ICT3261 Chapter 9 Strategic sourcing of resources, capabilities and competencies Paula Goulding

ICT3262 Introduction ‘We set out to shape a global enterprise that preserved the classic big company advantages while eliminating the big company drawbacks. What we wanted to build was a hybrid enterprise with the body of a big company and the soul of a small company.’ (Jack Welch, CEO, GE, 1995)

ICT3263 Developing e-business capabilities large, established firms act small enjoy advantages of being big small start-ups get big fast retain benefits of being small Do all organisations need to be ‘big’ and ‘small’ simultaneously?

ICT3264  need to combine: –Efficiency, power, resources, reach of ‘big’ and –Speed, agility, responsiveness of ‘small’  new capabilities, resources, and competencies needed to exploit digital business infrastructure Developing e-business capabilities

ICT3265 Organisational capabilities  Need capabilities and resources: –To identify opportunities and to create and communicate visions, goals, objectives strategies –To innovate and improve, to create excellent core business processes –To establish relationships and systems linking them to suppliers, trading partners and customers, and manage knowledge and intellectual resources –To maintain controls without stifling flexibility, creativity, agility, responsiveness, while remaining competitive, manage uncertainty

ICT3266 Understanding capabilities  Organisations become competitive through their ability to access (internally or externally) and exploit required resources, competencies and capabilities –Decision must be made on:  Capabilities to develop and acquire internally  Capabilities which would be better sourced through external providers –Crucial to delivering value to customers

ICT3267 Understanding capabilities  Organisational capability is derived through accessing competencies (the ability to do things or ‘know-how’) and resources needed to deliver on customer value proposition and thus achieve business objectives

ICT3268 Building IT capabilities  What we know…  IT is becoming commoditised…few impediments to purchasing IT –Require capabilities and competencies to leverage value from IT investments ‘Technical wizardry does not generate sustainable competitive advantage’ (Peppard 2000)

ICT3269 Sourcing required IT capabilities  Historically, IT capabilities were developed in- house  With increasing complexity and greater emphasis on cost controls, decisions often taken to access some/all capability from external providers –IT outsourcing

ICT32610 Outsourcing defined ‘ commissioning a third party (or a number of third parties) to manage a client organisation’s IT assets, people, and/or activities to required results. This can and often does involve a degree of transfer of assets and staff to the third party organisation.’ (Fitzgerald & Willcocks 1994) ‘ the use of a third party vendor to provide information products and services that were previously provided internally’ (Lacity & Hirschheim 1994) (Lacity & Hirschheim 1994) ‘ Outsourcing encompasses the movement of any part of MIS functionality to an outside agent’ (Chapman & Andrade 1998)

ICT32611 Degrees of outsourcing  Total outsourcing –>80% IT requirements are outsourced  Selective sourcing –IT viewed as a portfolio of activates –20-80% sourced internally –Decisions made on a case by case basis

ICT32612 Degrees of outsourcing  Insourcing –>80% IT requirements provided internally –Deliberate decision to retain IT in-house after evaluating marketplace  Backsourcing –Building IT capabilities internally following an outsourcing arrangement

ICT32613 Outsourcing decisions  None of these approaches are inherently good or bad –‘horses for courses’  IT becomes more diffused and more complex, yet more pivotal to the achievement of business goals and objectives, to the creation of efficient and effective business processes –Different perspectives emerge on how best to deal with increasing demands for IT services –Sourcing decisions are about how to achieve desired levels of competence, expertise and capability in IT, and how to manage increasing complexity

ICT32614 What can be outsourced?  All / most IT/EC operations  All / most applications development and/or maintenance functions  All/most networks and communications facilities  Training  E-business strategy formulation  Re-engineering processes and IT support General heuristic is to outsource those activities & services which are regarded as non-core. However, many organisations are now outsourcing core activities.

ICT32615 Why outsource? Accrue cost savings / better control of costs Uncertainty about value of IT Improve levels of service Internal IT to concentrate on ‘value add’ More predictability Refocusing staff

ICT32616 Why outsource?  Changing business strategy –focus on core competencies –shed all non-core functions –determination to improve business performance –accommodate business change, restructuring

ICT32617  Acquire new skills, ‘state of the art’ technology –resources not available internally  Cash infusion  Popular trend Why outsource?

ICT32618 Risks of outsourcing? Contractual complexity / incompleteness –IT services to be outsourced –required service levels –IT personnel to be provided by vendor –fees payable –clauses covering disputes, changing requirements

ICT32619 Risks of outsourcing?  Increased dependence on outside parties for service –poor relationship with vendor –loss of skills  Recognition that IT played strategic role –strategic disadvantage

ICT32620  Unrealistic contract negotiations –vendor pushed to provide low quotation –set about attempting to be profitable after winning the contract What are the risks?

ICT32621 What are the risks?  Hidden costs –Costs of locating & contracting with a vendor –Transitioning to the vendor  Disruption  ‘help’given bringing vendor up to speed –Contract management  Fulfilling contractual obligations  Bargaining with vendors  Negotiating contract changes & variations –Transitioning back in-house(?)

ICT32622 Best practice in outsourcing  Contracts are essential –Fee-for-service –Strategic alliances/partnerships –Buy-in contracts  Allow vendor to be profitable  Contract management  Change management  Retain IT management skills in-house

ICT32623 Trends in outsourcing  Contract renegotiation –Changes demanded to improve performance measurement, better monitoring of contract performance  Backsourcing –Decision to rebuild some IT capability internally  Netsourcing (e-sourcing) –Obtaining entire infrastructure requirements from single vendor who delivers all required services via Internet

ICT32624  Application service providers (ASPs) –Similar to netsourcing, but parts of services can be accommodated –Not confined only to infrastructure  Business processing outsourcing –Outsourcing entire business process or function  Offshoring –Trend to access IT services from developing countries with lower cost structures Trends in outsourcing