MANAGING IT AND
EXECUTIVE
E -BUSINESS
MBA-SPRING 2001
I T O UT SO U R C I N G
WHEN IS IT APPROPRIATE?
Prepared and submitted by
Team 0221
Rosemary Aguilar
Jorge Name
Tyrone Jones
Rick Cucksey
Lawrence Cope
Dan Kimmel
April 20, 2001
TABLE CONTENTS
Introduction __________________________________________________________________ 2
The Determining Factors _______________________________________________________ 6
Pursuing an Opportunity _____________________________________________________ 6
Changing Direction _________________________________________________________ 7
Correcting Problems ________________________________________________________ 8
Outsourcing When in Financial Distress ________________________________________ 9
PROS and CONS _____________________________________________________________ 10
Risks of Outsourcing _______________________________________________________ 10
Benefits of Outsourcing _____________________________________________________ 11
Negatives of Outsourcing ____________________________________________________ 12
Organizational Impacts of Outsourcing ________________________________________ 13
Strategy ____________________________________________________________________ 15
Define the IT Service Model _________________________________________________ 15
Define The Total Cost Of Service _____________________________________________ 15
Determining The Core Competencies __________________________________________ 16
Will Outsourcing Fit The Corporate Culture? __________________________________ 17
Selective vs. Total Outsourcing _______________________________________________ 18
Nextel Case _________________________________________________________________ 20
Article ___________________________________________________________________ 21
Summary ___________________________________________________________________ 22
Appendix ___________________________________________________________________ 23
The Outsourcing Institute’s Annual Survey Of Outsourcing End Users _____________ 23
Top 10 Reasons Companies Outsource ________________________________________ 23
Top 10 Factors in Vendor Selection ___________________________________________ 23
Top 10 Factors for Successful Outsourcing _____________________________________ 23
Resources ___________________________________________________________________ 24
2
IT OUTSOURCING
WHEN IS IT APPROPRIATE?
Introduction
Why do companies outsource today? Until the arrival of the Internet, the answer was
clearly cost. But the new economy is making new demands. How has a world moving at
Web speed altered the way companies decide to outsource? Big and small operating firms
alike in the name of reducing costs, concentrating scarce internal resources, and focusing
internal capabilities only on “critical skills” or “core competencies”, are promoting
outsourcing.
The decision to outsource is a difficult one that many executives now face. The
perceived advantages of outsourcing include better control of costs, accountability and
the ability to focus internal resources on more business critical tasks. At the same time,
the company gives up local control of the IT departments relying on an external vendor to
implement their IT strategy. All interactions with the outsourcing agent are indirect and
potentially time consuming. The outsourcing provider may not understand the business
environment or be able to react as quickly to changes in business strategies.
When approaching the outsourcing decision, executive must ask themselves a number
of questions including:
1) Why are we considering outsourcing?
2) What risks are there to outsourcing?
3) What are the benefits to outsourcing?
4) What budget and costs issues must be addressed?
5) What are the implications to the business structure and strategy?
One of the biggest issues CIOs and/or IT directors are dealing with these days are
questions related to outsourcing. Faced with increased cost pressures while trying to
improve services, CIOs are looking at all alternatives. Many, including the CEO, are
suggesting that outsourced third-party providers can solve all their problems, as in
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lowering the cost of services while improving the service provided. With the introduction
of client/server applications and processes; many executives think there isn't a need for IT
and that all of the IT functions should be given to these providers.
IS of the 90s and even into the millennium is coming under increased scrutiny and
pressure from corporate executives and IT customers. Executives, who don't consider IT
to be a competitive advantage to the company, are focused on return on investment
(ROI). They are continually thinking that IT spends too much money on IT with no return
-- and IT keeps coming back to ask for more.
Why are we doing this? With the advent of client/server, distributed applications, and
network computing, users of IT services are even wondering if there should be an IT
function at all. Many users are implementing and supporting their own distributed
applications and feel they don't even need IT -- the funny thing is the CIO is letting them!
Because the major theme of IT now is to improve service and lower the total cost of
doing business (executives are always asking the CIO for budget relief), the CIO is
