Strategic Framework for Successful Outsourcing in IT Operations

1. Week 8Monday, October 17 Outsourcing Managing Operations Systems Development IT Project Management

2. Drivers of Outsourcing • Breakdown in IT performance • Need to retool lacking technology • Intense supplier pressures • Sales of surplus supplier capacity • Simplified general management agenda • Outsource non-core competence operations • Financial factors • Reduce sporadic capital investments in IT • Downsizing IT operating costs • Greater organizational awareness of IT’s costs • More appealing for takeovers

3. Drivers of Outsourcing • Corporate culture • Resistance to change within the organization • Labor unions • Eliminating an internal irritant • Conflicts between users and IT staff • Other factors • Quick access to current technology and skills • Need to quickly response to changes in the market

4. Framework for Outsourcing • Position on the strategic grid Product differentiation High Strategic Strategic IT plan, initiatives Depends Yes Factory Operational IT Impact of Existing IT applications Yes Depends Support Basic elements Turnaround Gradual adoption Low Low High Impact of Future IT applications

5. Strategic Grid: Outsourcing Strategic Strategic IT plan, initiatives Factory Operational IT High • Economies of scale • Higher-quality service and backup • Management focus facilitated • Correct internal problem • Tap cash source • Cost flexibility • Divestiture Impact of Existing IT applications Support Basic elements Turnaround Gradual adoption • Access to IT professionals • Focus on core competencies • Access to current IT • Reduce risk in IT investments • Internal IT shortfalls • Internal IT development skill shortfalls Low Low Impact of Future IT applications High

6. Framework for Outsourcing • Position on strategic grid (cont.) • Outsource operational activities • More operationally dependent organizations • Need for greater analysis when large IT budgets involved • Development portfolio • Maintenance vs. development projects • High structured vs. low structured development work

7. Framework for Outsourcing • Operational learning • Organizational assimilation of technology • Organization’s IT architecture and infrastructure • Currency of architecture • Current technology in the organization • Segregated operations more easily outsourced

8. Structuring the Alliance between Outsourcer and “Outsourcee” (Customer) • Factors • Contract flexibility • Standards and control • Areas to outsource • Cost savings • Supplier stability and quality • Management fit • Conversion problems Alliance

9. Structuring the Alliance between Outsourcer and “Outsourcee” (Customer) • Contract flexibility • Accommodating changes in the environment • Information needs • Competitive needs • Advances in IT • Standards and control • Risk (i.e., lost of control, disruptions) in operations • Risk in introducing innovations to the organization • Risk in revealing internal secrets

10. Structuring the Alliance between Outsourcer and “Outsourcee” (Customer) • Areas to outsource • Determine • Are operations segregated or tightly embedded? • Can specialized competencies be acquired in the long run? • Are operations core to the organization? • Cost savings • Objective evaluation of costs and savings

11. Structuring the Alliance between Outsourcer and “Outsourcee” (Customer) • Supplier Stability and Quality • Financial stability • Difficult to insource • Difficult to change outsourcers • Incompatibility between the organization and outsourcer • Technology • Organization culture • Between technology and organization’s strategy

12. Structuring the Alliance between Outsourcer and “Outsourcee” (Customer) • Management fit • Compatibility between management styles and cultures • Conversion problems • Mergers and acquisitions • Incompatibilities

13. Managing the Alliance • Critical areas: • CIO Function • Management (balance between organization and outsourcer) • Planning (vision) • Awareness of emerging technologies • Continuous adaptation (evolution) • Performance measurements • Essential standards, measurements and interpretations

14. Managing the Alliance • Mix and coordination of Tasks • Development versus maintenance (portfolios) • Associated risks inherent to each • Customer-outsourcer interface • Delegation of authority, not responsibility

15. Information SecurityProtecting the Information Resource • Five security pillars • Authentication – verifying the authenticity of the user • Something you know, have or are (i.e., physical attribute) • Identification – identifying users to grant them appropriate access • Privacy – protecting information from being seen • Integrity – keeping information in its original form • Nonrepudiation – preventing parties from denying actions they have taken Encryption

