IS/IT Outsourcing GP Dhillon Virginia Commonwealth University

A Typical MIS Department Budget 33% Systems and Programming 70% Maintenance 70% Maintenance 30% New Development 30% New Development 10% Administration and Training 57% Operations Includes PCs, printers, off the shelf software, network hardware/software Includes PCs, printers, off the shelf software, network hardware/software Involve more $ than any other part of the MIS department Involve more $ than any other part of the MIS department

Reasons to Outsource Organizationally-drivenImprovement-drivenFinancially-drivenRevenue-drivenCost-drivenEmployee-driven

What is Outsourcing? Defined Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers.

Three solutions to operations problems Problems: downtime, obsolescence, unresponsive systems Solutions: Buy more equipment Buy more equipment Continuously fight fires and rearrange priorities, getting people to solve the problems at hand Continuously fight fires and rearrange priorities, getting people to solve the problems at hand Continually document and measure what you are doing, to find out the real problems, not just the apparent ones. Then set standards - the preferred solution Continually document and measure what you are doing, to find out the real problems, not just the apparent ones. Then set standards - the preferred solution

What does a business process look like? The Company Supplier

What does a business process look like? The Company Supplier I N T E R or I N T R A N E T I N T E R or I N T R A N E T ERP or equiv

Changes as IT has moved from the more traditional professional services category to outsourcing: IS Management loses an increasing amount of control IS Management loses an increasing amount of control Vendors take more risk Vendors take more risk Vendors’ margins improve Vendors’ margins improve Choosing the right vendor becomes more important Choosing the right vendor becomes more important Outsourcing Information Systems Functions: Customer-Vendor

Focus on core businesses: Global competition in 1970s-2002 have forced efficiencies Shareholder value: Companies “priced” based on shareholder value, and focus on short term profits. Management must stress value, they must consider outsourcing in all their nonstrategic functions. Outsourcing Information Systems Functions: Two Driving Forces

What does a business process look like? The Company Supplier I N T E R or I N T R A N E T I N T E R or I N T R A N E T ERP or equiv HPSt KOSup HPSt KOSup HPSt KOSup HPSt KOSup HPSt KOSup HPSt KOSup HPSt KOSup

High PotentialStrategic Key OperationalSupport

Nature of contracts

High PotentialStrategic Key OperationalSupport

IT outsourcing Single outsourcer Single outsourcer Big bang (common pre-1990) Big bang (common pre-1990) Sell IT assets to outsourcer Move personnel to outsourcer Get fixed costs off books and change to variable costs Outsourcers took loss for 2 years and then got economy of scale to keep costs down Many problems with transition and culture shock of ex- employees being treated like “temps” Outsourcing Alternatives

Best-of-breed outsourcing (common throughout 1990s) Multiple outsourcers Multiple outsourcers Choose each outsourcer based on their expertise Choose each outsourcer based on their expertise Alternatively, could be “collaborative outsourcing” Alternatively, could be “collaborative outsourcing” General contractor and subcontractor system Outsourcing Alternatives

Shared services Insourcing within organization Insourcing within organization Across large organization, create centralized service unit that deals with services of all sorts (like a spin off company that has its own management and autonomy and in some cases is legal corporate entity) Across large organization, create centralized service unit that deals with services of all sorts (like a spin off company that has its own management and autonomy and in some cases is legal corporate entity) Specialties within types of service (like IT or mailroom or legal) have autonomous subunits within service unit Specialties within types of service (like IT or mailroom or legal) have autonomous subunits within service unit Insource group can subsequently outsource Insource group can subsequently outsource Outsourcing Alternatives

Business process outsourcing (late 1990s) Margins for routine IT services shrank as they became commodities Margins for routine IT services shrank as they became commodities BPR became lucrative niche and is more art than science BPR became lucrative niche and is more art than science BPO is buying strategic process and administration of new processes for use of IT instead of just cutting costs of existing IT processes BPO is buying strategic process and administration of new processes for use of IT instead of just cutting costs of existing IT processes Is risky and sometimes risks and rewards are shared in joint ventureship Is risky and sometimes risks and rewards are shared in joint ventureship Outsourcing Alternatives