Outsourcing

Some Key Outsourcing Firms EDS CSC IBM Systematics Perot Systems Telesystems Andersen Consulting ISM Cap Gemini GSI AT&T Systemhouse PRC GIS

Strategic Planning Assumptions The most successful vendors will opportunistically form quasi-permanent or situational alliances with various partners (other outsourcers, hardware or software suppliers or users) to provide best-of-breed solutions (0.9 probability). In many cases, users will choose a prime contractor, then stipulate which best-of-breed vendors should be the preferred business partners (0.65 probability). Defining the Outsourcing Relationship

The Advantages of Outsourcing The deal may include cash payments for assets; this can be helpful for financially hurting companies or for ones that need cash to finance fast growth Cash Price Flexibility Personnel conservation Documentation and methodology People Technology Hassle As a result of economies of scale, many outsourcing firms can perform outsourced tasks at a cost lower than if the task were performed by internal operations. Use of an outsource firm gives companies the flexibility to deal with such major events as acquisitions or mergers. Use of an outsourcing firm for routine tasks frees internal employees for more strategic work. Outsourcing firms often use more structured methodologies to perform tasks and produce documentation more rigorously Outsourcing puts the burden of finding and managing skilled workers on the vendor. Outsourcing firms may have specific technology, tools, or expertise Outsourcing firms typically deal with vendor liaison, procurement, problem-solving, and so forth.

The Disadvantages of Outsourcing There is risk in giving control of lifeblood network and data processing operations to a third party. Control Returns Conversion Technology transfer Alliance management Supply restrictions Cost savings Change The returns on outsourcing, for both vendor and user, are based on the assumptions that may quickly become invalid. The cost of converting to outsourcing, including top management time and attention, is nontrivial. Once companies transfer application and operational knowledge to the outsourcing firm, getting it back might be difficult. Outsourcing shifts a company’s internal burden from providing infrastructure services to a managing a mission-critical alliance, which takes work. Relying on an outsourcing vendor will, as a practical matter, restrict availability of products and services from competitors. Contract pricing for out-years of the deal may not pass on costs savings available from technology. Changing business conditions for either user or vendor or changing strategic focus could leave either party stuck with an outmoded relationship.

Executive Survey: 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

Executive Survey: 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 Source: Survey of current and Potential Outsourcing End-Users, The Outsourcing Institute Membership

Executive Survey: 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/group 7. Senior executive support and involvement 8. Careful attention to personal issues 9. Near term financial justification 10. Use of outside expertise Source: Survey of current and Potential Outsourcing End-Users, The Outsourcing Institute Membership

Outsourcing and Strategy

Outsourcing - Paul Strassmann’s Argument Reasons for outsourcing - according to firms that do it: IT is no longer (never was) a core competency Lower IT costs by eliminating operational IT which enables the firm to focus on strategic IT Outsourcing firm has specialized IT expertise “If those reasons are correct, then IT outsourcing ought to be randomly distributed among firms.” A study of Fortune 1000 firms frequently mentioned in the press for outsourcing their IT found that … The distribution of firms is not random. Firms doing the outsourcing were “economic losers” in terms of an EVA (Economic Value Analysis) analysis starting from three years prior to the awarding of an outsourcing contract. No firm with a large EVA engaged in IT outsourcing. Conclusion: IT outsourcing is just another label and justification for cutbacks.

Stated Reasons for Outsourcing Financial reduce operational (maintenance, legacy) costs directly eliminating them from the firm’s budget gain from economies of scale in outsourcing vendor reduce financial uncertainty (turning variable costs of running IS internally into a known cost based on the contract with the outsourcer) Strategic enable IS staff to focus on strategic systems build a strategic partnership with a firm that has complementary skills Other gain access to state-of-the-art IT expertise manage the IS function more professionally eliminate a non-respected or difficult department provide a professional career path for IS staff

Internal vs External Service Delivery Does service offer competitive advantage? If “yes,” keep internal. Is external delivery reliable and lower cost? If “yes,” outsource.

Managing Risk Through Incremental Outsourcing The logic of incremental outsourcing parallels the logic of outsourcing large segments of the IT function. However, the economic stakes are not as high and the potential consequences of mismanagement are not as far-reaching. Mistakes are more reversible and less painful. Since costs are less, experimentation is feasible.

Issues to Consider Incremental outsourcing vs large-scale outsourcing When to outsource Position on strategic grid Development portfolio Organizational learning Firm’s position in market Impact of organizational culture on outsourcing Designing the alliance for success Managing the alliance