starting to look at all the alternatives, including outsourcing. (Of course, we know that
outsourcing has been around for many years. Several major corporations have been very
successful in this arena.) Now there are increased pressures with the new distributed
computing model (i.e., let business units implement their own applications, do away with
the glass houses, and use third parties for networking). Coupled with all this is that the
perceived level of service provided by IT has been generally poor over the last five to ten
years. What can they do?
The entire spectrum of outsourcing from outsourcing some components of IT (which
we call selective outsourcing), to completely outsourcing the entire IT, and to no
outsourcing at all has been seen in many companies. What is right for some may not be
right for others. Some may think that outsourcing is the answer to all problems.
We think there are several key objectives IT executives should examine before
making the final decision. They are:
1) Define the IT service model.
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2) Define the total cost of service.
3) Determine the core competencies.
4) Determine if outsourcing will fit the corporate culture.
5) If a company plans to outsource, determine whether selective or total
outsourcing is the best option.
Additionally, there are key questions, which need to be asked before the decision to
outsource is made.
1) Does the activity directly touch the customer? If it does, it is likely a
core function that the company should own. The depth of information
companies have about their customer is what is going to drive value.
2) Does the business have unique knowledge or processes that are
difficult to replicate? A razor-sharp focus has to be kept here. A
company has to own that process.
3) Is it necessary to make large investments in technology, systems or
infrastructure in-house, or can off-the-shelf solutions be modified
quickly and easily to meet your needs? Unless it is vital to the business,
let somebody else do it. If a company is going to have to reinvent
technology, it faces tremendous cost and distraction. Technology is
moving so fast today that for companies to invest in systems of the past
poses significant risks.
4) Is the company running up costs on in-house staff for initial work
whose skills cannot be transferred to ongoing operations? If not,
consider outsourcing this function. When a company considers the cost of
finding, training and then losing people to do development work, they
realize what "a long and time-consuming process" they face.
5) What strategic relationships support the value proposition for the
customer, and what supports the process of building the company? If
the relationship affects the value a company brings their customer, then it
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is theirs to own and develop. But if it only supports their operation, then
turn it over to someone else to handle it.
As business philosophy has evolved from a pre-occupation with technical objectives
to a pre-occupation with economic competitiveness, the nature of how business activities
are performed has changed remarkably. Traditional management philosophy has been to
perform all or nearly all functions within a company by in-house employees. Having all
functions performed by employees also maximizes control by management, and
minimizes the potential leakage of technology and business "know-how" to competitors.
In more recent times, the historic "do it all in-house" philosophy has been replaced by
"do only what you do best" in-house. In the extreme case, it has resulted in "virtual
companies" in which nearly all functions are contracted out, such that company
management is limited to coordination of activities of various subcontractors. The virtual
company concept works well only when business synergies between the various
functions of a company are not achieved when each of the elements is sub-contracted out.
In some cases, activities that recently have been outsourced are reverting to being
performed in-house.
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The Determining Factors
Outsourcing is an option for many situations. It can provide the expertise and resources
necessary to enable a company to pursue new opportunities, facilitate changes in
direction, strategy, and correct many types of problems.
Pursuing an Opportunity
Outsourcing may be an appealing option for an IT organization or company that is
looking for a way to get ahead. One of the benefits of outsourcing is the ability to
capitalize on the expertise and experience of the vendor. An organization can realize
tremendous benefits by combining the outsourcing company’s skills with their own core
competencies. Companies can capitalize on this knowledge to enter new businesses,
enhance operational effectiveness, or gain additional value from existing assets. They can
also benefit from being second mover in newly developed applications. When selecting
an outsourcing partner to pursue new opportunities, the emphasis is on obtaining essential
skills. Often, these engagements rely on the outsourcer to provide trained staff and offer
knowledge transfer to internal staff. Some examples of opportunities include:

