Managing IT Outsourcing Chapter 9

Outsourcing in Retrospect Major drivers for outsourcing in the 1990s Cost effective access to specialized skills or occasionally needed computing power or skills Avoidance of building in-house IT skills. Access to special functional capabilities.

Outsourcing in the 21st Century Acceptance of Strategic Alliances IT’s Changing Environment

IT Markets Location Physical Aspects Information Internal External Automating : Computerizing physical and clerical processes. DP era (1960 - 1980) • Dominant use of mainframe and minicomputers. • Operational level systems automated primarily with COBOL. • Process controls automate primarily with machine language. • Standard packages for payroll and general ledger. • Applications portfolio consists of millions of lines of code with 50% typically purchased from outside. Informating : Leveraging knowledge workers with computers. • User tasks leveraged through direct use of micro computers enabled by graphical use interfaces (GU) and purchased software such as word processing, spreadsheet, graphics, and CAD/CAM. • Local area networks (LANs) -- user oriented software for e mail, database sharing, file transfer, and groupware for work teams. • Microcomputer software consists of millions of lines of code almost 100% purchased from other companies. External Embedding : Integrating computers into products and services. Micro era (1980 1995) • Specialized code embedded in products and services to enhance function. • Microcomputers in physical products such as automobiles and “smart cards” in services. • Thousands of lines of code developed by both specialized internal programmers and outside contract programmers. Networking : “The Information Highway” Network era (1990 ?) • Wide area networks (WANs) networking workers, suppliers, and customers. • Internet for commercial use. • Millions of lines of code, almost 100% purchased and maintained from outside software firms. Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan , Corporate Information Strategy and Management . Burr Ridge, IL: McGraw - Hill/Irwin, 2002.

What Drives Outsourcing? General Managers’ concerns about costs and quality. Breakdown in IT performance. Intense vendor pressures Simplified general management agenda Financial factors Corporate culture Eliminating an internal irritant Other factors

Strategic Grid for Information Resource Management High Current Dependence Factory - uninterrupted service oriented information resource management Outsourcing Presumption : Yes, unless company is huge and well managed Reasons to consider outsourcing: • Possibilities of economies of scale for small and midsize firms. • Higher quality service and backup. • Management focus facilitated. • Fiber op tic and extended channel technologies facilitate international IT solutions. Strategic information resource management : Mixed • Rescue an out of control internal IT unit. • Tap source of cash. • Facilitate cost flexibility. • Facilitate management of divestiture. on Information Support oriented information resource management Outsourcing Presumption: Yes • Access to higher IT professionalism • Possibility of laying off is of low priority and problematic. • Access to current IT technologies. • Risk of inappropriate IT architecture reduced. Turnaround information resource management • Interna l IT unit not capable in required technologies. • Internal IT unit not capable in required project management skills. Low Importance of Sustained, Innovative High Information Resource Development Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan , Corporate Information Strategy and Management . Burr Ridge, IL: McGraw - Hill/Irwin, 2002. -

When to Outsource Position on the strategic grid Development portfolio Organizational learning A firm’s position in the market Current IT organization

Structuring the Alliance Contract flexibility Standards and control Areas to outsource Cost savings Supplier stability and quality Management fit Conversions problems

Managing the Alliance The CIO function Performance measurement Partnership/contract management Architecture planning Emerging technologies Continuous learning Performance measurement Mix and coordination of tasks Customer-vendor interface