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L11: IT Outsourcing (2 of 2): The Melbourne School view

L11: IT Outsourcing (2 of 2): The Melbourne School view. References: Cullen and Willcocks, Intelligent IT Outsourcing: Eight Building blocks to Success , Butterworth Heinemann 2003 Kern and Willcocks, The Relationship Advantage , OUP, 2002. Plan for today. Brief revision

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L11: IT Outsourcing (2 of 2): The Melbourne School view

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  1. L11: IT Outsourcing (2 of 2): The Melbourne School view References: Cullen and Willcocks, Intelligent IT Outsourcing: Eight Building blocks to Success, Butterworth Heinemann 2003 Kern and Willcocks, The Relationship Advantage, OUP, 2002 615-352 Managing the IT Function

  2. Plan for today • Brief revision • Key message for today • Cullen’s outsourcing process model • Cullen’s outsourcing configuration • Alborz’s Relationship model • Fitting all the pieces together • Summary 615-352 Managing the IT Function

  3. 615-352 Managing the IT Function L02, L03, and L10 IS/IT Governance Organisation • Demand • Opportunity • Strategy L04, L06 Elicitation and Delivery of Business Require-ments L09 L05 • Market Monitoring • Supplier Relations • Contracts • Technology • Integration • Architecture L11 Ensuring Technical Ability Managing External Supply Managing Internal Service Delivery L07 • Human Resource and Skills Management • Project and Change Management • Software Development and Testing • Building and Maintaining the IT Infrastructure • Security and Business-Continuity Planning L08 615-240&5 615-237? 615-360

  4. What is IT Outsourcing? Based on Loh and Venkatraman (1992: 9) we may define IT outsourcing as: “A significant contribution by external vendors to the management and provision of physical and/or human resources associated with the organization’s ICT function and services. This does not include use of contract ICT staff nor the cost of purchasing packaged software.” • Loh, L. and Venkatraman, N (1992). Determinants of information technology outsourcing: A cross-sectional analysis, Journal of Management Information Systems, 9, 1, pp. 7-25. • ICT = Information and Communications Technology 615-352 Managing the IT Function

  5. Domberger (1998: 51) Drivers of Benefits from Contracting 615-352 Managing the IT Function

  6. Conclusions (L09): Does the evidence support the keys to success with ITO? • Selective sourcing is better • Only outsource non-core activities • Relationship management • IT function should retain nine core competencies    ? 615-352 Managing the IT Function

  7. Summary (Lecture 9) • IT outsourcing is a widely-used management technique. • To be successful, the vendor needs to be able to make a profit. This means the vendor must be able to provide similar quality (or better) services for approximately 15% lower cost. (This should be easy for “offshore” outsourcing, where labour costs are much lower.) • Benefit drivers are specialization, market discipline, flexibility and lower-cost resources. • Keys to success with ITO are not clear. Claimed keys include (a) selective sourcing, (b) outsourcing non-core services, (c) good relationships, and (d) retaining nine core competencies. But there is little evidence to support (a) and (b). 615-352 Managing the IT Function

  8. 2. Key message for today • Outsourcing is concerned with contracts between organizations to purchase and supply millions of dollars worth of services. Both organizations must be able to achieve their goals if the deal is to work. Here, the term contract is used in its economic, not legal, sense. It includes both the written documents AND all unwritten (tacit) understandings and agreements between the parties. The contractual relationship between client and vendor is one of principal and agent. From the principal’s perspective, one contract is more efficient than another if it motivates the agent to act in a way that is more closely aligned with the principal’s interests. • Some types of contract appear to be more efficient than others for principals with different goals. A deep understanding of the potential consequences of different types of contract is required if the powerful forces of organizational self-interest are to be balanced effectively. • Good relationships between managers in both client and vendor organizations result in more successful deals because contracts are inevitably incomplete. Organizations with good relationships are more likely to resolve problems in ways that are agreeable to both parties.

  9. 3. Cullen’s Process Model Cullen’s process model provide a process explanation for how to succeed with outsourcing (not just IT Outsourcing). Reference: Cullen and Willcocks, Intelligent IT Outsourcing: Eight Building blocks to Success, Butterworth Heinemann 2003 615-352 Managing the IT Function

  10. Automobile Insurance Claims, 2003 The Age, Sunday 22 Aug 2004 Outsourcing “accidents” occur much more frequently. Imagine these were “accidents” per day, e.g., ten per hour at Springvale and Maroondah Highway! They would have people employed fulltime sweeping up the broken glass. 615-352 Managing the IT Function

  11. Cullen’s Dataset 1 • Over 100 consulting engagements over the last 10-15 years. 615-352 Managing the IT Function

  12. Cullen’s Dataset 1 ….continued 615-352 Managing the IT Function

  13. Outsourcing Process Model – 54 Key Activities to avoid disasters on the Outsourcing Process journey Sample size = 100. Only 22 of the 54 activities shown.