Gaining expertise for a new business process or technology. A company desires
to enter a new business market or implement a new technology but lacks the inhouse expertise. For example, a "brick and mortar" company may have plenty of
expertise in back-office systems, but it needs different expertise to launch an ebusiness operation. Competitive time pressures preclude the ability to grow the
expertise internally and eliminate the luxury of learning through mistakes.

Enhancing integration. Many companies have disparate pieces of things -activities, processes, and technologies -- that have evolved independently over
time. Rather than selecting an outsourcer to simply maintain a disparate, existing
environment, a company can choose an integrator with the experience to merge
multiple systems and technologies providing greater overall value to the
company.
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
Making better use of existing assets. Outsourcers learn best practices from
working with many different clients. Combining these practices with a fresh,
outside perspective enables an outsourcer to leverage existing assets in ways that
could otherwise be overlooked. For example, a company may have robust humanresource applications whose life could be extended and value enhanced by being
Web-enabled and made available to employees via a corporate Intranet.

Improving efficiency or lowering costs. Improving efficiency and lowering costs
are the most typical reasons that companies turn to outsourcing. An outsourcer,
through efficiencies of scale and replicable best practices, may improve efficiency
and save money, both short term and long term structure.
Changing Direction
When business reasons dictate, companies find themselves shifting directions or
changing focus. An inevitable result of these shifts is that certain technologies,
applications, or processes become less important. In these situations, outsourcing the
"orphaned" applications, technologies, or processes allows a company to devote its
attention to more strategic operations.
Outsourcing in these changed circumstances enables a company to:

Focus on a core competence. Fierce competition, financial losses, or
disappointing returns may prompt a company to return to its original, winning
competencies in order to survive. Non-critical functions still need to be
performed, but by offloading them to an vendor, will allow for a company to
devote its resources and attention to more valuable competencies.

Free resources for other tasks. A change in business direction often requires a
shift of resources to support the new business focus. An outsourcer can help a
company shift resources to more strategic endeavors by taking over the existing
workload.
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
Phase out old technologies and/or obsolete processes. Whether due to
technological or business changes, it is inevitable that certain technologies and
processes become obsolete over time. These components may be non-strategic,
yet still provide valuable services or information. An outsourcer can take over
these items during the phase-out period, gradually winding them down as newer
counterparts replace them.
Correcting Problems
Every company encounters problems that it cannot solve by itself or situations that
can benefit from a radical change. Bringing in an outsourcer with experience in resolving
functional problems may be the ideal way to surmount the difficulties and move forward.
However, an outsourcer cannot fix systemic problems or overcome political issues. When
the problem falls within the scope of an outsourcing engagement, the outsourcer can
provide the management, processes, and discipline needed to correct many IT issues.
Typical issues that can be addressed through outsourcing include:

Poor service to the business. IT organizations that fail to provide good, or even
adequate, service may suffer from one or a combination of ailments. Inefficient
processes, a lack of service-level agreements (SLA), or an ad hoc structure can
lead to under performing IT organizations and dissatisfied business users. An
outsourcer can provide the structure, skills, and efficiencies to deliver guaranteed
service levels to business areas.

Runaway costs. Although some IT organizations turn to outsourcing to achieve
incremental cost benefits, others are desperate to control ever-escalating operating
costs. By its nature, outsourcing forces a basic level of cost control. An SLA
(Service-Level Agreement) fixes workload and costs, enabling a company to have
the scope and associated costs clearly defined.

Staffing issues. While it has always been difficult to find talented technical staff, it
has become nearly impossible in recent years, especially in areas with a booming
economy and a shortage of trained workers. The situation is more acute for
smaller companies, whose narrow, technical career paths become much less
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attractive in a hot job market. An outsourcer can attract a broader cross-segment
of technical talent because of its range of career options and variety of available
placements.
Outsourcing When in Financial Distress
Historically, companies have outsourced because they are in financial distress. In
these instances, cost reduction and cash infusion are the overwhelming motivations. As
the outsourcing relationships continue, companies have noticed they are enjoying a host
of unanticipated benefits. Over time, outsourcing has become a proactive decision that
has allowed companies to enjoy all the goodies, including the welcome cost savings.
Five most important benefits to outsource have been to:
1) Improve productivity.
2) Reduce operating cost.
3) Upgrade, introduce or transform skills.
4) Better manage the department or function.
5) Make resources available for core area.
Outsourcing has allowed companies to redefine their corporate strategies. Companies
feel they can enter a new marketplace or develop a new product faster if they include
outsourcing in their business mix. In these days of mach speed change, large companies
believe outsourcing is one of the best ways to update their business models to be more in
tune with today's radically altered business world. Companies have relied more on cost,
quality and productivity in their decisions than on traditional financial measures like
return on investment.
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PROS and CONS
Risks of Outsourcing
While outsourcing can improve productivity, reduce operating costs, upgrade skills,
better manage the department or function, make resources available for a core area, it
does carry certain risks. Many of the factors that lead to the decision to outsource are also
risk factors. The process of outsourcing does not guarantee that the problems will be
resolved.
The potential risks include:

