Strategic IT Outsourcing: Challenges and Evolution

1. Lecture 17 Chapter 9 Managing IT Outsourcing

2. Final Exam Outline • 12 – 3pm, Wednesday June 14 • Half short and long answers on theory and principles from course • Half case-study • Open or closed book???

3. Managing IT Outsourcing • Focus on major projects rather than incremental • Larger investments • Higher risk • Greater overall management complexity • 8 to 10 years • Environment of change makes long term difficult to project • Benefits to each party very different • Path uncertainty can lead to conflict • Different from offshoring

4. Key challenges • First year large capital spending from customer • Later profit expected • Incentives to meet contract change with changing environment • Resolution of conflicts difficult and costly • Evolution of technology changes perspective

5. History of outsourcing A few early examples • 1960’s computer services for financial operations • ADP started in 1949 as small punch card payroll company • Grew to $8.5b company in 2005 • Large-volume standard transactions • Accenture software contractor • Purchasing equipment and software steps toward full outsourcing of IT

6. Major early drivers toward outsourcing • Cost-effective access to specialized or occasionally needed computing power/systems development • Avoidance of building in-house skills • Access to special functional capabilities • 1990 Kodak decision to outsource IT legitimized idea • Mainframes • PC maintenance and service • Telecom

7. Outsourcing Today • More and more functions outsourced • Acceptance of strategic alliances • Opportunity to complement strengths and weaknesses • Collaborative innovation • Changes in Technology • Most code development is outsourced • Most IT departments integrate rather than develop • See table 9.1

8. Drivers toward outsourcing today • Costs and Quality • Tighter overhead cost control of fringe benefits • Aggressive use of low-cost labor • Tough standards • Effective builk purchasing and leasing arrangements • Better management of excess hardware capacity • Better control of software licenses • More aggressive management of service and response time • Tighter inventory control • Professional service at multiple levels • Leaner management structure • Higher level of IT staff skills • More realistic lease structures

9. Drivers toward IT Outsourcing today (ctd) • Breakdown in IT performance • Complexity led to problems led to new models • Intense Vendor Pressures • Good sales and marketing teams plus positive results have lead to confidence in outsourcing • Simplified General Management Agenda • IT is messy! • Financial Factors • Lower risk of cost fluctuations • Fixed cost business becomes variable cost business • Opportunity to move group into acquiring company • Corporate Culture • Eliminating Internal Irritation

10. When to outsource When do benefits outweigh risks? • Position on strategic grid

11. When to Outsource • Development Portfolio • More maintenance/highly structured projects means more outsourcing potential • High technology in specific field means more outsourcing potential • Large, low structured projects pose difficult coordination problems for outsourcing • Organizational Learning • Development work difficult to outsource • New areas mean company doesn’t understand what is required let along how to manage outsourcing • Market Position • Large, well established firms are difficult to transition to new systems without outsourcing • Current IT organization • High structure easy to outsource • Contracts easy to write when know what is expected

12. Structuring Alliance • Contract Flexibility • May change radically over time • 6 to 8 months to write contracts • Process of drafting more important than resulting document • Standards and Control • Should be explicitly written into contract • Vendors often able to provide better performance measures • Areas to Outsource • All or nothing? • Coordination costs

13. Structuring Alliance • Cost Savings • Supplier Stability and Quality • 10 year contract is long time in high-tech! • Keeping open to other outsourcing options • Managing conflicts of interest • Management Fit • People working with people • Conversion problems • IT staff move leads to uncertainty

14. Managing Alliance • Early results are key • CIO Function • Partnership/contract management • Architecture planning • Emerging Technologies • Continuous learning • Performance Measurement • Some areas easier than others • Cost savings vs. streamlining/simplification • Mix and Coordination of Tasks • Benefits can be overrun by management of complex project mix with multiple vendors • Customer-Vendor Interface • Final responsibility on both sides • Who communicates what and when? • Reporting expectations • Relationship managers and coordinating groups

15. What about the contractor? • Business model for consulting/contracting companies • Risks