16. Management and Technical Countermeasures Management countermeasures • Evaluate return on their security expenditures • Conduct security audits • Do not outsource cybersecurity • Security awareness training Technical countermeasures • Firewalls • Encryption • Virtual private networks (VPN) Expense Likelihood Balancing between expense and likelihood of a threat

17. Planning for Business Continuity • Recognize threats • Contingency plans if a threat is realized • Alternate workspaces for people to resume work • Backup IT sites • Up-to-date evacuation plans • Backed up computers and servers • Helping people cope with disaster

18. Internal and External Resources Internal • Multiple data centers • Distributed processing • Backup communications facilities • LANs External • Integrated disaster recovery services • Specialized disaster recovery services • Online and off-line data storage

19. Systems Development

20. Systems Development • The activity of creating or modifying existing business systems • Managing the implementation of IT • Size of the implementation requires a sound methodology • Understanding the user’s information needs and the processes he/she must follow to complete his/her tasks

21. Systems Development Life Cycle (SDLC) Systems Requirements Software Requirements Preliminary Design Detailed Design Code and Debugging Test and Preoperation Operation and Maintenance Documentation and deliverables Sunset period Each phase is managed according to its scope and has deliverables

22. Systems Development Life CycleAnother Example • Definition Phase • Feasibility analysis – Economic, operational and technical • Requirements definition – The “right system” • Logical design (the whats) • Construction Phase • System design –Physical design (the hows) • System building • System testing • Implementation • Installation • Operations • Maintenance Building the “system right”

23. Documentation and Managing User Changes

24. Systems Development Life Cycle Cost of make a change ($) PreliminaryDesign Coding and Debugging Testing and preoperation System Requirements Software Requirements DetailedDesign Danger of off-shoring Time Other variations exist

25. Prototyping and Discovering User Specs Refine Prototype Complete Task Investigate and analyze problem Iterations Develop Prototype Operationalize Prototype

26. Prototypes • Operational (evolutionary) – prototype eventually becomes the system or application • Non-operational (throw-away) – prototype is used to determine specifications of the actual system or application • Discarded after user’s specifications are known Often used for novel systems and applications or when technology or specifications are known Actually number of iterations are unknown, therefore managers must carefully monitor progress.

27. RAD (Rapid Application Development) • A technique that employs tools, techniques and methodologies designed to speed application development • Reduces paper-based documentation • Automates program source code generation • Facilitates user participation in design and development activities • Best suited for decision support and management information systems

28. JAD (Joint Application Development) • Process for daa collection and requirements analysis involving group meetings • Team approach: Facilitator, developer, users, observers, managers, experts • Assumes… • People who actually do a job have the best understanding of that job • People who are trained in information technology have the best understanding of the possibilities of that technology

29. JAD (Joint Application Development) Cont. • Assumes… • Information systems and business processes rarely exist in isolation • People working in these related areas have valuable insight on the role of a system within a larger community. • The best information systems are designed when all of these groups work together on a project as equal partners.

30. Approaches to Implementation • Parallel • Pilot • Phase • Cutover Old New Old New Old New Old New

31. Sunset Period Performance Requirements Organizational Needs Widening gap System Performance Upgrades Time

32. Systems Integration • Database management systems (DBMS) • Enterprise resource planning (ERP) • Integration of processes and activities • Middleware Not mutually exclusive

33. Project Management • Application of knowledge, skills, tools and techniques to project activities to meet project requirements • Processes involve: initiating, planning, executing, controlling and closing • Knowledge areas involve: integration (coordination), scope (project boundary), time, cost, quality, human resources, communication, risk, and procurement

34. Project Manager • Setting up the project – establish the scope, time frame and deliverables • Managing the schedule – coordinating activities and resources, and schedule of deliverables • Managing the finances – costs, cash flows, benefits • Managing the benefits – profitability, cost reductions, changes to working capital, and adherence to regulatory/legal reform • Managing the risks, opportunities and issues – identify and weigh • Soliciting independent reviews

35. Change Management • Helping people to accept change • Overcoming resistance • Accept and adopt changes

36. Lewin-Schein Model for Change Getting people to change their “behavior.” Move Unfreeze Freeze Prepare for change Implement change Stop change • Assurance that change comes with predefined goals • Stopping change with goals are achieved • Convincing people to accept change • Selling the benefits of change • Managing change