Loss of control of delivery quality and timeliness

Less flexibility

Cost creep

User-customer bypass outsourcing vendor

Technology change

Transition of services

Inappropriate type of relationship
Even with a strict SLA, the outsourcer may fail to meet the defined quality measures.
While the company has legal recourse to address these failures, the situation may remain
in disarray for months or even years while the issues are resolved. If the company selects
an outsourcer with limited capabilities, they may not offer the flexibility needed to
address all of the company’s problems or projects. Some outsourcers have broad service
offerings while others specialize. If the outsourcer’s skills are not matched to the
company’s needs, there is limited flexibility in expanding the relationship and limited
value in a long-term relationship.
In some cases when a company contracts with an outsourcer, departments may bypass
the outsourcing agreement and contract their own services or replicate the function
internally. While an internal management issue, this does pose a problem. The
outsourcing contracts may have specific agreements prohibiting the use of other
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resources with stated financial penalties. This also reduces the potential cost savings from
economies of scale and keeps employees and departments from focusing on the most
business critical issues and projects.
Benefits of Outsourcing
At the strategic level, outsourcing is an effective option for staying ahead of the
competition, while enhancing productivity and profitability. From a management
viewpoint, outsourcing provides employees with a higher level of skills and knowledge
for basic office support functions, thus elevating the quality of work and freeing senior
staff for more productive projects. Taking an operational perspective, outsourcing creates
flexibility, allowing a company to adjust staff and operations to stay ahead of the market.
Outsourcing also keeps a company in the forefront of technological advancements in
operational systems and equipment-increasing efficiency and responsiveness.
The core benefits of outsourcing are:

Reduce or Control Operating Costs. Access to outside providers' lower cost
structure is one of the most compelling short-term benefits of outsourcing. In an
Outsourcing Institute survey, organizations reported that on average they saw a
9% reduction in costs through outsourcing.

Make Capital Funds Available. Outsourcing reduces the need to invest capital
funds in non-core business functions. This makes capital more available for core
areas. Outsourcing can also improve certain financial measurements by
eliminating the need to show return on equity from capital investments in noncore areas.

Cash Infusion. Outsourcing can involve the transfer of assets from clients to
providers. Equipment, facilities, and licenses used in the current operations all
have a value and are, in effect, sold to the provider as part of the transaction
resulting in a cash payment.
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
Resource Availability Internally. Companies outsource because they do not have
access to the required resources within. For example, if an organization is
expanding its operations, outsourcing is a viable and important alternative to
building the needed capability from the ground up.

Function Difficult to Manage or Out of Control. Outsourcing is certainly one
option to address these types of problems. Outsourcing does not, however, mean
abdication of management responsibility, nor does it work well as a knee-jerk
reaction by companies in trouble.
Negatives of Outsourcing

Loss of privacy- Information may be leaked to competitors

Difficulty to establish responsibilities- It becomes harder to pinpoint that is
responsible for an error/mistake.

Liability- Though both companies share risks decreasing the amount of liability
the outsourcer will always be affected (name and reputation).

Communication- Issues are hard to communicate/understand unless there is
perfect agreement and understanding on core functions.

Contract and Negotiation difficulties- Everyone wants to get the most out of the
deal at the lowest price.

Loss of control- Some of the things you used to manage are in somebody else’s
control.

