CGEY Olayele Adelakun (Ph.D) Assistant Professor CTI DePaul University, Chicago, IL Web:

CGEY Agenda IT Outsourcing Trends, Market and Practices Outsourcing Drivers and Difficulties When and What to Outsource Keys to Successful Outsourcing Conclusion

CGEY Customers wanted flexible, low cost, high service IT products and services to enable business objectives. 1960s s s s s------>$1 trillion Time-sharing Insourcing > 75% Outsourcing > 24% ASP ---> 1% IT Outsourcing Trends Source: Lacity and Willcocks 2001

CGEY $9 billion Dataquest $28billion Dataquest $50billion The Yankee Group (global revenues) $76 billion International Data Corporation (global revenues) $121billion International Data Corporation (global revenues) 2004 $154 billion Kern and Willcocks (2002) IT Outsourcing is not a fad, but a fundamental change in the way IT is delivered IT Outsourcing Market Source: Willcocks 2002

CGEY Percent Outsourced by Function * 2001* Source: Michael F. Corbett & Associates, Ltd & 2000 Strategic Outsourcing Studies The Outsourcing Research Council * Projected

CGEY Outsourcing’s Economic Impact U.S. Corporate Revenue $11.08T 11.65T 12.23T 12.85T Outsourcing Spending $510B 610B 730B 874B as a %of Corporate Revenue 4.6% 5.2% 6.0% 6.8% 1999 Revenue: GM, GE, Ford, Exxon, IBM $682B 2000 Global E-commerce Spending $272B 2000 Global Electronics Sales $772B 2001 Federal Budget (discretionary) $642B (Source: Michael F. Corbett & Associates, Ltd. 2001)

CGEY Customer Rating of Supplier Performance Overall, suppliers are earning a “good” report card, but there are many opportunities for improvement. Source: Lacity and Willcocks 2001

CGEY Sourcing Outcomes: 116 Cases Yes, most expectations met Too early No, most expectations not met Mixed Results IT Outsourcing Practices Source: Lacity and Willcocks 2001

CGEY Outsourcing Success Rates Improve over Time Contract Signed Percent “Successful” % % IT Outsourcing Practices Source: Lacity and Willcocks 2001

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(>80% of IT budget outsourced) (20-80% IT budget outsourced) (<20% IT budget outsourced) Outsourcing Scope: 116 sourcing decisions from case studies IT Outsourcing Practices Source: Lacity and Willcocks 2001

CGEY Selective Outsourcing (n=102 sourcing decisions from case studies with discernible outcomes) Sourcing Decision Percent “Successful” Selective Sourcing 77% Total Outsourcing 38% Total Insourcing 76% Source: Lacity and Willcocks 2001 IT Outsourcing Practices

CGEY Contract Duration: 82 Cases Less than 4 years Between 4 to 7 years Greater than 7 years Source: Lacity and Willcocks 2001 IT Outsourcing Practices

CGEY (n=85 outsourcing decisions with discernible outcomes) Contract Duration: Percent Successful: Less than 4 years 88% Between 4 and 7 years 59% Greater than 7 years 38% Shorter contracts had a higher success frequency than longer contracts. Source: Lacity and Willcocks 2001 IT Outsourcing Practices

CGEY Trends: E-sourcing and the ASP Model “ASPs are doing for software what the Internet has already done for data -- making software applications available, affordable and ubiquitous.” Traver Gruen-Kennedy, chairman, The ASP Industry Consortium Custom Applications Few Companies Packaged Applications Many Companies Packaged Services Ubiquitous (Source: 2001 Michael F. Corbett & Associates, Ltd.)

CGEY Trends: E-sourcing is Used To... Deliver Internal IT Capabilities IT Department Functional Areas ASPs IT Department (Source: 2001 Michael F. Corbett & Associates, Ltd.)

CGEY Trends: Offshore and Nearshore

CGEY Sourcing of IT Work Offshore (SITO) Stage Model Offshore Bystander Domestic sourcing only. Offshore Experimenter Experimentation begins. Sourcing is ad hoc. Proactive Cost Focus Strategy focused on cost efficiencies where sourcing centers perform non-core activities (support, enhancement) Proactive Strategic Focus Strategy focused on multiple sources of competitive advantage: innovation, world-class talent, and skills. Sourcing centers perform core corporate activities, including new systems and product Trends: Offshore and Nearshore Source: Erran Carmel and Ritu Agarwal (2000)

CGEY Agenda IT Outsourcing Trends, Market and Practices Outsourcing Drivers and Difficulties When and What to Outsource Keys to Successful Outsourcing Conclusion

CGEY Changing Business Environment The Need to Maximize Business Value, Reduce Risk, Make Profit, Stay in Business Deregulation Changing Business Conditions and Objectives Global Competition Cost Pressure New Technology E-Business & E- Commerce Total Quality Sourcing Relationships, Alliances, Partnerships, Mergers, Acquisitions Source: Everest Software Company

CGEY Outsourcing Drivers Two main factors have affected the growth of IT outsourcing –Recognition of strategic alliances –Changes in the technological environment

CGEY What drives Outsourcing –Concern for cost and quality –Breakdown in IT performance –Intense Supplier pressure –Simplified GM Agenda Concentrating on core competence? Improved company focus –Financial factors (make capital available) Cash infusion Turn fixed cost into variable cost –To reduce cycle time / process improvement (BPR/TQM) –Eliminating Internal Irritant Engage an outside agent in the change process. –Strategic Alliance Outsourcing Drivers

CGEY Top ten problems perceived by customers as “serious/difficult” 44% Getting different contract suppliers to work together 42% Poor supplier staffing of contract 38% Defining service levels 33% Supplier’s lack of understanding your business 32% IT skills shortage affecting supplier service 30% Cost for additional services beyond contract 28% In-house staff resistance to outsourcing 28% Managerial skills shortage 26% Cost escalation due to contract loopholes 25% Failure to align corporate strategy with IT strategy Outsourcing Difficulties Source: “Inside Information Technology Outsourcing: A State of the Art Report”, published by Oxford Institute of Information Technology.

