• More attention must be paid to large applications, standard tools and platforms that will be used by IT workers around the world, such as J2EE or .NET.

• In addition, a more global perspective should be taken

Generalized Application Packages

• There has been a growing trend towards the use of generalized application packages in IS development, largely due to the fact that in-house development has turned out to be costly and risky in terms of development costs and schedules and the quality of the resulting systems

• The impression is that there is a common-sense belief that application package based information systems are easier to implement than in-house developed systems

• It should be observed, however, that the results are not very conclusive in this respect

Questions?