Employee fear of job security – employees fear their jobs are going to be taken
away when outsourcing is being considered.

The outsourcee may gain knowledge of business and then become a competitor.

If outsourcee is too weak and goes down, so does that part of your business.

If outsourcing IT components (chips) & company goes down then it can stop the
entire production line.
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
Outsourcing may create software incompatibilities due to interfaces between
components and the software development becomes expensive.
Organizational Impacts of Outsourcing
Outsourcing has a significant impact on an organization’s structure and function.
Employees from an external organization, the outsourcer, must integrate into the existing
internal structure. Several approaches can be used to facilitate this integration.
Outsourcing in its most simplistic form may mean hiring a few temporary or contract
employees to fill in gaps in departments during times of extreme need such as when
taking on a new project or implementing a new technology. The contract employee is
integrated into the existing group of internal employees and managers, to the limit
allowed by law. The department manager must report on the performance of the
employee and work with the account representative from the outsourcer to handle any
employee or contract issues.
Some organizations may choose to have the outsourcing company provide all frontline employees for a department with an internal manager. The internal manager has
complete control over setting objectives and monitoring employee performance. While
the internal manager may not be able to discuss assignment and performance issues
directly with the contract employee due to legal implications, they can work with a
designated representative from the outsourcer who ensures that the manager’s goals are
met. This can be an effective method for smaller outsourcing projects such as a single
department or function within the company. On a larger scale, it may create problems
with having numerous internal managers interacting with the external outsourcer.
Another option is to have the outsourcer provide both the employees and managers.
The outsourcer's management team is responsible for sending reports on performance to
their executive or accounts representative whom then communicates this information to
the appropriate executives at the company. This works well for larger outsourcing
function such as the outsourcing of a company’s entire helpdesk. The outsourcer is free to
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run the function as they see fit and provide data to the company showing that all
contractual obligations were met.
In all of these cases, care must be taken to ensure that the outsourcer provides the
service levels guaranteed in the contract. The company must also work to integrate the
outsource functions into the business, primarily to ensure better synergy between the
contracted functions and the internal business units. Having a mix of contract employees
and internal employees is difficult to manage at times especially if there is disparity in
their benefits or compensation.
Companies must also be aware of the legal issues surrounding contract labor. Several
court cases have validated contract employees claims of being internal employees and
thus deserving of all the benefits of internal employees. These issues tend to only come
up in extreme cases of long-term outsourcing, but there must be clear policies and
procedures to protect the company.
When an organization announces a decision to outsource, a number of unforeseen
employee concerns can arise. Many of these issues may not directly relate to outsourcing,
but rather to the whole organizational change process. The importance of an employee
transition plan cannot be understated.
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Strategy
Define the IT Service Model
The first thing IT should do (regardless of whether or not outsourcing is being
considered) is define the service model. Because of all the sins of the past and the new
distributed computing model, IT needs to rethink what services are provided. We know
that IT cannot be all things to all people, but there are a certain set of services that can
and should be provided effectively by the IT function. A service model has been defined
to include planning, process, and people. The plan should address who the customer is
and include the services provided. The process will define how services are supported.
The most important piece is how we organize, train, and retain the IT staff (oh, those
people issues). The service model should be defined, documented, marketed, and sold to
users of IT services. When considering outsourcing this will really help in preparation of
a request for proposal (RFP).
Define The Total Cost Of Service
Defining the total cost of service can only be determined after defining the service model.
As part of the service model IT must become proactive with its customers and (again)
market and sell its services. What better way to be proactive than to provide customers
with a menu of services and associated costs. But a word of warning -- don't start selling
until you know you can deliver! Part of the selling should include that fact that there is a
fee for services rendered. Any customer who asks for services from a vendor should pay
