Matakuliah
Tahun
Versi
: J0422 / Manajemen E-Corporation
: 2005
:1/2
MODULE 12 :
Managing IT Outsourcing
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Learning Outcomes
 In this chapter, we will study:
 How to outsource from outside and how to manage
that?
 Why company prefer to do outsourcing than having
their own IT team?
 What is the cost effective for company, if they using
outsourcing?
 The policies that we need to know when we want to
outsource?
 CIO was responsible for outsource in IT?
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Outline Topic
Why Outsourcing Alliances are so difficult ?
What drives Outsourcing ?
When to Outsource
Structuring the Alliance
Managing the Alliance
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Content
 Increasingly, companies are outsourcing all
significant parts of their management of information
technology (IT).
The reasons include:
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Concern for cost and quality
Lagging IT performance
Supplier pressure
Access to special technical and application skills’
Other Financial factors
 From a relatively unusual entrepreneurial activity in
the past, IT outsourcing has in the last five years
exploded across the global corporate landscape
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Managing IT Outsourcing
 Xerox, United Technologies, commonwealth Bank, Nortel,
Nedcor are just a few mega alliances.
 Outsourcing arrangements are easier to enter than to sustain
or dissolve. Special economic technology issues surrounding
outsourcing agreements make them more complex and fluid
than an ordinary contract.
 For outsourcing to be successful, both parties must make a
sustained effort to work together.
 Major outsourcing programs typically involve larger
investments, higher stakes, and greater overall management
complexity than does incremental outsourcing.
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Why Outsourcing Alliances Are So Difficult
 Many major outsourcing contracts are structured to expand
over long periods. However, these agreements exist in a
world of fast-moving technical and business change.
 Eight to ten years is the normal length of a contract in an
environment in which computer chip performance is improving
by 20 to 30 per cent per year.
 A deal making sense at the beginning of the contract may not
make economic sense three years later and may require
adjustments to function effectively.
 Timing of benefits to customer and vendor exacerbates the
situation. Benefits in the first year are clear to the customer,
who often receives a one-time capital payment in exchange
for assets that are being transferred to the vendor.
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Why Outsourcing Alliances Are So Difficult
 The contract payment stream becomes less and less tied to
the initial set of planned outputs and thus more subject to
negotiation and possible misunderstanding between the
customer and vendor.
 From the outsourcing vendor’s perspective, the situation is
the reverse. The first year may require a heavy capital
payment followed by the extraordinary costs of taking
responsibility for the customer’s IT operations and executing
agreed-upon cost reduction and quality control initiatives.
 All this is completed in anticipation of a back-loaded profit
flow. At the time the vendor is finally moving into its planned
profit stream, the customer, feeling the need for new services
is chafing under the monthly charges and anxious to move to
new IT architectures.
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Why Outsourcing Alliances Are So Difficult
 A further complication is that only a few outsourcing vendors
have the critical mass and access to capital markets to
undertake large contracts.
 ASPs provide special industry skills, small contracts, or
specific sub functions such as network operations. If an
alliance is not working, a customer company’s options for
resolving the situation are limited, particularly because
outsourcing is relatively easy but in sourcing is very difficult.
 Finally, the evolution of technologies often changes the
strategic relevance of IT to a firm.
 From the customer’s viewpoint, assigning a commodity
service to an outsider is very attractive if the price is right.
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Why Outsourcing Alliances Are So Difficult
 Outsourcing IT has been used by organizations a long time.
In the mid-1960s, computer services bureaus ran a variety of
programs whose applications focused on the financial and
operations support areas.
 The programs were both customized and general-purpose,
and the individual firm had to accommodate its operations to
the standard options in the package.
 Service bureau customers were mostly small and mediumsize firms, although large firms used them for specialized
needs or highly confidential items such as executive payroll.
 ADP is a good example of a provider in the outsourcing
industry.
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What Drives Outsourcing?
General Managers’ Concerns about Costs and Quality
 An outsourcing vendor can save money for a customer in:
 Tighter overhead cost control of fringe benefits. On
balance, outsourcing vendors run much leaner overhead
structures than do many of their customers.
