Chapter 10
Information Systems Sourcing
© 2016 John Wiley & Sons, Inc.
1
Kellwood Opening Case
• Why did Kellwood outsource?
• Why did Kellwood decide to backsource after 13
years?
• What was the result?
© 2016 John Wiley & Sons, Inc.
2
Sourcing Decision Framework
© 2016 John Wiley & Sons, Inc.
3
Sourcing Options
Domestic
Insourcing
Outsourcing
Domestic in-house
production
Domestic outsourcing
Company produces its
products domestically without
any outside contracts
Offshore
Offshore in-house
sourcing
Company uses services supplied
by its own foreign-based affiliate
(subsidiary)
Company uses services supplied
by another domestic-based
company
Offshore outsourcing
Company uses services supplied
by an unaffiliated foreign-based
company
Figure 10.3. Different Forms of Sourcing.
(Source: http://www.dbresearch.com/ servlet/reweb2.ReWEB?rwsite=DBR_INTERNET_EN-PROD)
© 2016 John Wiley & Sons, Inc.
4
INSOURCING
A firm provides IS services or develops IS in its own inhouse IS organization
© 2016 John Wiley & Sons, Inc.
5
IT Outsourcing
• With IT, there is equipment and personnel involved
• Equipment and facilities are sold to outside
vendors
• Personnel might be hired by outside vendors
• Services are hired from the vendors
• Common length of agreement: 10 years
© 2016 John Wiley & Sons, Inc.
6
Insourcing drivers and challenges
Insourcing Drivers
Insourcing Challenges
Core competencies related to
systems
Inadequate support from top
management to acquire needed
resources
Confidentiality or sensitive
system components or services
Time available in-house to
develop software
Temptation from finding a
reliable, competent outsourcing
provider
Expertise for software
development in-house
© 2016 John Wiley & Sons, Inc.
7
Economics of Outsourcing
• Benefits:
• Sell equipment, buildings (large cash inflow)
• Downsized payroll – outsourcer hires employees
• Costs:
• Services provided for a fee
• Fixed costs usually over 10-year term
© 2016 John Wiley & Sons, Inc.
8
Drivers and disadvantages of outsourcing
Drivers
Disadvantages
• Offer cost savings
• Offer service quality
• Ease transition to new
technologies
• Offer better strategic focus
• Provide better mgmt of IS staff
• Handle peaks
• Consolidate data centers
• Infusion of cash
•
•
•
•
•
•
Abdication of control
High switching costs
Lack of technological innovation
Loss of strategic advantage
Reliance on outsourcer
Problems with
security/confidentiality
• Evaporation of cost savings
© 2016 John Wiley & Sons, Inc.
9
Decisions about How to Outsource
Successfully
• Decisions about whether or not to outsource need care and
deliberation.
• Requires numerous other decisions about mitigating
outsourcing risks.
• Three major decision areas: selection, contracting, and
scope.
1. Selection: find compatible providers
2. Contracting:
1. Try for flexible management terms
2. Try for shorter (3-5 year) contracts
3. Try for SLAs (service level agreements on performance)
3. Scope – Determine if full or partial outsourcing
© 2016 John Wiley & Sons, Inc.
10
Offshoring
• Short for outsourcing offshore
• Definition:
• When the MIS organization uses contractor services in
a distant land. (Insourcing offshore would be your own
dept offshore)
• Substantial potential cost savings through reduced
labor costs.
• Some countries offer a very well educated labor
force.
• Implementation of quality standards:
• Six Sigma
• ISO 9001
© 2016 John Wiley & Sons, Inc.
11
Selecting an Offshoring Destination
• About 100 countries are now exporting software
services and products.
• What makes countries attractive for offshoring?
•
•
•
•
•
•
•
•
High English language proficiency.
Countries that are peaceful/politically stable.
Countries with lower crime rates.
Countries with friendly relationships.
Security and/or trade restrictions.
Protects intellectual property
Level of technical infrastructure available.
Good, efficient labor force
• Once a country is selected, the particular city in that
country needs to be assessed as well.
© 2016 John Wiley & Sons, Inc.
12
Selecting an Offshoring Destination
• Countries like India make an entire industry of
offshoring.
• Software Engineering Institute’s Capability Maturity
Model (CMM).
• Level 1: the software development processes are
immature, bordering on chaotic.
• Level 5: processes are quite mature, sophisticated,
systematic, reliable
• Indian firms are well known for their CMM Level 5
software development processes, making them
desirable
© 2016 John Wiley & Sons, Inc.
13
Offshore DestinationDevelopment Tiers
Carmel and Tjia suggest that there are three tiers of
software exporting nations:
•
Tier 1: Mature.
•
•
Tier 2: Emerging.
•
•
•
Brazil, Costa Rica, South Korea, and many Eastern European countries.
Tier 3: Infant.
•
•
United Kingdom, United States, Japan, Germany, France, Canada, the
Netherlands, Sweden, Finland, India, Ireland, Israel, China, and Russia.
Cuba, Vietnam, Jordan, and 15 to 25 others.
