OUTSOURCING in IT
services
Group HAPY:
Hong Nhung NGUYEN
Huong Trang TRAN
Mengyao XING
Zicong WANG
March 2012
Overview
 Introduction
 Definitions
 IT outsourcing development
 Classifications
 The risks of IT outsourcing
 Feeny/Willcocks framework
 Case study companies
 DuPont case
 Volkswagen case
 Zara case
 Summary
 Advantages and disadvantages of IT outsourcing
 Recommendation
 References
Definitions
 Outsourcing occurs when an organisation contracts with
another organisation to provide services or products of a major
function or activity (Belcourt, 2006).
 IT outsourcing:
“… a decision taken by organisation to contract-out or sell the
organisation IT assets, people, and/or activities to a third party
vendor, who in exchange provides and manages assets and
services for monetary returns over an agreed time period” (Kern,
1997, p.37)
IT outsourcing development
 1963: Electronic Data Systems signed the agreement
with Blue Cross of Pennsylvania for data processing
services -> beginning of IT outsourcing century.
 1989: Kodak enter strategic alliance with IBM-IS partner
($1 billion outsourcing deal)
->widespread interest in outsourcing
 Recently, it evolves from one vendor-one client to
multiple vendors-multiple clients.
IT outsourcing development
 The trend towards outsourcing is increasing in all
industrial and commercial sectors. The growth in IT
outsourcing in the last 10 years has been significant.
 Major drivers for upsurge in IT outsourcing:






Global competition
Downsizing
The move to flatter organisation,
The search for greater flexibility,
Rapid change in technology
Emphasis on concentrating on core competencies
IT outsourcing classifications
 Lacity and Hirschheim (1993) divided into 3 types:
 Total outsourcing: to a single third party, >80% of the IS
budget
 Selective sourcing: source externally between 20%-80%
of IS budget
 Total insourcing: retain >80% of the IS budget internally
The Risks of IT Outsourcing
 Outsourcing has risks => significant to analyse risks
of IT outsourcing
 Earl (1996) discusses eleven risks of IT outsourcing:
Possibility of weak
management
Dangers of an eternal triangle
Business uncertainty
Lack of organizational learning
Outdated technology skills
Loss of innovative capacity
Endemic uncertainty
Hidden costs
Technology indivisibility
Fuzzy focus
Inexperienced staff
Feeny/Willcocks framework
DuPont case
 Founded in July 1802 as a gunpowder mill.
 Before 1997, it expanded as a chemical and energy
company. In 1997, transformed to a science
company.
 Figures:
 2010: Net sales: $31.5 billion,
 2011: 67,000 employees, operating in 90 countries
DuPont Timeline
F
ocused on core business
competencies, a reduction
of overhead costs and an
increase of capital
efficiency
Applied Feeny/Willcocks
framework
E
xtended the contract
with CSC through 2014
1994
1995
1996
1997
1998
1999
Signed a series of ten year
contract of IT outsourcing
with CSC and Accenture
2000
2001
2002
T
2003
2004
ransferred 80% of IT
spending and 75% of IT
staff
2005
2006
2007
How did DuPont apply the
framework?
 Defined 5 of 9 capabilities as general
competencies:
 Relationship building




Leadership
Contract facilitation
Informed buying
Making technology work
 Pointed to 3 faces as career paths:
 Business and IT vision
 Delivery of IT services
 Design of IT architecture
How did DuPont apply the
framework?
 Have informed discussion with vendors
 improve architecture planning
 A benchmarking process was introduced
 improve contract monitoring
 Support senior technical capability and
informed buying capability
How did DuPont apply the
framework?
 By 2003:
 Fill 90% of key leadership positions internally
 The projected shortfall of in-demand
employees was reduced from 30 in 1997 to 2 in
2004
 Leverage its relationship with suppliers and
renegotiate sourcing arrangements into the
future
Profile of Volkswagen
 Industry: Automotive
Products: Cars
Revenue: €80.251 billion(2010)
Profile of Volkswagen
 1937: Volkswagen Group established
 Late 1940s:Beetle was introduced and became internationally popular
for 20 years before experiencing fluctuation, known as :” Himalayas
chart”
 Early 1990s: dropped to a new low point
 In 2001: changed in strategy, developed “classic” and “sporty” brands
Volkswagen IT strategy timeline
VWoA IT staffs were
transferred to f “gedas AG” to
monitor outsource contract
Outsourced with Perot
Systems, and dramatically
reduced internal IT staff
The single internal IT
department BPTO was
created
In 1999,Set up
'Ebusiness teams'
1990
1992
Early 1990s, sale dropped to
new point
1994
1996
1998
2000
2002
2004
2006
Analysis of Feeny/Willcocks Framework
on Volkswagen case
 Leadership issue:
 failed on creating organizational arrangements
 Relationship building issue:
 failed on building a single organization in control of the overall
process
 Contract monitoring issue:
 frequently changes on IT staff
Zara case
 Spanish clothing and accessories retailer,
belongs to Inditex group.
 In 2010:
 Net sale: €8,088m,
 Contributed to total sale: 64.6%
 Numbers of countries: 77
IT source and Feeny/Willcocks
framework
 Zara’s IT strategy:
 Utilize technology that is simple, cost-effective and easy to use
 Doesn’t require a lot of IT support.
 Nine IS core capabilities from the framework are low
 Low level of IT infrastructure and organisation.
 No CIO; no formal processes for IT budgets; no investments for
strategies and IT projects.
 Low leadership
 Using outdated software – POS terminals which ran on DOS.
 Architecture planning
 Contract facilitation
 Vendor development
 Recommendation: has a room for improvement
Why do Zara not IT outsourcing?
 Preference for speed
 Unique business
 Vertical Integration
 All functions link together
 Have their own factory
Summary
Advantages and Disadvantages of IT outsourcing
Advantages
Disadvantages
Cost-Effectiveness
Loss of Control
Qualitative Services
Communication Challenges & Different
Standards
Skilled Manpower
Time Zone- a double-edged Sword
Focus
Cultural Differences
Expertise in IT Outsourcing
Service Provider wants to diversify and take
more projects
Customer is Novice
Summary
Recommendation
Step 1: Consider the risks of IT outsourcing.
Step 2: Outsource or insource?
Step 3: Consider using the Feeny/Willcocks
framework to manage their IT function in long
term .
References
 Austin, R.D. (2006) “ Volkswagen of America: Managing IT
Priorities”, Harvard Business School.
 Hirschheim, R., & Lacity, M. C. (1993). The information systems
outsourcing bandwagon. Sloan Management Review, 35(1), 73-86.
 Kern, T. (1997). The Gestalt of an Information Technology
Outsourcing Relationship: An Exploratory Analysis. Paper
presented at the 18th International Conference on Information
Systems, Atlanta, USA
 Mcafee, A., Dessain, V., Sjoman, A. (2004) “ZARA IT for fast
fashion”, Harvard Business School.
 Offshoring Times (No date) IT Outsourcing with Advantages and
Disadvantages. Available at:
http://www.offshoringtimes.com/Pages/2007/offshore_news144
4.html (Accessed: 8th March 2012)
 Willcocks, L.P. and Feeny, D (2006) “IT Outsourcing and core is
capabilities: Challenges and lessons at DuPont”, Information
systems management, p.49-56.
Thank you for
listening