1. IT Outsourcing Until 1990, the major drivers for outsourcing were:
Cost-effective access to specialized or occasionally needed computing power or systems development skills
Avoidance of building in-house IT skills and skill sets, primarily an issue for small and very low-technology organizations
Access to special functional capabilities. Outsourcing during this period was important but, in retrospect, largely peripheral to the main IT activities that took place in mid-sized and large organizations.

2. IT Outsourcing IT Outsourcing Evolution EDS CSC ADP IBM Others
Regulated, then to non regulated industries
CSC
First to governments then to industries GD
ADP
Payroll, data center, etc
IBM
The “big bang” internationalization, etc.
Others
(Gap Gemini, Perot Systems, Digital Equipment Corporation, Andersen Consulting, AT&T Solutions etc. ?)

3. IT Outsourcing Billions of $ Recent IT Outsourcing Agreements
Two factors have affected the growth of IT outsourcing
Recognition of strategic alliances
Changes in the technological environment

4. IT Outsourcing Acceptance of Strategic Alliances
Finding a strong organization partner to complement an area of weakness gives an organization an island of stability in a turbulent environment.
It is difficult to fight on all simultaneously on all fronts
Alliances allow a company to simplify its management agenda safely.
Alliance allow a firm to leverage a key part of the value chain by bringing in a strong partner that complements its skills.
Both firms should legitimately be benefiting

5. IT Outsourcing IT Changing Environment
Today, firms are not focusing IT only on internal processing systems: but, in a network fashion, - integrating internal system with those of customers, suppliers, - to be more efficient in globally market place.
This integration places extraordinary pressures on firms trying to keep the old system services running while developing the interconnections and services demanded by the new environment.
On the one hand, firm are looking for low-cost maintenance of the old systems to ensure they operate reliably, while, on the other hand, gaining access to new skills to permit their transformation to new model.

6. IT Outsourcing Contracting ?
“Contracting is the purchasing of goods or services when the buyer owns the process.” Bendor-Samuel
If the buyer owns a process but purchases time, products or services to facilitate that process, then the buyer is in a contractual relationship.
Outsourcing?
“Outsourcing takes place when an organization transfer the ownership of a business process to a supplier” Bendor-Samuel
. The key is the concept of transfer of control or transfer of ownership.
This is why IT outsourcing is very challenging and often a painful process.
“As the handling over of assets, resources, activities and/or people to third party management to achieve agreed performance outcomes”
Willcocks and Lacity (2006)

7. IT Outsourcing What drives Outsourcing Back Office Transformation
The goal of back office is radically:
Reduce cost
Improve service
Increase revenue
Practice to achieving it:
Centralization, standardization, re-orientation of staff, technology enablement, and process redesign

8. IT Outsourcing What drives Outsourcing Back Office Transformation
Concern for cost and quality
Can we get our existing services for a reduced price at acceptable quality standard? (cost reduction)
Can we get new systems developed faster?
Breakdown in IT performance
Access to capabilities not otherwise available
Intense Supplier pressure
To free internal resources for other purposes
Simplified GM Agenda
Concentrating on core competence?
Improved company focus
Financial factors (make capital available)
E.g. General Dynamics received $200m for transferring its hardware/software to EDS.
Cash infusion

9. IT Outsourcing What drives Outsourcing To reduce cycle time
Some kind of process improvement (BPR/TQM)
Corporate culture
Turn fixed cost into variable cost
Eliminating Internal Irritant
Engage an outside agent in the change process.

10. IT Outsourcing Disadvantages of IT Outsourcing Can Increase Costs
Locks Company to a Provider
Switching Costs in outsourcing vs. contracting
Terminating charges
Resume responsibility for process itself
Rebuild infrastructure
Recapture the process expertise
Removes Knowledge of Processes from the Company
Time and materials, and other capital investments
Decreases Ability to Use Information Technology Strategically
Losing control over process
Risk involved in establishing IT process group from scratch

11. IT Outsourcing Why Outsourcing Alliances are so Difficult
Length of relationship
Long term contracts (8-10 years.) in fast moving technical and business environment. A deal that make sense in the beginning might make less sense three years after and requires adjustments to functions
Resulting into negotiation and misunderstanding
Outsourcing is relatively easy but in-sourcing again is very difficult
Initial process ownership investment, ?, etc

12. IT Outsourcing Difficulties with IT Outsourcing Measuring results
In the first year the outputs closely resemble those anticipated in the contract. In subsequent year, however, the contract payment stream becomes less and less tied to the initial set of planned outputs as the world changes
Supplier power
The longer the outsourcing-relationship continued, the more the power shifts to the supplier, why?

