Carnegie Mellon University © Robert T. Monroe Management Information Systems Acquiring IS Capabilities II: Outsourcing Management Information Systems Robert Monroe October 18, 2009

Carnegie Mellon University © Robert T. Monroe Management Information Systems Quiz 1.True or false: It is possible to have an outsourcing agreement that is not also an offshoring agreement. 2._______ ________ ________ (BPO) is the contracting of a specific business task, such as payroll, to a third-party service provider. 3.Are confidentiality concerns more of a problem with offshore outsourcing or onshore outsourcing?

Carnegie Mellon University © Robert T. Monroe Management Information Systems Goals For Today By the end of today's class you should: –Be able to explain what the terms 'outsourcing' and 'offshoring' mean, how they are similar, and why they are different. –Understand some of the core challenges to outsourcing IS development, processes, and management. –Know some of the most important questions to consider when your business is evaluating whether to outsource IS processes and infrastructure. –Understand that IS outsourcing is one example of the broader concept of Business Process Outsourcing

Carnegie Mellon University © Robert T. Monroe Management Information Systems Definitions In-house development, or insourcing, is the traditional SDLC model in which each step in the SDLC is conducted primarily by a company’s own staff, possibly with on-site guidance and assistance from consultants and contractors Outsourcing is an arrangement in which part or all of an organization’s IS capabilities are provided by an outside contractor Maintain & Support Impl.Test Develop Design AnalyzePlan

Carnegie Mellon University © Robert T. Monroe Management Information Systems Some Different Approaches To IS Outsourcing Outsource it all! –Hire another company to handle all of your company’s IS needs Outsource certain aspects of your IS organization’s responsibilities, such as: –Systems administration, hosting, and maintenance –Testing –Help desk / user support –Etc... Outsource on a project-by-project basis –Full project, beginning to end –Selected pieces of the project All of these approaches can be effective under certain conditions (and will likely be ineffective under other conditions)

Carnegie Mellon University © Robert T. Monroe Management Information Systems Why Would You Want To Outsource IS? Benefits Your company focuses on its core competencies Your IS provider focuses on its core competencies Lower total costs (hopefully) Better overall outcomes of IS projects Increased agility and ability to leverage new technologies Costs and Risks Loss of control Loss of agility and flexibility Many opportunities for disagreement between contractor and customer (you) High likelihood of higher costs Security and confidentiality concerns

Carnegie Mellon University © Robert T. Monroe Management Information Systems Discussion Questions: The book states that one of the risks that the company may face through outsourcing is inflexibility and it states that one of the benefits the company may get is flexibility. So houw can outsourcing both be flexible and inflexible at the same time? What are the consequences if the outsourcing company does not live up to the organization’s expectations? –Student questions posted to the wiki

Carnegie Mellon University © Robert T. Monroe Management Information Systems Outsourcing Parts Of An IS Project Outsourcing is not an all-or-nothing proposition Many firms choose to outsource part of a project’s SDLC but keep other parts in-house Exercise: Order the stages from most easy to outsource, to hardest to outsource Maintain & Support Impl.Test Develop Design AnalyzePlan

Carnegie Mellon University © Robert T. Monroe Management Information Systems Technology Advances Enabling Outsourcing Internet and pervasive high-speed network connectivity –VoIP –Web applications / access to data –Web services –Internet video General move to storing corporate data electronically Software as a Service and Utility Computing providers Automated workflow management systems Anything else?

Carnegie Mellon University © Robert T. Monroe Management Information Systems Some Thoughts On How To Outsource Effectively You need to be more disciplined to outsource IS effectively than to do your IS processes in house Learn to work with your outsourcing partner/provider gradually, starting with smaller, lower-risk projects Be very clear of what your goals are in pursuing an outsourcing arrangement Devise the outsourcing agreement carefully – make sure that both parties have incentives to make it work, and the flexibility to execute

Carnegie Mellon University © Robert T. Monroe Management Information Systems Offshoring Offshore outsourcing, or offshoring, is an outsourcing arrangement in which the contractor provides the outsourced IS capabilities from a lower-wage country Offshoring amplifies the benefits, as well as the costs and risks, of in-country outsourcing –Generally a much stronger focus on cost savings –Pool of competent and capable outsourcing firms grows –Communication difficulties are amplified –Risks grow, especially for protection of IP and confidential information

Carnegie Mellon University © Robert T. Monroe Management Information Systems Further Thoughts On How To Outsource Effectively Have an outsourcing strategy and make sure that your tactical outsourcing and offshoring decisions are consistent with that strategy Go into your outsourcing program with clear, well defined metrics that both parties agree on, as well as how they will be monitored, and what actions will be taken if the metrics show problems Outsourcing is not a panacea (cure-all). If you have a poorly run IS organization, and the rest of your company does a poor job managing IS, then simply asking an outsourcing company to take over is not likely to fix those problems

Carnegie Mellon University © Robert T. Monroe Management Information Systems Discussion Questions: How do companies decide what to outsource, what to offshore, and what to keep in-house? The textbook states that “outsourcing is rapidly approaching commodity status”. Do you agree or disagree with this claim? Since outsourcing is becoming more like a commodity, what competitive advantage does a company gain if they outsource their IT operations? If outsourcing is less expensive than in-house, what stops a company from outsourcing everything? –Student questions posted to the wiki

Carnegie Mellon University © Robert T. Monroe Management Information Systems The Next Step: Business Process Outsourcing (BPO) Business Process Outsourcing occurs when one company hires another company to take over a business process on a contract basis IS outsourcing is one of many examples of BPO This has been going on for centuries for manufactured goods but is just starting to become common practice for high-value add services Examples: payroll, insurance claim coding and processing, legal review of documents, airline or hotel reservations, product testing, financial analysis, invoice processing –Other examples?

Carnegie Mellon University © Robert T. Monroe Management Information Systems Offshoring BPO Offshoring IS responsibilities is part of a much broader trend of multi-national corporations towards sending work to the place where it can be done most cost effectively The same considerations, concerns, and benefits described for IS outsourcing and offshoring also apply to BPO for other business functions

Carnegie Mellon University © Robert T. Monroe Management Information Systems BPO In Class Exercise Pick one company from the list below. Identify three business processes that the company should consider outsourcing –What benefits might they gain by doing so? –What risks and concerns do you recommend they consider? –Should they be looking at local outsourcing, or offshoring? Qatar Airways Carrefour Q-Tel Apple

Carnegie Mellon University © Robert T. Monroe Management Information Systems Discussion Questions: We looked at the chapter from the point of view of companies looking to outsource. From the point of view of the outsourcing companies, how can they differentiate themselves from their competitors and convince clients to hire them for the job instead of other companies? –Student question posted to the wiki

Carnegie Mellon University © Robert T. Monroe Management Information Systems Wrap Up: Assignment #2 Reminder: Due on Thursday, October 22, 5:00pm –… you should have already started working on it! Details posted on wiki Collaboration guidelines Questions?

Carnegie Mellon University © Robert T. Monroe Management Information Systems Wrap Up: Goals For Today By the end of today's class you should: –Be able to explain what the terms 'outsourcing' and 'offshoring' mean, how they are similar, and why they are different. –Understand some of the core challenges to outsourcing IS development, processes, and management. –Know some of the most important questions to consider when your business is evaluating whether to outsource IS processes and infrastructure. –Understand that IS outsourcing is one example of the broader concept of Business Process Outsourcing.