ERP Outsourcing Evaluation
David L. Olson, Evaluation of ERP outsourcing, Computers & Operations Research 34:12,
2007, 3715-3724
Outsourcing reduces costs
Reduces one type of risk
Introduces other risks
Korea Telecom 2007
Olson: ERP4
Scope of ERP Outsourcing
• ERP rental estimated
at $6.4 billion in 2001
– Forrester Research
Inc.
• Induced by
competitive pressures
• Gartner: monthly
outsourcing fees $300
to $1,000 per user
Korea Telecom 2007
Olson: ERP4
Relative IT Costs
T. Hoffman, P. Thibodeau, Wage inflation unlikely to soon end India’s offshore
dominance. Computerworld 38:14, 2004, 11-12.
COUNTRY
Vietnam
India
China
Russia
Mexico
Ireland
Israel
Singapore
U.S.
Korea Telecom 2007
Average Programmer Salary
$3,475
$7,500
$7,550
$10,000
$20,500
$24,500
Olson: ERP4
$29,150
$30,950
$65,000
Dial soap
Schwartz (2003)
• Installed SAP suite run by EDS
– 18 month, $35 million project
– Overall transfer expense $110
million
• Replace mix of Siebel, Oracle,
Manugistics, and other
applications
• 50 IT employees transferred to
EDS
– Only a small governance team
retained by Dial
Korea Telecom 2007
Olson: ERP4
Other outsourcings
• Sun:
– Will outsource about 90% of IT jobs
• California State Automobile Association
– Accenture to run PeopleSoft system
• ASAT Holdings
– IBM to run SAP system
Korea Telecom 2007
Olson: ERP4
Targeted Outsourcing
• Informatica Inc.
– Outsourced HR, felt could operate even if it went
down
– Didn’t outsource other modules
• Federal-Mogul Corp.
– Experienced quick growth through acquisitions
– Needed to consolidate 27 different ERPs
– Outsourced only technical work such as SAP
programming
Korea Telecom 2007
Olson: ERP4
Government ERP Outsourcing
• Can lower costs of software
ownership
• Avoid problems of developing &
retaining IT staff
• More difficult to get approval for
large ERP projects
– Need to defend proposals in public
hearings
– Reduction of State jobs has led to
difficulties with information workers’
unions
Korea Telecom 2007
Olson: ERP4
Reasons to Outsource
Bryson & Sullivan (2003); Clymer (2004)
•
•
•
•
•
•
•
•
•
•
Reduced capital expenditure
ASP economies of scale
More flexibility & agility
Increased service levels at lower cost
Gain expertise unaffordable in-house
Allow focus on core business
Continuous access to the latest technology
Reduced risk of infrastructure failure
Manage IT workload variability
Replace obsolete systems
Korea Telecom 2007
Olson: ERP4
Reasons Against Outsourcing
Bryson & Sullivan (2003); Clymer (2004)
•
•
•
•
•
•
•
•
•
Security & privacy
Dependency on vendor (lock-in)
Availability, performance, reliability
High migration costs
ERP expertise may be critical to organizational
success
ERP systems tied to IT infrastructure
Key applications may need to be in-house
May have existing efficient operation
Corporate culture
Korea Telecom 2007
Olson: ERP4
Russ Berrie & Co.
Nash (2002)
• Gift-related retailer
• 1998 & 1999 spent $19.2 million on SAP
– Problems tracking orders
– Wrote off $10.4 million to revert to old systems
• 2001 supply chain inefficiencies
– Investigated 4 ERP vendors (not SAP)
– Gave hard technical criteria
• User ability to access via Web
• Software resident on user PCs
• Installation in stages
– Used weighted scoring system, selected JDEdwards
Korea Telecom 2007
Olson: ERP4
General Motors
eWeek (2003)
• Outsourced ERP in early 1990s
• One of first to outsource such a large system
– Acquired EDS
– Problems: no management control
• Second generation:
– Combination of outsourcing companies
• 2003 Third generation:
–
–
–
–
Outsource all IT
Retain control over everything
Wanted competing outsourcing companies
In 2003 spending $1 billion less on IT than in 1996
Korea Telecom 2007
Olson: ERP4
Soft Impacts of Outsourcing
McCarthy (2001)
• Software upgrades over time
• Integration, implementation, testing,
maintenance
• User functionality, technical support,
service
• Servers
• Disaster recovery
• Staffing
Korea Telecom 2007
Olson: ERP4
Selection Criteria
Van Everdingen et al. (2000)
IS (n=2401)
ERP Supplier (n=2623)
1. Fit with business
procedures
2. Flexibility
1. Product functionality
3. Cost
3. Implementation speed
4. User friendliness
5. Scalability
4. Interface with other
systems
5. Price
6. Support
6. Market leadership
2. Product quality
7. Corporate image
Korea Telecom 2007
Olson: ERP4
8. International orientation
ASP Evaluation Factors
Ekanayaka et al. (2003)
Security
1.
