IS/IT Outsourcing
GP Dhillon
Virginia Commonwealth University
A Typical MIS Department Budget
33% Systems and Programming


70% Maintenance
30% New Development
10% Administration and Training
57% Operations
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Includes PCs, printers, off the shelf software, network
hardware/software
Involve more $ than any other part of the MIS
department
Reasons to Outsource
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven
What is Outsourcing?
Defined
Outsourcing is defined as the act of moving
a firm’s internal activities and decision
responsibility to outside providers.
Three solutions to operations
problems
Problems: downtime, obsolescence,
unresponsive systems
Solutions:
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

Buy more equipment
Continuously fight fires and rearrange priorities,
getting people to solve the problems at hand
Continually document and measure what you are
doing, to find out the real problems, not just the
apparent ones. Then set standards - the preferred
solution
What does a business process look
like?
Supplier
Supplier
Supplier
Supplier
The Company
Supplier
Supplier
What does a business process look
like?
Supplier
ERP or equiv
Supplier
ERP or equiv
Supplier
I
N
T
E
R
or
I
N
T
R
A
N
E
T
The Company
ERP or equiv
I
N
T
E
R
or
I
N
T
R
A
N
E
T
Supplier
ERP or equiv
Supplier
ERP or equiv
Supplier
ERP or equiv
ERP or equiv
Outsourcing Information Systems
Functions: Customer-Vendor
Changes as IT has moved from the more
traditional professional services category to
outsourcing:
 IS Management loses an increasing amount
of control
 Vendors take more risk
 Vendors’ margins improve
 Choosing the right vendor becomes more
important
Outsourcing Information Systems
Functions: Two Driving Forces
Focus on core businesses: Global competition in
1970s-2002 have forced efficiencies
Shareholder value: Companies “priced” based on
shareholder value, and focus on short term
profits.
Management must stress value, they must
consider outsourcing in all their nonstrategic
functions.
What does a business process look
like?
St
HP
Supplier
KO Sup
ERP or equiv
St
HP
Supplier
KO Sup
ERP or equiv
St
HP
St
I
N
T
E
R
or
I
N
T
R
A
N
E
T
The Company
ERP or equiv
St
HP
Supplier
KO Sup
KO Sup
I
N
T
E
R
or
I
N
T
R
A
N
E
T
HP
Supplier
KO Sup
ERP or equiv
St
HP
Supplier
KO Sup
ERP or equiv
St
HP
Supplier
KO Sup
ERP or equiv
ERP or equiv
Strategic
Key Operational
High Potential
Support
Nature of contracts
Area of concern
Uncertainty
Risk/Reward
Contract
Ineffective
Vendor
Constrained
Fixed Fee
Contract
Inefficient
Open to Abuse
Certainty
Loose
Degree of Contractual Definition
Tight
Area of concern
Ineffective
Vendor
Constrained
Uncertainty
Risk/Reward
Contract
Fee
StrategicFixed
Contract
High Potential
Inefficient
Open to Abuse
Certainty
Loose
Tight
Degree of Contractual Definition
Area of concern
Area of concern
Uncertainty
Risk/Reward
Contract
Ineffective
Vendor
Constrained
Uncertainty
Risk/Reward
Contract
Key Operational
Ineffective
Vendor
Constrained
Support
Fixed Fee
Contract
Fixed Fee
Contract
Inefficient
Open to Abuse
Inefficient
Open to Abuse
Certainty
Certainty
Loose
Degree of Contractual Definition
Tight
Loose
Degree of Contractual Definition
Tight
Outsourcing Alternatives
IT outsourcing


Single outsourcer
Big bang (common pre-1990)
Sell IT assets to outsourcer
Move personnel to outsourcer
Get fixed costs off books and change to variable costs
Outsourcers took loss for 2 years and then got economy of
scale to keep costs down
Many problems with transition and culture shock of exemployees being treated like “temps”
Outsourcing Alternatives
Best-of-breed outsourcing (common throughout
1990s)
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Multiple outsourcers
Choose each outsourcer based on their expertise
Alternatively, could be “collaborative outsourcing”
General contractor and subcontractor system
Outsourcing Alternatives
Shared services
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Insourcing within organization
Across large organization, create centralized service
unit that deals with services of all sorts (like a spin off
company that has its own management and
autonomy and in some cases is legal corporate entity)
Specialties within types of service (like IT or mailroom
or legal) have autonomous subunits within service
unit
Insource group can subsequently outsource
Outsourcing Alternatives
Business process outsourcing (late 1990s)
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Margins for routine IT services shrank as they
became commodities
BPR became lucrative niche and is more art than
science
BPO is buying strategic process and administration of
new processes for use of IT instead of just cutting
costs of existing IT processes
Is risky and sometimes risks and rewards are shared
in joint ventureship