for those services. We do this in our every day lives, why can't we do it with IT?
The big thing is making sure we deliver effective levels of services for the fees. And
as part of the menu of services provided, IT as vendors should show costs compared to
other vendors' costs for the same services. This gives customers a view of the total costs
and potential added value. As an example, we provide here a look at the desktop support
functions, what the services might be, and what the costs would be for those services.
Cost of service doesn't need to be sophisticated or lengthy. It should be kept simple:
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Services and Costs - $12/day/person
Standard Services - $6/day/person
 System Administration
 System Security
 Desktop Application Support
 Hardware Installation
 Software Distribution Support
 Telecommunications
 User Training
 Local Network Services
 Software Configuration
 Selected Optional Software
 Database Administration
 Systems Analysis
 Performance and Tuning
 Disaster Recovery
Resources/Equipment - $6/day/person
 Client Servers
 Network Servers
 Disk Usage
 Home Directories
 Mail
 Misc.
The same set of cost structures for all IT functions including wide-area network,
local-area networks, data center(s), etc., should be developed. If a company hasn’t
already done so, it must then document the service levels available at that cost. These two
things (cost and service level) will probably be the two most important items when
benchmarking costs and services and developing a contract with potential third-party
service providers. And if a contract is left with a vendor, understanding what services are
provided in the contract, and at what cost, will ultimately determine the success of
transition.
Companies do not want their service providers saying to their customers that the
service they are asking for is not part of the contract and will be billed separately. It has
been found to happen in many cases because the outsourcing contract was done without a
complete understanding of the services provided, both from the service provider and enduser perspective.
Determining The Core Competencies
One of the main things IT has forgotten about over the past few years is to look at what
things they do right. Since they've been reactive vs. proactive they have not taken the
time to look at or publicize the good things. A company should always do that not only to
show what it can do well but also to help morale. This is a very important step when
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looking at a potential outsourcing scenario. (It will really help when benchmarking
services vs. those of the outsource group). Should a company outsource everything in IT?
Should the company keep the functions that it does well?
The best way to get started is to simply ask questions. Is the network a core
competency for the company? Is the desktop support function a core competency? Does
the company manage data centers as well as anyone? Once those questions have been
answered, it would be a good idea to get a customer viewpoint.
Will Outsourcing Fit The Corporate Culture?
A major factor IT needs to consider (and many times doesn't) relates to the corporate
culture. Companies have been asked over the years to provide a set of standard guidelines
for our methodologies, processes, and procedures. Companies would surely like to be
able to give a cookie cutter approach, but in these times, it is virtually impossible due to
vastly different corporate cultures. A successful IT operation will always know its
customer and its corporate culture when dealing with service. In many cases IT will have
the most impact on culture. And how a company deals with it usually determines its
success.
Outsourcing can and will have a major impact on corporate culture. History has
shown that depending on the outsourcing vendor and transition plan the transition itself
can be seamless. But has the impact on the culture been measured? Probably not. The
impact on culture also depends on the agreement with the vendor and how the vendor is
treated. In some cases the vendor is seen as a partner and becomes the IT department. If
the vendor does not have experience with the culture, it may take several months before
the impact on service goes down (i.e., how the new IT responds to service issues or the
customer, and what services are included in the contract and which are not). In other
cases where the service vendor has had more experience with similar cultures the impact
can be far less.
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When buyers and suppliers share common goals and values, the outsourcing
relationship is most successful. Sellers who can demonstrate a similarity of corporate
cultures not only help sell the engagement but also ensure its success.
Selective vs. Total Outsourcing
Once core competencies have been defined, the next step will be to look at selective vs.
total outsourcing. In either case, some basic objectives and goals must first be defined to
be accomplished from outsourcing. Some examples would be:
1. Provide a better level of service.
2. Reduce the total cost of IT by 20 percent.
3. Provide an increase in potential career opportunities for the IT staff.
Next, the core competencies are looked at. If there are services provided by IT that