  14. Cullen’s Proposition: If you do all 54 activities well, you should be able to outsource anything successfully! 615-352 Managing the IT Function

  15. Cullen’s Dataset 2: All IT outsourcing cases • Seven client organizations from five different industries: • communications and transport (1), • health (1), • manufacturing (2), • mining (1), • large state agencies (2 orgs., 3 cases) • Organization size ranged from • $2B to $40B in p.a. revenue • 7,800 to 51,000 employees 615-352 Managing the IT Function

  16. Evidence of Importance of the 54 Activities Data from 7 major Australian client organizations. “How important do you think this activity is?” 1=not at all, 5= very. 615-352 Managing the IT Function

  17. Correlation between “Conduct of life cycle” and “ITO Success” (not signif.) (r=0.4, n=8, p=0.29) 615-352 Managing the IT Function

  18. Outsourcing Process Model – 54 Key Activities to avoid disasters on the ITO-process journey BB1 BB2 BB3 BB4 Sample size = 100. Only 22 of the 54 activities shown.

  19. Cullen’s Outsourcing-Life-Cycle Process Model • Go through entire lifecycle & identify: • issues • strategies • principles • Select path • activities • sequence • deliverables • handovers • Assess expertise • match to capabilities • get help Building Block 1 Acumen Building Block 9 Next Generation Building Block 2 Target Building Block 8 Manage Building Block 3 Strategies Building Block 7 Transition Building Block 4 Design Building Block 6 Negotiation Building Block 5 Selection 615-352 Managing the IT Function

  20. Conclusion: Cullen’s Process Model Cullen claims that if you do all 54 activities well, you should be able to outsource anything (ITO, BPO, OO) successfully! Based on the tests with Dataset 2, she has: • strong evidence that the 54 activities are important. • less strong evidence that doing them well is results in success. 615-352 Managing the IT Function

  21. But we are left with many questions • Although the 54 activities are important, it appears that firms can skip some (run red lights?) and still succeed.  How do they sense which ones can be safely skipped/rushed? • Second-generation outsourcers (the people, not the firms) have fewer problems.  Perhaps they have learnt which key activities need more attention? • Can actions taken in some activities compensate for poorer performance in others? 615-352 Managing the IT Function

  22. 4. Cullen’s ITO Configuration Each firm’s outsourcing arrangement is different. Maybe the advice for managing one type of configuration is not appropriate for another type? ITO deal 1 ITO deal 1 a. Scope ITO deal 2 ITO deal 2 • • What is outsourced? What is outsourced? ITO deal 3 ITO deal 3 • • Which business units? Which business units? • • Geographic location? Geographic location? 4. Pricing framework d. Pricing framework ITO deal ‘n’ ITO deal ‘n’ 5. Contract Duration e. Contract Duration b. Supplier grouping 6. Resource Ownership f. Resource Ownership c. Financial scale g. Commercial Relationship 7. Commercial Relationship 615-352 Managing the IT Function

  23. Link between Cullen’s Outsourcing Process Model & her Configuration Model • Go through entire lifecycle & identify: • issues • strategies • principles • Select path • activities • sequence • deliverables • handovers • Assess expertise • match to capabilities • get help Building Block 1 Acumen Building Block 9 Next Generation Building Block 2 Target Configuration Building Block 8 Manage Building Block 3 Strategies Building Block 7 Transition Building Block 4 Design Building Block 6 Negotiation Building Block 5 Selection 615-352 Managing the IT Function

  24. Evidence from one client that configuration matters

  25. a. Scope options 615-352 Managing the IT Function

  26. b. Supplier-Grouping options 615-352 Managing the IT Function

  27. Supplier Groupings, Australia, 2000 Our ITO Survey 1999-2000, n = 71 respondents • Different firms have chosen different ITO configuration options. We need to understand which ones are better in which circumstances, and why. 615-352 Managing the IT Function

  28. Example explanation of advantages and disadvantages of different Supplier-Grouping Options

  29. d. Pricing Options in IT Outsourcing 615-352 Managing the IT Function

  30. Advantages and disadvantages of some different pricing options

  31. Conclusion: Configuration (Similar lists of Options, Advantages and disadvantages, and Management issues are available for each of the other four configuration attributes.) Since the management issues for different outsourcing configurations can be very different, perhaps we will be able to provide better advice on how to manage outsourcing if we stop treating outsourcing as one type of thing, and try to offer different advice for managing different types of outsourcing configurations. 615-352 Managing the IT Function

