Module 5: Managing Organizational Transformation Topic 11: Outsourcing

Pressures to Outsource Overspending on IT High debt Lack of in-house expertise and experience IT as a support function Learning experience required Free staff’s time

Insource VS Outsource Hardware and software Pros and cons of insourcing and outsourcing (see table 1)

Myths of Outsourcing Outsourcing vendors are strategic partners Outsourcing vendors are inherently more efficient than an internal ISD

Strategic Alliance Corporate venturing Joint technology development

Decision to Outsource When making a decision about to build a system in house or to buy it, the rule of thumb is that never outsource your mission critical system or your core competence.

Risks Involving in Outsourcing Loss of Intellectual Property Competitive Risks Performance Risks Risks associated with relying on external partners

1. Loss of Intellectual Property Outsourcing leads to a steady deterioration of firms’ production skills and technologies that are important sources of organizational learning Technology is easily imitated.

2. Competitive Risks Partners can become competitors.

3. Performance Risks Happens in the case of logistics and IT outsourcing alliances The risk of changes in software and resulting disruptions

4. Risks associated with Relying on External Partners The concept of creating ‘value constellation’ Do not outsource ‘core competency’ E.g., Marriott Corporation

4. Risks associated with Relying on External Partners (cont.) Non Performance Profit Skimming Elimination

4.1 Risk of Non Performance Fail to deliver the promise Solutions: - Carefully developing a contract - Monitoring a consulting company’s performance closely

4.2 Risk of Profit Skimming Partners may skim most of the profits generated and leave a firm only marginally profitable.

4.3 Risk of Elimination This is an extreme portion of profit skimming.

Management Challenges (Quinn 2000) Speed Turbulent and complex environment Insource or Outsource? Decide carefully