are considered strategic then it is recommended they should automatically be eliminated
from consideration. This is where selective vs. total is determined. If there are no
particular core competencies then total outsourcing should be considered (many use the
term facilities management). If there are, then selective outsourcing would be considered.
Selective means that particular functions within IT are outsourced that are currently not
being done very well to reduce cost and can be more easily accomplished by vendors
who specialize in those functions. Some examples could include desktop support, help
desk, network management, telecommunications support (adds, moves, and changes), and
wiring and cabling.
During this time, it is probably a good idea to send out a request for information
(RFI) to a number of potential service vendors. The results of the RFI can provide very
valuable information about the vendors being considered. Once vendor(s) to consider are
determined then the next step is to develop and send out the RFP. The result should be a
very detailed response from the selected vendors with their proposed solution(s) and costs
to meet objectives.
The RFP is very important. IT recommends that technical managers be involved in
preparation of the RFP to make sure all the current and potential services are defined.
There have been many RFPs developed at the executive level, and many important
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services and service levels often get excluded. This can potentially cause some extreme
cost exposures because service vendors will charge different rates for any service outside
the scope of the contract.
It has been seen that this reduces the service levels because there is no one chartered
to provide the service (i.e. the existing IT group thinks that the service is within scope of
contract while the service vendor indicates it is outside the scope and can only support
the service after an agreement to pay). As mentioned, the preparation of the RFP is very
critical. It must contain a very detailed description of the current service(s) that are to be
considered for outsourcing and those that will not. And, remember to never lose sight of
your goals and objectives. There is always the risk that they will be pushed aside or
forgotten during heavy legal negotiations.
If a decision has been made to look at total outsourcing this does not mean that the IT
function goes away. The IT function is still important and a part of the corporation. A
third-party vendor has just been chosen to provide the IT services. There must still be
corporate managers to manage the vendors and their services. The key thing to remember
is that they are providing a service to the corporation, not a partnership, and they need to
be managed as such. IT employees (of the corporation) should be the interface between
the service provider and the customer (user of IT services). IT must continue to manage
customer expectations and service levels.
In order to assist management choose the right Outsource decision, one should use the
following questionnaire. “This questionnaire is intended to provide those organizations
considering outsourcing as solution, a guide for gathering much of the information
necessary to begin the process of contacting vendors or developing an RFP. It is written
with mainframe technology in mind. However, as you will see, it can easily be applied to
other technologies”.
http://www.outsourcing.com/OI_Agreements/OutsourcingQuestionnaire2.pdf
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Nextel Case
Nextel is a wireless telecommunications provider, one of the leading in the US. Last
year they decided to outsource their “mission critical” customer care and billing
operations to Amdocs for seven years.
Nextel’s reasons for the decision were:
1. Amdocs Ensamble is state-of-the-art proven platform
2. Cost effectiveness
2.1. Provides time-to-market competitors responses for rate plans, new products, etc.
2.2. Amdocs provides R&D resolutions to new technologies (WNP, Data Volume
Rating, GPRS, etc.)
3. Support Nextel's rapidly growing convergent operations (scalability, performance,
etc.)
4. Providing a unified customer view (many Telecom companies are using multiple
CC&B’s, which complicates operations)
5. Integrating a variety of customer critical information regarding Nextel's multiple
service offerings of wireless data and voice technologies
6.
Cutting on operations management, providing Nextel with focus on Marketing and
business strategies rather than operations.
It is common in the telecom business for a company to purchase their CC&B from a
vendor, however it is rare for them, especially as large a company as Nextel, to outsource
their operation. The reasons they operate their own CC&B are mainly “mission critical”
control, and fear of being in the hands of a vendor with your most vulnerable operation.
On the other hand, telecom companies are not known to operate their CC&B in the most
efficient and effective way. Their hiring standards may lead to medium to low software
engineers, and team leaders and management in many cases grew from being reps in their
past, having weak background in managing IT. Turnover rate can be high, since salaries
are less than high tech companies, and good software engineers have market temptations.
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Article
