Reasons for IT outsourcing
1.
Cost & quality
• Cheaper at same quality
• Faster at same cost
Vendor can provide cheaper solution because:
• Vendors run leaner shops with fewer over heads
• May use off shore operations in India, Philippines,
Ireland
• highly skilled and up to date staff
• Economies of scale
• Better utilization of hardware capacity
• Better negotiation of software licensing
• Tighter control over inventories
• Its their core business
2.
3.
4.
Lagging IT performance
Access to special technical skills
Other financial factors
•
can get quick cash against transfer of IT assets
•
Fixed costs become variable costs
•
Discipline amongst the user group as the $$s show up in the monthly
bills and request for change costs
•
Easier to sell off divisions
5.
HR concerns
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6.
Corporate culture
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Inefficient staff
Out dated staff
Over staffed but don’t want to fire (not a company culture)
Vendor may bring much needed change in the culture
Large IT outsourcing arrangements are easy to enter but very hard to
divorce
Major outsourcing agreements are done more due to strategic reasons
rather than operational reasons
but the two approaches are complementary
Why are outsourcing arrangement so difficult
Major outsourcing contracts cover 8-10 years
Usually the customer gets lump sum cash in the first year.
After 1st year customer gets a monthly bill
In the 1st year the customer gets service very similar to what it was before
the assets were transferred.
As the requirements for 2nd year onwards change, negotiations are
required to work it out---it can be stressful
For the vendor, a big cash outflow takes place in 1st year
Vendor expects profit from 2nd year onwards
But customer may start complaining 2nd year onwards because of the
monthly bill and need to rework the contract because of changing
requirements
This creates tension
Novice customer may not do a good job of handling this
Handful of vendors who can take large contracts
Not much choice to switch
Large vendors include
1.
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4.
5.
6.
7.
EDS
IBM
COMPUTER SCIENCES CORPORATION
COMPUTER ASSOCIATES
PEROT SYSTEMS
GENERAL DYNAMICS
LOCKHEED MARTIN
Some of these specialize in niche areas like
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Government
Chemical industry
Auto industry etc
When do benefits of outsourcing outweigh risks
1.
2.
Position on the strategic grid (show figure 9.1)
Development portfolio
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Outsource if high %age of IT staff working on maintenance or
high-structured (end-products are clearly defined, static, and
require no organizational change) projects
High tech, highly structured is a good candidate because
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Large low structured projects not good candidate because:
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3.
Requires specialized leading-edge technical skills
These require high degree of coordination
Design is iterative so require lots of coordination
End outputs evolve as make progress on the project
Organizational learning
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Some IT projects underway require BPE resulting in layoffs
These are not good projects for outsourcing as it adds to tension
4.
Firms position in the market
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5.
Firms lagging their peers in IT architecture, IT leadership, staff
skills can do a quick catch up by outsourcing
Current IT organization
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Segregated or decentralized IT department is a good candidate for
outsourcing
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It has fewer issues that need to be resolved with the vendor
Has few integration problems
Assuming in the above situations that the customer does not want
to integrate the organization
How to make partnership successful
Doing the right things still do not guarantee success but wrong structure will
make management impossible.
• Business circumstances (economy, competition, technology etc.) change
so there should be provision for altering the contract. Both sides should be
interested in having a good relationship. The process of drafting the
contract is more important than the contract itself.
• If co depends heavily on IT for smooth operation or evolution of IT very imp
for the co, then will be worried about giving control to vendor. To make it
easier have detailed performance standards like response time, availability
of service, responsiveness to systems requests etc.
• When thinking about partial outsourcing ask:
– Can the portion being outsourced be separated easily from the rest of
the company or will it create a mess
– Are we outsourcing this part cuz we don’t have skills or time
– Are these activities central to the strategy
When outsourcing small parts consider coordination costs too.
• Pick a vendor that has record of keeping current with
technology and spending money on retraining its
employees
• Once outsource its hard to bring it back cuz may have lost
the technical and managerial competency
• Customers quadrant should not mismatch with vendor’s
quadrant e.g. if customer in strategic quad and vendor in
factory
• It should be a win/win partnership
• Both parties should think about solving problems together
– Have similar values
– Good chemistry among key staff people
– Many times corporate culture fit should be present altho in some
cases it worked in opposite situations too
• Career paths and job security for IT should be handled
carefully
Managing the alliance
• The customer firm must retain strong CIO function whose main
job is planning, and monitoring vendor performance against
contracts and then works with vendor on issues
• CIO must have a vision for long term architecture (networks,
hardware, software standards, and database architecture)
• Customer should develop clear grasp of emerging technogies
and their potential applications. Managers must attend vendor
briefings, conferences, fairs. Do not delegate this to the vendor.
• Create an internal learning environment to bring users up to
speed.
• Set performance standards and measure against them
• Highly structured projects easy to outsource not low structure
projects cuz need high degree of coordination
• Interface with vendor should occur at multiple levels. High
levels take care of policy and relationship structuring issues,
low levels take care of operational and tactical issues.