CGEY Agenda IT Outsourcing Trends, Market and Practices Outsourcing Drivers and Difficulties When and What to Outsource Keys to Successful Outsourcing Conclusion

CGEY –Business Factor –Position in the strategic grid –Technical Factor Matrix When to Outsourcing

CGEY The Business Factors Matrix Contribution to Business Operations Contribution to Competitive Positioning Critical Useful Commodity Differentiator ‘Qualifiers’ ‘Necessary Evils’ ‘Order Winners’ ‘Distractions’ (Best-source: In-House/Partner) (In-House/Buy-In) (Outsource)(Migrate or Eliminate) When to Outsourcing Source: Lacity and Willcocks 2001

CGEY Factory-uninterrupted service-oriented information resources management Outsourcing Presumption: Yes Support -oriented information resources management Outsourcing Presumption: Yes. Turnaround information resources management Outsourcing Presumption: No Strategic information resources management Outsourcing Presumption: No Current Dependence on Information Importance of Sustained, Innovative Information Resources Development Low High Low High When to Outsourcing

CGEY The Business Factors Matrix Degree of Integration Technology Maturity High Low High Preferred Supplier Buy-in Contract Strategic Alliance Fee-For-Service When to Outsourcing Source: Lacity and Willcocks 2001

CGEY –Development portfolio –Organizational learning –A firm’s position in the market –Current IT organization When to Outsourcing

CGEY Agenda IT Outsourcing Trends, Market and Practices Outsourcing Drivers and Difficulties When and What to Outsource Keys to Successful Outsourcing Conclusion

CGEY Keys to Successful IT Outsourcing Literature Review on Outsourcing Success Factors –Outsourcers’ technical skill and competence –Cultural awareness –PM skills –Cost –Telecommunications –SW development process –Trust and good relationship –Problem resolution –Intellectual property protection –Detailed contract (SLA)

CGEY Note: √ indicates that the item had a mean value significantly greater than 4.0 on a five point scale: 1=Not Important, 2=Useful, 3=Important, 4=Very Important, 5=Critical. n=201 √Intellectual Property RightsRI1 √√√ Trust exists in the relationship CI2 √√ Client knowledgeable CI1 √√ Technical skills of outsource workers TI3 √ Telecommunications infrastructure TI1 √√√ General Knowledge Skills of outsource workers PI1 Clients Non-U.S. Outsourcers U.S. Outsourcers AttributeItem Most Critical Success Factors Source: Jennex and Adelakun (2003), see Journal of IT Cases and Application Special issue on outsourcing Keys to Successful IT Outsourcing

CGEY Relationship Management: Better Viewed as Stakeholders Managers Staff Senior Managers Account Managers Users Senior Business Managers Staff Trade Union Subcontractors Keys to Successful IT Outsourcing Source: Lacity and Willcocks 2001

CGEY Tentative Relationships: Complementary Goals Conflicting Goals Collaborative Relationships: Unknown Goals Shared Goals Cooperative Relationships: Adversarial Relationships: Stakeholder Relationships Vary by Goal Alignment for Task at Hand Source: Lacity and Willcocks 2001 Keys to Successful IT Outsourcing

CGEY Intervening Technical Infrastructure Client Interface Client Outsourcer Business Interface Internal Technical Infrastructure People Factor Regulatory Environment - Client Regulatory Environment - Outsourcer Source: Jennex and Adelakun (2003), see Journal of IT Cases and Application Special issue on outsourcing Keys to Successful IT Outsourcing Outsourcing Success Factor Model Business Interface Internal Technical Infrastructure People Factor

CGEY Agenda IT Outsourcing Trends, Market and Practices Outsourcing Drivers and Difficulties When and What to Outsource Keys to Successful Outsourcing Conclusion

CGEY Conclusion IT Outsourcing is not a fad –Fee-for Service Contracts –Strategic Alliances/Partnership –Offshore –ASP models –Selective / multi-Sourcing –In-sourcing –Total outsourcing –Selective outsourcing decisions and total in-sourcing decisions achieved success more often than total outsourcing decisions.

CGEY Conclusion Senior executives and IT managers who made decisions together achieved success more often than when either stakeholder group acted alone. Organizations that invited both internal and external bids achieved success more than organizations that merely compared a few external bids with current IT performance Short-term contracts achieved success more often than long-term contracts Detailed fee-for-service contracts achieved success more often than other types of contracts Older contracts experienced failure more than newer contracts. The type of IT services most commonly outsourced are infrastructure and support IT activities

CGEY Conclusion Two main Critical Success Factor –Excellent skill –Good relationship

CGEY CGEY Revisited Main FactorNo.Sub factorsAllSn. Man. Man. Organization and people Factor (OP) OP7TMN/OS management has a good understanding of the client organization’s culture Technical Infrastructure (TI) TI1TMN/OS workers have up to date technical skills Client Interface (CI) CI2Trusting relationship exists between client and TMN/OS across several management levels

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