Amdocs (NYSE: DOX), the world's leading provider of customer care, billing and
order management solutions for communications and IP services, announced entry into a
seven year outsourcing agreement with Nextel Communications (Nasdaq: NXTL), a
leading provider of integrated digital wireless telecommunications services. Under the
agreement, Amdocs will provide Nextel's domestic operations with a comprehensive
billing and customer care information outsourcing solution, including software and
support services for end-to-end customer care and billing systems, data center, and billing
operations. Amdocs is also providing Nextel with implementation and conversion
services.
The Amdocs solution will support Nextel's more than six million wireless subscribers
across the US. Amdocs' system will support Nextel's rapidly growing convergent
operations, providing a unified customer view, and integrating a variety of customer
critical information regarding Nextel's multiple service offerings of wireless data and
voice technologies including Nextel Direct Connect(R), digital cellular, short messaging,
data transmission and wireless Internet services. The solution will be based on Ensemble,
Amdocs' customer care and billing system.
"We chose the Amdocs solution because it involves a proven platform customized to
deliver a cost-effective solution for our needs," said Dick LeFave, Senior Vice President
and Chief Information Officer at Nextel. "As we continue to experience dramatic
increases in subscriber volumes, scalability is a key issue. Another key requirement is
advanced support for complex corporate accounts which represent a very important
element in our business environment."
Norman Rafalowitz, Amdocs Senior Vice President, International Marketing, said,
"Nextel is a very future-oriented, forward-looking company, in both the technological
and business arenas. We are delighted to be working with Nextel as they continue their
rapid expansion. In providing Nextel with a complete outsourcing solution, we look
forward to a productive long-term relationship."
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Summary
Outsourcing is an excellent way for a company to maximize their return on the IT
investment. Outsourcers can fill gaps in training, knowledge and resources at times of
critical need. There are risks and benefits to outsourcing that must be considered before
proceeding. The impact to the organization is also a major issue that can affect the overall
success of the outsourcing effort. When planned carefully and monitored at all stages,
outsourcing should be a relatively low-risk, high benefit opportunity, especially for small
to medium sized businesses whose resources are already stretched thin. If managed
poorly, outsourcing can drive up project costs and leave a gap in who has ultimate
responsibility for the success of IT and its integration into the business.
A company’s main concern should be to focus on their core business. A business will
be successful in keeping their concentration if they can have someone develop the
required activity or service more efficiently and effectively if they turn the project over to
someone else than if they do it in-house. Acting on such realization, one needs to
embrace outsourcing as an integral part of the business strategy.
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Appendix
The Outsourcing Institute’s Annual Survey Of Outsourcing End Users
Top 10 Reasons Companies Outsource
1. Reduce and control operating costs
2. Improve company focus
3. Gain access to world-class capabilities
4. Free internal resources for other purposes
5. Resources are not available internally
6. Accelerate reengineering benefits
7. Function difficult to manage/out of control
8. Make capital funds available
9. Share risks
10. Cash infusion
SOURCE: SURVEY OF CURRENT AND POTENTIAL OUTSOURCING END-USERS
THE OUTSOURCING INSTITUTE MEMBERSHIP, 1998
Top 10 Factors in Vendor Selection
1. Commitment to quality
2. Price
3. References/reputation
4. Flexible contract terms
5. Scope of resources
6. Additional value-added capability
7. Cultural match
8. Existing relationship
9. Location
10. Other
Top 10 Factors for Successful Outsourcing
1. Understanding company goals and objectives
2. A strategic vision and plan
3. Selecting the right vendor
4. Ongoing management of the relationships
5. A properly structured contract
6. Open communication with affected individual/groups
7. Senior executive support and involvement
8. Careful attention to personnel issues
9. Near term financial justification
10. Use of outside expertise
SOURCE: SURVEY OF CURRENT AND POTENTIAL OUTSOURCING END-USERS THE OUTSOURCING INSTITUTE
MEMBERSHIP, 1998
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Resources
www.bpo-outsourcing-journal.com/
http://webserver.cpg.com/features/cover/4.3/index.html
http://www.outsourcing-experts.com/cgi-bin/webbbs/outsourcingboard/index.cgi?read=2493
http://www.thebusinessmac.com/features/outsource.shtml
http://www.unixinsider.com/sunworldonline/swol-08-1997/swol-08-unix.html
http://www.amdocs.com/hotnews.asp?news_id=230
http://www.outsourcing.com/AboutOI.jsp
http://www.outsourcing.com/OI_Agreements/OutsourcingQuestionnaire2.pdf
http://www.outsourcing-awards.com/html/compaq2.html
http://www.futurestrategy.com/fsweb/news/outsource.asp
http://www.outsourcing-awards.com/html/2001ebus.html
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