 More aggressive use of low-cost labor pools by using
geography creatively. Frequently, the outsourcing vendor
moves data centers and gives portions of the development
activity to low-cost areas such as India and Northern Ireland
(modern telecommunications).
 Tough world-class standards applied to the company’s
existing staff, all of whom have to requalify for appointment
at the time of outsourcing. Maintaining high standards
keeps employees from losing their skills in leading-edge IT
practices.
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What Drives Outsourcing?
General Managers’ Concerns about Costs and Quality
 An outsourcing vendor can save money for a customer in:
 More effective bulk purchasing and leasing arrangements
for all aspects of the hardware/software configuration
through discounts and better use of capacity.
 Better management of excess hardware capacity. By
combining many firms’ work in the same operations center,
an outsourcing vendor can use less hardware. One small
firm’s online operations ($27M, 10-year contract) were
transferred to a larger data center at no extra cost to the
outsourcing vendor. Capacity was simply better used.
 Better control over software licenses through both
negotiation and realistic examination.
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What Drives Outsourcing?
General Managers’ Concerns about Costs and Quality
 An outsourcing vendor can save money for a customer in:
 More aggressive management of service and response time
to meet, but not wildly exceed, corporate standards. Tighter
control over inventories.
 Hustle. Outsourcing vendors are professionals. Outsourcing
is their only business, and their success is measured by
satisfied customers who recommend them to others, bottomline profitability, and stock market performance.
 The ability to run with a leaner management structure
because of increased competence and critical-mass volumes
of work.
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What Drives Outsourcing?
General Managers’ Concerns about Costs and Quality
 An outsourcing vendor can save money for a customer in:
 The ability to access higher levels of IT staff skills, IT
application skills (such as SAP, Oracle, and PeopleSoft), or
special customer industry skills.
 Creative and more realistic structuring of leases.
Breakdown in IT Performance
 Failure to meet service standards forces general management
to find other ways to achieve reliability.
 Example: Massachusetts Blue Cross and Blue Shield’s
decision to outsource to EDS was triggered by
failure of three major systems development projects.
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What Drives Outsourcing?
Breakdown in IT Performance (Cont’d)
 An additional driving factor toward outsourcing is the need
for companies to rapidly retool backward IT structures in order
to remain competitive.
Simplified l Management Agenda
 A firm under intense cost or competitive pressures which does
not see IT as its core competence may find outsourcing a way
to delegate time-consuming, messy problems. The firm then
can focus its energy on other competitive differentiators.
Financial Factors
 Several financial issues make outsourcing appealing. One is
opportunity to liquidate the firm’s intangible IT asset and
strengthen the balance sheet and avoid a future stream of
sporadic capital investments.
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What Drives Outsourcing?
Financial Factors (Cont’d)
 Outsourcing can turn a largely fixed-cost business into one
with variable costs. This change is important for firms whose
activities vary widely in volume from year to year or which
face significant downsizing.
 A third-party relationship also brings an entirely different set of
dynamics to a firm’s view of IT expenditures. The company is
now dealing with a hard-dollar expenditure that all users must
take seriously. There is a sense of discipline and toughmindedness that a fully charged-back internal IT department
has trouble achieving.
 For a firm considering divestiture or sale of one or more of its
divisions, outsourcing liquidates and gets value for an asset
unlikely to be recognized in the divestiture. It gives the
acquirer fewer problems to deal with in assimilating the firm.
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What Drives Outsourcing?
Corporate Culture
 Sometimes a company’s values make it hard for managers to
take certain actions that make business sense.
 Example: A firm has several internal data centers and an
obvious and compelling case for consolidating them. The
internal IT department lacked the clout to pull off a centralized
strategy in what was a highly decentralized firm built up over
the years by acquisitions.
 The firm saw the decentralized culture as a major strength,
not subject to reconsideration. Outsourcing, driven by senior
management, provided the fulcrum for overcoming this
impasse, since it was not directly associated with any division
or corporate staff.
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What Drives Outsourcing?
Eliminating an Internal Irritant
 No matter how competent and adaptive a firm’s IT management
and staff are, tension often exists between the end users of the
resources and the IT staff.
