Download Managing IT Outsourcing

Lecture 17
Chapter 9
Managing IT Outsourcing
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???
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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
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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
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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
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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
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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 (select vendors,
code etc.) rather than develop
– See table 9.1
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Drivers toward outsourcing today
• Costs and Quality
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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
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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 (capital) cost business becomes variable cost business
– Opportunity to move group into acquiring company
• Corporate Culture
– IT team given clout to make major decisions
• Eliminating Internal Irritation
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When to outsource
When do benefits outweigh risks?
1. Position on
strategic grid
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When to Outsource
2.
Development Portfolio
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3.
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
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Development work difficult to outsource
New areas mean company doesn’t understand what is required let
alone how to manage outsourcing
Market Position
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Large, well established firms are difficult to transition to new systems
without outsourcing
Current IT organization
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High structure easy to outsource
Contracts easy to write when know what is expected
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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
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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
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Managing Alliance
• Early results are key
• CIO Function
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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
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Final responsibility on both sides
Who communicates what and when?
Reporting expectations
Relationship managers and coordinating groups
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What about the contractor?
• Business model for consulting/contracting
companies
• Risks
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