1. Management Information Systems by Prof. Park Kyung-Hye Chapter 13 (14th Week) Choices in Systems Acquisition 13

2. Objectives Choices in Systems Acquisition Explain the differences among the alternatives to tailored system development: outsourcing, licensing ready-made software, using software as a service, and encouraging users to develop their own applications List the business trade-offs in the various methods of acquiring systems Describe which systems acquisition approach is appropriate for a particular set of circumstances Discuss organizational policies on employee computer use 2

3. Options and Priorities 3 There are four alternatives to in-house development: Choices in Systems Acquisition The deciding factor is usually cost when the desired application is available from multiple sources Licensing is preferred due to low cost and immediate availability Outsourcing Licensing Using software as a service (SaaS) Having users develop the system

4. Options and Priorities (continued) 4 If licensing is not available: Choices in Systems Acquisition Third best choice is allowing users to develop their system Application service provider (ASP) is the next best choice System is immediately available for a small start-up fee Last choice is to outsource, if non-IT employees cannot develop IS Many factors must be considered in addition to cost and quality Alternatives are not fully comparable, and often cannot be simply prioritized

5. Options and Priorities (continued) 5 Choices in Systems Acquisition

6. Outsourcing 6 Outsourcing has two meanings in the IT arena: Choices in Systems Acquisition To commission the development of an application to another organization To hire the services of another company to manage all or parts of the services usually rendered by an IT unit in the organization - May not include development of new applications

7. Outsourcing Custom-Designed Applications 7 Custom-designed (tailored) software: software developed specifically for the needs of an organization Choices in Systems Acquisition Several advantages: Good fit to need Good fit to culture Dedicated maintenance Smooth interface Specialized security Potential for strategic advantage

8. Outsourcing Custom-Designed Applications (continued) 8 Custom-designed (tailored) software: software developed specifically for the needs of an organization Choices in Systems Acquisition Disadvantagesadvantages Good fit to need Good fit to culture Dedicated maintenance Smooth interface Specialized security Potential for strategic advantage High cost The organization must fund all development costs Staff may be diverted from other projects Software is less likely to be compatible with other organizations’ systems

9. Outsourcing Custom-Designed Applications (continued) 9 Choices in Systems Acquisition

10. Outsourcing Custom-Designed Applications (continued) 10 Must deal with an inherent conflict when outsourcing software development: Choices in Systems Acquisition Client wants a firm contract and set of requirements Specific requirements may mean that no deviation is allowed if changes are needed later as development progresses - Changes may involve hefty additional charges Offshoring: outsourcing to other countries such as India, China, Philippines, etc.

11. Outsourcing IT Services 11 Many businesses turn to IT companies for long-term services, including: Choices in Systems Acquisition Purchasing and maintaining hardware Developing, licensing, and maintaining software Installing communications networks Maintaining and operating Web sites Staffing help desks Running IT daily operations Managing customer and supplier relations Business process outsourcing: outsourcing routine processes, such as order entry or HR Some companies realize IT is not their core competency and should not be a focus of their efforts

12. Outsourcing IT Services (continued) 12 Choices in Systems Acquisition Pace of development in IT requires a high level of expertise A growing portion of IS budgets are being allocated for outsourced services Popular IT service providers include: IBMEDS AccentureUnisys Outsourcing companies are known as vendors IT outsourcing contracts are typically long-term contractual relationships, usually for seven to 10 years Clients sometimes find themselves bound by obsolete contracts, and must renegotiate

13. Outsourcing IT Services (continued) 13 Choices in Systems Acquisition

14. Outsourcing IT Services (continued) 14 Choices in Systems Acquisition Advantages Improved financial planning - Client knows the exact cost of IS functions Several advantages of outsourcing: Reduced license and maintenance fees - IS professional firms pay discounted prices for tools and can pass on the savings to their clients Increased attention to core business - Executives can concentrate on their company’s core business

15. Outsourcing IT Services (continued) 15 Choices in Systems Acquisition Advantages(continued) Shorter implementation cycles - IT vendors can complete new applications faster Advantages of outsourcing Reduction of personnel and fixed costs Increased access to highly qualified know-how Availability of ongoing consulting as part of standard support Sometimes outsourcing does not save the client money

16. Outsourcing IT Services (continued) 16 Choices in Systems Acquisition Advantages(continued)

17. Outsourcing IT Services (continued) 17 Choices in Systems Acquisition Disadvantages Loss of control - High risk in a quickly changing industry Disadvantages of outsourcing Loss of experienced employees - Usually involves transferring employees to vendor Risks of losing a competitive advantage - May disclose trade secrets High price - Can be more expensive than keeping the tasks in-house - Important to clearly define contract terms

18. Outsourcing IT Services (continued) 18 Choices in Systems Acquisition Risks of Outsourcing IT Services

19. Outsourcing IT Services (continued) 19 Choices in Systems Acquisition Risks of Outsourcing IT Services (cont.) The most important element of an outsourcing agreement Service-level agreement Lists all services expected of the vendor Defines the metrics to be used to measure vendor performance The client must develop the service level and metrics list, not the vendor

20. Licensing Applications 20 Choices in Systems Acquisition Purchasing software usually means purchasing licenses to use the software There is a large selection of high-quality packaged software available Two groups of ready-made software: Relatively inexpensive software that helps in the workplace, such as office suites Large applications that support entire organizational functions, such as HR or financial management - Typically cost millions of dollars

