1. Chapter Extension 20 Outsourcing © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke

2. CE20-2 Study Questions What is outsourcing? Why do organizations outsource information IS and IT services? What are popular outsourcing alternatives? What are the risks of outsourcing?

3. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-3 What Is Outsourcing? Process of hiring another organization to perform services – Any business activity in value chain can be outsourced – Vendor can be domestic or international Overseas labor cheaper Able to take advantage of time differences

4. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-4 Why Do Organizations Outsource IS and IT? Management advantages – Easy way to gain expertise Specialists hired rather than training employees – Avoids management problems Outside firms hired to develop and maintain non-core activities – Save management time and attention Reduces management time spent on extraneous activities Both direct and indirect management time saved

5. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-5 Why Do Organizations Outsource IS and IT?, continued Cost reduction – Organizations can obtain part-time services – Gain economies of scale Risk reduction – Caps financial risk – Ensures certain level of quality – Reduce implementation risk

6. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-6 Hewitt Associates, Inc. Provides outsourcing services – Primarily human resources Customers need to be assured on three key factors – Commitment for a significant percentage reduction in current costs – Services need to be effective within client’s particular corporate culture – Provide new expertise and improved service

7. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-7 Is Outsourcing Fool’s Gold? May trade one set of problems for another – Outsource vendor may get first-level employees by hiring organization’s old employees Provide management oversight – Each vendor has own set of forms, procedures, reports Create clone of all vendor’s clients – Critical knowledge is in minds of vendor’s employees – Contractual obligations may prevent termination of contract

8. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-8 What Are Popular Outsourcing Alternatives? Organizations may outsource acquisition and operation of computer hardware – EDS Acquisition of licensed software Outsource entire system – PeopleSoft Application outsourcing – Web storefront Business function outsourcing – Employee travel

9. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-9 What Are the Risks of Outsourcing? Loss of control – Vendor in the driver’s seat Organization must conform to vendor’s methods and procedures Vendor chooses technologies to implement – Potential loss of intellectual capital – Vendors prioritize quality fixes – Vendors’ priorities may change due to adoption of different strategic directions or management changes – Company’s CIO may become superfluous

10. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-10 Additional Risks Benefits outweighed by long-term costs – Fixed costs remove benefits of economies of scale – Vendor may change pricing strategy after it becomes sole source – Organization may pay for vendor’s mismanagement – Vendor may lack management expertise No easy exit – Organization may lack knowledge to bring service back in- house – Vendor may be too tightly integrated May need to invest considerable work, duplication of effort, management time, expense

11. © 2008 Pearson Prentice Hall, Experiencing MIS, David Kroenke CE20-11 Active Review What is outsourcing? Why do organizations outsource information IS and IT services? What are popular outsourcing alternatives? What are the risks of outsourcing?