2.
3.
4.
Physical security
Data & application security
Back-up & restoration
Disaster recovery plan
Integration
1.
Sharing data across applications
Pricing
1.
2.
3.
Total cost impact
Hidden costs & charges
ROI
Customer service
1.
2.
Help desk & training
Support for administration of accounts
Service level
1.
2.
3.
Performance metrics clearly defined
Procedures to open & close accounts
Flexibility in service offerings, pricing, duration
Reliability
Korea Telecom(RAS)
2007
1.
2.
Availability
Olson: ERP4
Scalability
Example: Start with Life Cycle Cost
Option
Software Consult
HW
Implement
Train
Total
In-house
$15 m
$8 m
$6 m
$5 m
$4 m
$38 m
B-of-B
$12 m
$9 m
$6 m
$6 m
$6 m
$39 m
Custom
$13 m
$7 m
$6 m
$8 m
$2 m
$36 m
Full vendor
$9 m
$6 m
$6 m
$5 m
$7 m
$33 m
ASP
$3 m
$4 m
$0 m
$2 m
$7 m
$16 m
Korea Telecom 2007
Olson: ERP4
Criteria, Scores by Alternative
Option
Customer RAS
service
In-house
Integrate Cost
Security Svc L
1
0.3
1
0.2
1
0
B-of-B
0.6
0.7
0.7
0.1
.9
.8
Custom
0.9
0.5
0.9
0.3
.9
.7
Full vendor
0.7
1
0.3
0.5
.9
1
ASP
0.5
0
0.3
1
0
1
Korea Telecom 2007
Olson: ERP4
Develop Weights
• Rank order criteria by importance
• Identify worst measure by criteria
– Give worst 10, others assigned proportionally
• Identify best measure by criteria
– Give best 100, others assigned proportionally
• Compromise
Korea Telecom 2007
Olson: ERP4
Weight estimates
Criteria
WORST
BEST
Comp
1-Cust svc
200
0.381
100
0.377
0.38
2-RelAvScal
150
0.286
80
0.302
0.30
3-Integrate
90
0.171
50
0.189
0.18
4-Cost
50
0.095
20
0.075
0.08
5-Security
25
0.048
10
0.038
0.04
6-Service
10
0.019
5
0.019
0.02
Korea Telecom 2007
Olson: ERP4
Value = Weights time Scores
Criteria
Wgt
In-house
B-o-B
Custom
Full V
ASP
Cust Svc 0.38
x 1.0
=0.380
x 0.6
=0.228
x 0.9
=0.342
x 0.7
=0.226
x 0.5
=0.190
RelAvSc
0.30
x 0.3
=0.090
x 0.7
=0.210
x 0.5
=0.150
x 1.0
=0.300
x 0.0
=0.000
Integrate
0.18
x 1.0
=0.180
x 0.7
=0.126
x 0.9
=0.162
x 0.3
=0.054
x 0.3
=0.054
Cost
0.08
x 0.2
=0.016
x 0.1
=0.008
x 0.3
=0.024
x 0.5
=0.040
x 1.0
=0.080
Security
0.04
x 1.0
=0.040
x 0.9
=0.036
x 0.9
=0.036
x 0.9
=0.036
x 0.0
=0.000
Svc Lev
0.02
x 0.0
=0.000
x 0.8
=0.016
x 0.7
=0.014
x 1.0
=0.020
x 1.0
=0.020
TOTALS
1
0.706
0.624
0.728
0.706
0.344
Korea Telecom 2007
Olson: ERP4
Summary
• Outsourcing ERP an important new option
• Hard to figure impact on:
– Cost
– Risk
• Multicriteria methods can help evaluate
Korea Telecom 2007
Olson: ERP4