37. Lewin’s Theory of Change Change Restraining Forces Driving Forces Driving forces must overcome restraining forces

38. Fred Davis’Perceived Usefulness, Perceived Ease of Use, and Perceived Use • Perceived Ease of Use • Self-efficacy beliefs: Perceived exertion level to implement behavioral change • Perceived Usefulness • Outcome beliefs: Perceived success resulting from behavioral change Perceived Use

39. Fred Davis’Perceived Usefulness, Perceived Ease of Use, and Perceived Use Perceived Ease of Use Perceived Use Perceived Usefulness Perceived use is the best predictor of actual future use If a person believes the amount of expended energy to adapt to a new system will place him/her in a better position as a result of its use, he/she is more likely to commit him/herself to using it.

40. Risk Management • Types of risk • Technical – failure due to technology • Business – failure do due organizational issues • Assessment of risks • Project’s leadership – commitment, experience, abilities, formal and informal management skills • Employee’s perspective – acceptance to change • Scope and urgency – extent of change (breadth and depth), need to implement change

41. Risk Management Likelihood of Business Change Employees’ Perspective Project Scope and Urgency Recommended Project Method Leadership High Big Bang + Less Risky Improvisation - + Guided Evolution + + Top-down Coordination - - Championed Dealmaker + + More Risky - Championed Improvision - Champion Guided Evolution - + Migrate or Kill the Project - Low

42. Other Aspects of IT Project ManagementBased on a Survey of 10 Executives in Sacramento • Develop and compare feasibility, complexity, scalability and cost of possible solutions • Project portfolio – investing in the right projects • Aligning projects and initiatives to strategic objectives • Risk management – risk considerations, factors and plans • Contingency plans • Managing multiple vendors and workflow • Regulatory and compliance issues • Leveling resources over projects – human, financial, technical

43. Other Aspects of IT Project ManagementBased on a Survey of 10 Executives in Sacramento • Project planning, execution and scheduling – Prioritizing, defining performance measures, tracking processes to ensure performance, schedule resources, project monitoring, change and service controls, quality assurance and testing, identify key drivers • Project leadership – Assessing change and change management, communication and organizational skills • Adoption issues • Identify and understanding stakeholders

44. Good IT Project Management • Deliver on time • Come in or under budget • Meet the original objectives • Establish ground rules • Foster discipline, planning, documentation and management • Obtain and document the “final” user requirements • Obtain tenders from all appropriate potential vendors • Include suppliers in decision making • Convert existing data • Follow through after implementation Successful project characteristics

45. Value of a System or Application • Benefits the business will receive from the IT • IT by itself provides no benefits or advantages • Measuring benefits • Distinguish between the different roles of the systems – support role, integral to strategy, or product/service offering • Measure what is important to management • Assess investments across organizational levels

46. Measuring Benefits: Role of System • Measuring organizational performance – ability to support the organization and its users with their tasks • Measuring business value – help meeting organizational and business goals • Measuring a product or service – profitability of product or service

47. Measuring Benefits: Importance to Management • IT is usually not viewed as a revenue generator • Investment to improve the business • Corporate effectiveness • Less tangible benefits includes • Customer relations (satisfaction) • Employee morale • Time to complete an assignment

48. Measuring Benefits: Across the Organization Sources of Value • Potential benefits differ at various organizational levels • Dimensions • Economic performance payoffs (market measures of performance) • Organizational processes impact (measures of process change) • Technology impacts (impacts on key functionality) Individual Corporate Division Assess IT’s impact in each cell

49. Value of IT Investments to Investors • Brynjolfsson, Hitt and Yang study • Every $1 of installed computer capital yielded up to $17 in stock market value, and no less than $5 • Led to organizational changes that created $16 worth of “intangible assets” • Past IT investments correlated with higher current market value

50. Value of IT Investments to Investors • Brynjolfsson and Hitt study • Organizational factors correlated to and complemented IT investments • Use of teams and related incentives • Individual decision-making authority • Investments in skills and education • Team-based initiatives • Businesses making the highest IT investments not only invest in IS but also invest in making organizational changes to complement the new IS