Tiers: based on industrial maturity, the extent of
clustering of some critical mass of software enterprises,
and export revenues.
The higher tiered countries have higher levels of skills and
higher costs.
© 2016 John Wiley & Sons, Inc.
14
Farshoring
• Definition: sourcing service work to a foreign, lowerwage country that is relatively far away in distance or
time zone.
• Client company hopes to benefit from one or more
ways:
• Big cost savings due to exchange rates, labor costs,
government subsidies, etc.
• For the US and UK, India and China are popular
• Oddly, India and China also offshore to other
locations
© 2016 John Wiley & Sons, Inc.
15
Nearshoring
• Definition: sourcing service work to a foreign, lower-wage
country that is relatively close in distance or time zone.
• Client company hopes to benefit from one or more ways
of being close:
• geographically, temporally, culturally, linguistically, economically, politically or
from historical linkages.
• Distance and language matter.
• There are three major global nearshore clusters:
• 20 nations around the U.S., and Canada
• 27 countries around Western Europe
• smaller cluster of three countries in East Asia
© 2016 John Wiley & Sons, Inc.
16
Captive Centers
• An overseas subsidiary that is set up to serve the
parent company.
• Alternative to offshoring or nearshoring.
• Four major stategies that are being employed:
• Hybrid Captive – performs core business processes for parent company
but outsources noncore work to offshore provider
• Shared Captive - performs work for both parent company and external
customers.
• Divested captive - have a large enough scale and scope that it could be
sold for a profit by the parent company.
• Terminated Captive - has been shut down, usually because its inferior
service was hurting the parent company’s reputation.
© 2016 John Wiley & Sons, Inc.
17
Backsourcing
• When a company takes back in-house, previously
outsourced, IS assets, activities, and skills.
• Partial or complete reversal
• Many companies have backsourced such as
Continental Airlines, Cable and Wireless, and Halifax
Bank of Scotland.
• 70% of outsourcing clients have had negative
experiences and 25% have backsourced.
• 4% of 70 North American companies would not
consider backsourcing.
© 2016 John Wiley & Sons, Inc.
18
Backsourcing Reasons
• Mirror reason for outsourcing (to reduce costs,
increase quality of service, etc.)
• Costs were higher than expected
• Poor service
• Change in management
• Change in the way IS is perceived within the
company
• New situations (mergers, acquisitions, etc.)
© 2016 John Wiley & Sons, Inc.
19
Crowdsourcing
• Definition:
• Taking a task traditionally performed by an employee or
contractor, and
• Outsourcing it to an undefined, generally large group of
people,
• In the form of an open call.
• Used by companies to increase productivity, lower
production costs, and fill skill gaps.
• Can be used for a variety of tasks.
• Companies do not have control over the people doing
the work.
© 2016 John Wiley & Sons, Inc.
20
Partnering Arrangements
• Strategic networks: arrangements made with
other organizations to offer synergistic or
complementary services
• Example: The Mitsui Keiretsu contains over 30 firms
spanning many industries. The members use each
others’ services and don’t compete: Toshiba,
Fujifilm, Sony are members
• Business ecosystems (see chapter 9): Informal,
emerging relationships
© 2016 John Wiley & Sons, Inc.
21
Deciding Where Onshore, Offshore, or in the Cloud?
• New option: cloud computing
• See chapter 6 for basic definitions; advantages;
disadvantages.
• Works when outsourcing or insourcing
© 2016 John Wiley & Sons, Inc.
22
Cloud Computing Options
• On-premise
• Private clouds
• Data—managed by the company or offsite by a third party.
• Community clouds.
• Cloud infrastructure is shared by several organizations
• Supports the shared concerns of a specific community.
• Public clouds.
• Data is stored outside of the corporate data centers
• In the cloud provider’s environment
• Hybrid clouds
• Combination of two or more other clouds.
© 2016 John Wiley & Sons, Inc.
23
Public Clouds - Versions
• Infrastructure as a Service (IaaS).
• Infrastructure through grids or clusters of virtualized servers,
networks, storage, and systems software.
• Designed to augment or replace the functions of an entire data
center.
• The customer may have full control of the actual server
configuration.
• More risk management control over the data and environment.
• Platform as a Service (PaaS).
• Virtualized servers
• Clients can run existing applications or develop new ones
• Provider manages the hardware, operating system, and
capacity
• Limits the enterprise risk management capabilities.
© 2016 John Wiley & Sons, Inc.
24
Public Clouds - Versions
Software as a Service (SaaS) or Application Service Provider (ASP).
• Software application functionality through a web browser.
• The platform and infrastructure are fully managed by the cloud
provider.
• If the operating system or underlying service isn’t configured
correctly, the data at the higher application layer may be at risk.
• The most widely known and used form of cloud computing.
Some managers shy away from cloud computing because they are
concerned about:
• security—specifically about external threats from remote
hackers and security breaches as the data travels to and from
the cloud.
• data privacy.
© 2016 John Wiley & Sons, Inc.
25