IT Outsourcing Until 1990, the major drivers for outsourcing were: Cost-effective access to specialized or occasionally needed computing power or systems development skills Avoidance of building in-house IT skills and skill sets, primarily an issue for small and very low-technology organizations Access to special functional capabilities. Outsourcing during this period was important but, in retrospect, largely peripheral to the main IT activities that took place in mid-sized and large organizations.

IT Outsourcing IT Outsourcing Evolution EDS CSC ADP IBM Others Regulated, then to non regulated industries CSC First to governments then to industries GD ADP Payroll, data center, etc IBM The “big bang” internationalization, etc. Others (Gap Gemini, Perot Systems, Digital Equipment Corporation, Andersen Consulting, AT&T Solutions etc. ?)

IT Outsourcing Billions of $ Recent IT Outsourcing Agreements Two factors have affected the growth of IT outsourcing Recognition of strategic alliances Changes in the technological environment

IT Outsourcing Acceptance of Strategic Alliances Finding a strong organization partner to complement an area of weakness gives an organization an island of stability in a turbulent environment. It is difficult to fight on all simultaneously on all fronts Alliances allow a company to simplify its management agenda safely. Alliance allow a firm to leverage a key part of the value chain by bringing in a strong partner that complements its skills. Both firms should legitimately be benefiting

IT Outsourcing IT Changing Environment Today, firms are not focusing IT only on internal processing systems: but, in a network fashion, - integrating internal system with those of customers, suppliers, - to be more efficient in globally market place. This integration places extraordinary pressures on firms trying to keep the old system services running while developing the interconnections and services demanded by the new environment. On the one hand, firm are looking for low-cost maintenance of the old systems to ensure they operate reliably, while, on the other hand, gaining access to new skills to permit their transformation to new model.

IT Outsourcing Contracting ? “Contracting is the purchasing of goods or services when the buyer owns the process.” Bendor-Samuel If the buyer owns a process but purchases time, products or services to facilitate that process, then the buyer is in a contractual relationship. Outsourcing? “Outsourcing takes place when an organization transfer the ownership of a business process to a supplier” Bendor-Samuel . The key is the concept of transfer of control or transfer of ownership. This is why IT outsourcing is very challenging and often a painful process. “As the handling over of assets, resources, activities and/or people to third party management to achieve agreed performance outcomes” Willcocks and Lacity (2006)

IT Outsourcing What drives Outsourcing Back Office Transformation The goal of back office is radically: Reduce cost Improve service Increase revenue Practice to achieving it: Centralization, standardization, re-orientation of staff, technology enablement, and process redesign

IT Outsourcing What drives Outsourcing Back Office Transformation Concern for cost and quality Can we get our existing services for a reduced price at acceptable quality standard? (cost reduction) Can we get new systems developed faster? Breakdown in IT performance Access to capabilities not otherwise available Intense Supplier pressure To free internal resources for other purposes Simplified GM Agenda Concentrating on core competence? Improved company focus Financial factors (make capital available) E.g. General Dynamics received $200m for transferring its hardware/software to EDS. Cash infusion

IT Outsourcing What drives Outsourcing To reduce cycle time Some kind of process improvement (BPR/TQM) Corporate culture Turn fixed cost into variable cost Eliminating Internal Irritant Engage an outside agent in the change process.

IT Outsourcing Disadvantages of IT Outsourcing Can Increase Costs Locks Company to a Provider Switching Costs in outsourcing vs. contracting Terminating charges Resume responsibility for process itself Rebuild infrastructure Recapture the process expertise Removes Knowledge of Processes from the Company Time and materials, and other capital investments Decreases Ability to Use Information Technology Strategically Losing control over process Risk involved in establishing IT process group from scratch

IT Outsourcing Why Outsourcing Alliances are so Difficult Length of relationship Long term contracts (8-10 years.) in fast moving technical and business environment. A deal that make sense in the beginning might make less sense three years after and requires adjustments to functions Resulting into negotiation and misunderstanding Outsourcing is relatively easy but in-sourcing again is very difficult Initial process ownership investment, ?, etc

IT Outsourcing Difficulties with IT Outsourcing Measuring results In the first year the outputs closely resemble those anticipated in the contract. In subsequent year, however, the contract payment stream becomes less and less tied to the initial set of planned outputs as the world changes Supplier power The longer the outsourcing-relationship continued, the more the power shifts to the supplier, why?

IT Outsourcing The Nature of IT Outsourcing Relationship Alliance Partnership Relationship (strategic) Marriage Integration “The term outsourcing is inappropriate. This is really more of an integration of two separate businesses” “We wanted to take the best parts of each culture and put them together. The same goes for structure, strategy and people.” Jagdish Dalal Head of Xerox’s Global outsourcing in 1994. “Integration could only be achived if they developed a high degree of cooperation” Mike Reed Xerox outsourcing team

IT Outsourcing When to Outsource IT and What could be Outsourced?