21. Software Licensing Benefits 21 Choices in Systems Acquisition Licensing benefits include: Beta version: a prerelease version of software to be tested by companies who want to use it Immediate system availability High qualityLow price (license fee) Available support Often includes a period of up to one year of free service Large applications require installation specialists

22. Software Licensing Risks 22 Choices in Systems Acquisition Software licensing has risks including: Loose fit between needs and features - Must determine if the software will comply with company needs and organizational culture Difficulties in undertaking custom modifications Dissolution of the vendor - May be left without support and maintenance High turnover of vendor personnel - Turnover among IS professionals is high - May result in lowered support expertise from vendor

23. Steps in Licensing Ready-Made Software 23 Choices in Systems Acquisition Selecting software involves a large money investment and a long- term commitment Identify problem or opportunity - Define functional requirements Project management team responsibilities: Identify potential vendors Solicit vendor information - Request for information (RFI): request for informal information about a vendor’s product Define system requirements Request vendor proposals - Request for proposal (RFP): a document that specifies all requirements and solicits a proposal

24. Steps in Licensing Ready-Made Software (continued) 24 Choices in Systems Acquisition Review proposals and screen vendors Project management team responsibilities(continued): Visit sites where the application is in use Select a vendor Benchmark the application by comparing actual performance against specific quantifiable criteria Negotiate a contract - Should define performance expectations and penalties for failure to meet expectations Implement the new system Manage postimplementation support

25. Steps in Licensing Ready-Made Software (continued) 25 Choices in Systems Acquisition

26. Steps in Licensing Ready-Made Software (continued) 26 Choices in Systems Acquisition

27. Software as a Service 27 Choices in Systems Acquisition Application service provider (ASP): an organization that offers software through communication lines (such as the Web) No software is installed on a client’s computers Files may be stored on local storage devices Software as a service (SaaS): applications available through the Web ASPs may rent the software they offer

28. Software as a Service (continued) 28 Choices in Systems Acquisition Renting software also has risksRenting software has benefits No need to learn how to maintain the software No large start-up fee Storage hardware is unnecessary Software is usually available sooner A good option for small companies Is considered a “software on demand” approach Lack of control may be an issue, as the client’s data is managed by the vendor Vendor is unlikely to make many customized changes to the software Response time is impacted by traffic levels May be security risks through a public network - Many clients used leased lines instead of the Internet to limit security risks

29. Software as a Service (continued) 29 Choices in Systems Acquisition

30. Caveat Emptor 30 Choices in Systems Acquisition ASP may be disappointing in some areas: Scope of services provided Level of reliability Manager guidelines when selecting an ASP: Check the ASP’s history: get references Check the ASP’s financial strength Ensure you understand the price scheme Get a list of the provider’s infrastructure Craft the service contract carefully

31. Caveat Emptor (continued) 31 Choices in Systems Acquisition Uptime: proportion of time that the ASP’s systems and communications links are up No ASP has 100% uptime 99.9 % uptime = up to 500 minutes/year of downtime 99.999% uptime = less than 5 minutes/year of downtime - Recommended for critical applications Four categories of typical users of ASP services: Rapidly growing companies that rely on software for deployment of their operations Small companies without cash to pay up-front costs for software Medium-sized companies that need expensive software Organizational units at remote locations Storage service provider (SSP): rents storage space for remote storage of client files

32. User Application Development 32 Choices in Systems Acquisition User application development: nonprogrammer users write their own business applications User-developed software is usually: Simple and limited in scope Small applications developed for immediate or brief needs Maintained by end users Organizational units at remote locations

33. User Application Development (continued) 33 Choices in Systems Acquisition

34. Managing User-Developed Applications 34 Choices in Systems Acquisition Challenges of user-developed applications include: Managing the reaction of IT professionals Providing support Compatibility Managing access

35. Managing User-Developed Applications (continued) 35 Choices in Systems Acquisition

36. Managing User-Developed Applications (continued) 36 Choices in Systems Acquisition DisadvantagesAdvantages Shortened lead times Good fit to needs Compliance with culture Efficient utilization of resources Acquisition of skills Freeing up IS staff time Poorly developed applications Islands of information Duplication Security problems Poor or no documentation

37. Summary 37 Several alternatives to having applications developed in-house include outsourcing, licensing ready-made software, using software as a service, and allowing users to develop their own software Outsourcing can mean commissioning development or assigning services to vendor Outsourcing custom-designed applications might afford the organization a good fit of software to need Outsourcing IT services has great benefits, such as reduced cost and allowing the organization to focus on its core competency Outsourcing IT services has potential risks, such as loss of control, loss of experienced employees, and loss of competitive advantage Choices in Systems Acquisition

38. Summary (continued) 38 Licensing software advantages include software being immediately available and low-priced Disadvantage of licensing software is often a loose fit to the organization’s needs Software as a service, from an ASP, is a popular method of obtaining software for a monthly fee User application development advantages include short lead time, good fit, freeing IT staff User application development disadvantages include poor quality, islands of information, security problems, and poor documentation Over half of America’s office workers have rich computer resources Policies must be established to prevent computer abuse by employees Choices in Systems Acquisition