 The different language IT professionals use, lack of career paths
for IT staff across the organization, perceived high IT costs,
perceived unresponsiveness to urgent requests, and perceived
technical obsolescence frequently exacerbate this tension.
Other Factors
 A variety of other drivers for outsourcing appear in specific
situations. At one mid-size high-tech firm, outsourcing provided
access to skills the company needed to run a series of critical
applications. In another example, a large firm received a level of
commitment and energy that it felt would not have been
forthcoming from an in-house unit.
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When to Outsource ?
 When do the benefits of outsourcing outweigh the risks? Five
factors tip the scale:
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Position on the Strategic Grid
Development Portfolio
Organizational Learning
A Firm’s Position in the Market
Current IT Organization
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Structuring the Alliance
 Several factors are vital to a successful alliance:
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Contract Flexibility
Standards and Control
Areas to Outsource (See Notes below)
Cost Savings
Supplier Stability and Quality
Management Fit
Conversion Problems
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Structuring the Alliance
Areas to Outsource
 When assessing incremental outsourcing, managers should
ask:
• Can the portion of IT proposed for outsourcing be separated
easily from the rest of the firm, or will the complexities of
disentangling systems absorb most of the savings?
• Does the activities proposed for outsourcing require
particular specialized competencies that we do not possess
or lack the time to build?
• How central are the activities to be outsourced to the strategy
of our firm? Are they more or less significant to the firm’s
value chain than other IT activities?
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Managing the Alliance
 The ongoing management of an alliance is the single
most important aspect of the success of outsourcing.
Four critical areas require close attention:
1. The CIO Function
• Partnership/contract management
An informed CIO who monitors performance against the contract
and plans for and deals with issues that arise helps an outsourcing
alliance adapt to change. Outsourcing experiences of Kodak and J.
P. Morgan/ Chase provide evidence of need for this ongoing role.
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Managing the Alliance
1. The CIO Function
• Architecture planning
A CIO’s staff must visualize and coordinate a longterm
approach to networks, hardware and software standards, and
database architectures. The firm can delegate execution of
these areas but not its assessment of what it needs to support
the firm in the long term.
• A staff roughly five percent the size of the outsourced IT
organization is the norm, although in practice the percentage
may vary. In general, organizations should err on the side of
too much coordinating staff.
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Managing the Alliance
1. The CIO Function
• Emerging technologies
A company must develop a clear grasp of emerging
technologies and their potential applications.
• To understand new technology, managers must attend
vendor briefings and peer group seminars and visit firms
that are using the new technology. Assessing technology
alternatives cannot be delegated to a third party.
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Managing the Alliance
1. The CIO Function (Cont’d)
• Continuous learning
A firm should create an internal IT learning environment
to bring users up to speed so that they are comfortable in
a climate of continuous change.
• An aerospace firm felt this was so important that, when
outsourcing, it kept the internal learning environment inhouse.
2. Performance Measurement
3. Mix and Coordination of Tasks
4. Customer-Vendor Interface
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Chapter Summary
 Executives can use the following questions to assess whether
they are sizing the opportunities provided by outsourcing and
managing the associated risks:
 Have you assessed the case for outsourcing some or all of your
company’s IT activities? If past studies indicated that outsourcing did
not make sense, how confident are you of the objectivity of those
studies?
 If you are engaged in outsourcing relationships, have you built the need
to change the relationship over time into the contract? Do you have
specific mechanisms in place to indicate when an adjustment to the
contract might be called for?
 Do your outsourcing arrangements provide profits for both parties to the
agreement?
 Have you retained an internal CIO function to perform the IT planning
and contract monitoring functions that cannot be delegated? Have you
adequately funded and staffed this internal group?
 Do you have practices in place to nurture and maintain the health of the
outsourcing relationship?
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Chapter Summary
 Do we have detailed service-level agreements in
place with our service providers?
 Have we made sure the SLAs in our service deliver
chains interlock and that incentives are aligned up
and down the chain?
 Do we have systems in place for virtually integrating
with service delivery partners?
 Have we specified contract terms with service
providers that preserve our options for incrementally
improving our infrastructure?
 What our short-term and long-term strategies for
dealing with legacy system issues?
 What systems should we replace, and when should
we replace them?
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