IT Outsourcing When do the benefit of outsourcing outweigh the risks? 1. Position in the strategic grid 2. Development portfolio 3. Organizational learning 4. A firm’s position in the market 5. Current IT organization 6. Make, Buy, Outsource 7. Sourcing Strategies 8. Resource dependence theory

Outsourcing High Factory-uninterrupted service-oriented information resources management Outsourcing Presumption: Yes, unless company is huge and well managed Reasons to consider outsourcing Higher -quality services and backup Management focus facilitated Strategic information resources management Outsourcing Presumption: No. Reasons to consider outsourcing Rescue an out-of-control internal IT unit Tap source of cash Facilitate cost flexibility Facilitate management of divestiture Current Dependence on Information Support -oriented information resources management Outsourcing Presumption: Yes. Reasons to consider outsourcing Access to consider IT professionalism Access to current IT technologies Risk of inappropriate IT architecture reduced Turnaround information resources management Outsourcing Presumption: No. Reasons to consider outsourcing Internal IT unit not capable in required technologies project management skill Low Importance of Sustained, Innovative Information Resources Development

IT Outsourcing Development Portfolio The higher the percentage of the systems development portfolio in maintenance or high-structured projects, the more the portfolio is a candidate for outsourcing Outsourcers with access to high-quality, cheap labor pools (e.g. in Russia, India or Ireland) and good project management skills can consistently outperform, on both cost and quality, a local unit that is caught in a “high-cost” geographic area and lacks the contacts, skills and confidence to manage extended relationship The growth of global fiber-optic networks has made all conventional thinking on where work should be done obsolete Research have pointed out that more than 150,000 programmers are working in India on software development for US and European countries Large, low-structured projects pose very difficult coordination problems for outsourcing.

IT Outsourcing Organizational Learning “Many times people will change just the structure and the reporting relationships. But if you want to change a company, you’d better change more than that. There’s the formal structure and then there’s the way the company really works. You have to change the way it really works” Allaire Xerox CEO 1992 The more experience the firm has had in implementing redesign the easier the outsourcing will be Process reengineering seeks to install very different procedures for handling transactions and doing the firms work. Responsibility for such development work (low structure by its very nature) is the hardest to outsource. A significant component of many firms’ applications development portfolios comprises projects related to business process reengineering or organizational transformation.

IT Outsourcing A Firm’s Position in the market The further a company is from the network era in its internal use of IT, the more useful outsourcing can be to close the gap Firms still in the DP era and early micro era do not have the IT leadership, staff skills, or architecture to move ahead The outsourcer, by contrast, cannot just keep its old systems running, but must drive forward with contemporary practices and technology.

IT Outsourcing Current IT Organization The more IT development and operations are already segregated, in the organization and in accounting, the easier it is to negotiate an enduring outsourcing contract. A stand-alone differentiated IT unit has already developed the integrating organizational and control mechanisms that are the foundation for an outsourcing contract. Separate functions and their ways of integrating with the rest of the organization already exist.

Make, Buy or Outsource Rands (1993) Company’s Skills Related to Best External Source Low Equal High Low Make or Buy/Out. Buy/Outsource Tend to make Strategic Importance Strategic Alliances Tend to make Make High

Sourcing Strategies High Low Low High Need for tailor made support In-house solution Joint Venture/Enterprise Partnership/ or strategic alliance/ Selective outsourcing Need for tailor made support True spin-Off or outsourcing/Net sourcing/ASP Low Low Market Potential to provide the support High

Resource Dependence Theory Strategic Choice Framework for the IT Professional Resource In-house solution Cost sharing or strategic alliance High Degree of Resource Dependence True spin-Off or outsourcing Outsource Low Low High Degree of volatility

Outsourcing Learning Curve Phase 3 Institutionalization Focus on value-added transformation Size of Market Customer Learning Phase 3 Market matures Richer practices emerges Focus on quality Phase 2 Early adopters Best and worst practices emerges Focus on cost Phase 1 Hype and fear Time

Performing / Strategic Focus (Not just focusing on cost) Stages 5 4 3 2 1 Performing / Strategic Focus (Not just focusing on cost) Norming / Proactive Cost Focus (Beginning to form norms and actively focusing and proactively using outsourcing for cost saving including offshore. Outsourcing 20-40% of IT activities) Storming / Strategic decision point (Organization leaders share conflicting ideas about outsourcing and pursuing different strategy to provide IT services) Forming / experimenting stage (outsourcing between 10-20% of IT activities) Insourcing / Bystander (outsourcing between 1-5% of IT. Mostly purchasing of IT functions). Time