  32. 5. Alborz’s Relationship Model Factors affecting client-vendor relationships • Alborz argues that maintaining a good relationship between client and vendor is a key ingredient for ITO success. 615-352 Managing the IT Function

  33. Example relationships in one of Alborz’s case studies Client 3 Supplier 3 CEO CEO Talks to Talks to Sector Service Exec. (BU GM) CIO Talks to Project Executive (Account Mgr.) IT Mgr. Talks to Contract Mgr. Talks to Person Person Service Delivery Mgr. Internet Team Network Team App. Team Desktop Team Helpdesk Team Talks to Mainframe Team Other Team Contract Person 615-352 Managing the IT Function

  34. Lecture 9, Rule 3: Good relationships is a key success factor. Alborz: Quality of Relationship • Communication • Commitment to building and sustaining the relationship • Cooperative • Trust • Listens • Participates in planning and goal setting • Conflict resolution • Personal bonds • Shares information including critical and strategic • Is flexible to changes in other party’s needs Success: “Today, from our point of view, the IT outsourcing arrangement is successful.” 615-352 Managing the IT Function

  35. Alborz (2004): Quality of Relationship vs Perceived ITO Success (Is this general? Data from only 4 client-supplier pairs) 615-352 Managing the IT Function

  36. Alborz’s Relationship Model: factors affecting “the relationship” 615-352 Managing the IT Function

  37. 6. How I fit the ITO pieces together • Outsourcing is concerned with contracts between organizations to purchase and supply millions of dollars worth of services. Both organizations must be able to achieve their goals if the deal is to work. • Here, the term contract is used in its economic, not legal, sense. It includes both the written documents AND all unwritten (tacit) understandings and agreements between the parties. • The contractual relationship between client and vendor is one of principal and agent. From the principal’s perspective, one contract is more efficient than another if it motivates the agent to act in a way that is more closely aligned with the principal’s interests. 615-352 Managing the IT Function

  38. How I fit the pieces together (slide 2 of 4) • The client firm’s objective when outsourcing is to select the most efficient contract, or at least, a contract near what might be called the efficient-contracting frontier. • Sara's configurations are examples of different types of contractual arrangements. • Apparently, some configurations are more efficient than others for principals with different goals. • A deep understanding of the potential consequences of different types of contract is therefore required if the powerful forces of organizational self-interest are to be balanced effectively. 615-352 Managing the IT Function

  39. How I fit the pieces together (slide 2 of 4) • Sara's process model appears to be helpful for discovering/ revealing information necessary to construct efficient contracts. • In other words, if Sara’s model is followed, rational managers will be able to design more efficient contracts (choose more appropriate configurations) because they will understand better the implications of the myriad choices available to them in contracting for outsourced service provision. • If an outsourcing manager is aware of the consequences of a certain aspect of a contract, the corresponding step in Sara's process does not have to be done. Thus, second-generation outsourcers can skip some steps. 615-352 Managing the IT Function

  40. How I fit the pieces together (slide 4 of 4) • Good relationships between managers in both client and vendor organizations result in more successful deals because contracts are inevitably incomplete. • Post-contract negotiations between people with good relationships are more likely to resolve problems in ways that are agreeable to both parties than in contractual arrangements where relationships are poor. 615-352 Managing the IT Function

  41. 7. Summary L09 and L11 • The received wisdom on IT outsourcing seems to require more detailed investigation. • Some general principles seem to apply to all outsourcing, e.g., Domberger (1998) provides some general insights into four underlying sources of economic benefit (for both vendor and client) from “contracting out”. • Configuration: Different contracts (broadly defined) are needed for different goals. Many outsourcing deals are so different that guidelines about effective management that may be valid for one organization may not apply to another. 615-352 Managing the IT Function

  42. Summary L09 and L11 …continued • Following Sara’s process model will probably enable client organizations to identify more clearly what they hope to achieve from outsourcing, and to configure deals that are more likely to have desirable outcomes. Sara’s process is important because it reveals information that allows rational managers to make appropriate configuration decisions (and so avoid less efficient contracts). • Positive relationships seem to be clearly related (probably causally) to (IT) outsourcing success. They are necessary because outsourcing contracts are incomplete. • Selective outsourcing may be more effective than total outsourcing because it is easier to write more efficient contracts for less complex bundles of services. 615-352 Managing the IT Function

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