13. IT Outsourcing The Nature of IT Outsourcing Relationship Alliance
Partnership
Relationship (strategic)
Marriage
Integration
“The term outsourcing is inappropriate. This is really more of an integration of two separate businesses”
“We wanted to take the best parts of each culture and put them together. The same goes for structure, strategy and people.” Jagdish Dalal Head of Xerox’s Global outsourcing in 1994.
“Integration could only be achived if they developed a high degree of cooperation” Mike Reed Xerox outsourcing team

14. IT Outsourcing
When to Outsource IT and What could be Outsourced?

15. IT Outsourcing When do the benefit of outsourcing outweigh the risks?
1. Position in the strategic grid
2. Development portfolio
3. Organizational learning
4. A firm’s position in the market
5. Current IT organization
6. Make, Buy, Outsource
7. Sourcing Strategies
8. Resource dependence theory

16. Outsourcing High Factory-uninterrupted service-oriented
information resources management
Outsourcing Presumption: Yes,
unless company is huge
and well managed
Reasons to consider outsourcing
Higher -quality services and backup
Management focus facilitated
Strategic information resources
management
Outsourcing Presumption: No.
Reasons to consider outsourcing
Rescue an out-of-control internal IT unit
Tap source of cash
Facilitate cost flexibility
Facilitate management of divestiture
Current Dependence on Information
Support -oriented information
resources management
Outsourcing Presumption: Yes.
Reasons to consider outsourcing
Access to consider IT professionalism
Access to current IT technologies
Risk of inappropriate IT architecture
reduced
Turnaround information resources
management
Outsourcing Presumption: No.
Reasons to consider outsourcing
Internal IT unit not capable in required
technologies
project management skill
Low
Importance of Sustained, Innovative Information Resources Development

17. IT Outsourcing Development Portfolio
The higher the percentage of the systems development portfolio in maintenance or high-structured projects, the more the portfolio is a candidate for outsourcing
Outsourcers with access to high-quality, cheap labor pools (e.g. in Russia, India or Ireland) and good project management skills can consistently outperform, on both cost and quality, a local unit that is caught in a “high-cost” geographic area and lacks the contacts, skills and confidence to manage extended relationship
The growth of global fiber-optic networks has made all conventional thinking on where work should be done obsolete
Research have pointed out that more than 150,000 programmers are working in India on software development for US and European countries
Large, low-structured projects pose very difficult coordination problems for outsourcing.

18. IT Outsourcing Organizational Learning
“Many times people will change just the structure and the reporting relationships. But if you want to change a company, you’d better change more than that. There’s the formal structure and then there’s the way the company really works. You have to change the way it really works” Allaire Xerox CEO 1992
The more experience the firm has had in implementing redesign the easier the outsourcing will be
Process reengineering seeks to install very different procedures for handling transactions and doing the firms work. Responsibility for such development work (low structure by its very nature) is the hardest to outsource.
A significant component of many firms’ applications development portfolios comprises projects related to business process reengineering or organizational transformation.

19. IT Outsourcing
A Firm’s Position in the market
The further a company is from the network era in its internal use of IT, the more useful outsourcing can be to close the gap
Firms still in the DP era and early micro era do not have the IT leadership, staff skills, or architecture to move ahead
The outsourcer, by contrast, cannot just keep its old systems running, but must drive forward with contemporary practices and technology.

20. IT Outsourcing
Current IT Organization
The more IT development and operations are already segregated, in the organization and in accounting, the easier it is to negotiate an enduring outsourcing contract.
A stand-alone differentiated IT unit has already developed the integrating organizational and control mechanisms that are the foundation for an outsourcing contract.
Separate functions and their ways of integrating with the rest of the organization already exist.

21. Make, Buy or Outsource Rands (1993)
Company’s Skills Related to Best External Source
Low
Equal
High
Low
Make or Buy/Out.
Buy/Outsource
Tend to make
Strategic Importance
Strategic Alliances
Tend to make
Make
High

22. Sourcing Strategies High Low Low High Need for tailor made support
In-house solution
Joint Venture/Enterprise Partnership/ or strategic alliance/
Selective outsourcing
Need for tailor made support
True spin-Off or outsourcing/Net sourcing/ASP
Low
Low
Market Potential to provide the support
High

23. Resource Dependence Theory
Strategic Choice Framework for the IT Professional Resource
In-house solution
Cost sharing or strategic alliance
High
Degree of Resource Dependence
True spin-Off or outsourcing
Outsource
Low
Low
High
Degree of volatility

24. Outsourcing Learning Curve
Phase 3
Institutionalization
Focus on value-added
transformation
Size of Market Customer Learning
Phase 3
Market matures
Richer practices emerges
Focus on quality
Phase 2
Early adopters
Best and worst practices emerges
Focus on cost
Phase 1
Hype and fear
Time

25. Performing / Strategic Focus (Not just focusing on cost)
Stages 5 4 3 2 1
Performing / Strategic Focus (Not just focusing on cost)
Norming / Proactive Cost Focus (Beginning to form norms and actively focusing and proactively using outsourcing for cost saving including offshore. Outsourcing 20-40% of IT activities)
Storming / Strategic decision point (Organization leaders share conflicting ideas about outsourcing and pursuing different strategy to provide IT services)
Forming / experimenting stage (outsourcing between 10-20% of IT activities)
Insourcing / Bystander
(outsourcing between 1-5% of IT. Mostly purchasing of IT functions).
Time