1. Chapter 8 Slide 1 Chapter 8 Managing IT Outsourcing

2. Chapter 8 Slide 2 Overview  Companies outsource for a variety of reasons  Cost and quality  Lagging IT performance  Access to special technical application skills  Strategic alliances are common and accepted  Like marriages, outsourcing deals are easier to enter into than to sustain or dissolve  Long-term management of the alliance is a challenge

3. Chapter 8 Slide 3 Difficulties  Why are outsourcing alliances difficult (who could have thought that they would be ease?)  Many are designed for the long-term in a fast changing world  8-10 year contracts  Chip performance improves by 20-30% per year  Many upper level IT department executives lack the exposure to decipher technology trends  Timing of benefits  Initial benefits (first year) accrue to the customer  Outsourcing firm makes it up on the back end

4. Chapter 8 Slide 4  There are few outsourcing firms that can handle really big jobs  Low competition  These firms have more experience setting up deals than their customers (the car salesman problem)  Insourcing can be a NIGHTMARE scenario  Shipping employees out of the area  Loyalty lost  The strategic relevance of IT to a firm can shift Difficulties

5. Chapter 8 Slide 5  Popular since the 1960s  Computer service bureaus ran financial and operations support programs (general ledger, payroll, inventory control)  Mainframes were expensive  Expertise in programming was rare and costly  Popular with small and mid-sized firms  ADP was one of the first  started with punch-card payrolls in 1949  Now does $4 billion Outsourcing History

6. Chapter 8 Slide 6 Outsourcing History  Kodak outsourcing in 1990  Turning point in the industry  The CIO had been a general manager, not technicalCIO  Outsourced Mainframes, Telecom, and PCs  Businessland went under, damaging the dealwent under  Kodak had not internal IT personnel to forewarn them of the impending digital photo explosion  IT outsourcing is reminiscent of Accounting firms moving outside the organization

7. Chapter 8 Slide 7  Acceptance of Strategic Alliances  Finding a strong partner to complement an area of weakness  Must be a WIN-WIN situation  Changing IT Environment  Pressure to keep legacy systems running while optimizing new technology and techniques  Comfort with packaged software (e.g. PCs)  Operating systems, email, browsers, office automation, compilers  Y2K 2 Factors Affecting Outsourcing Growth

8. Chapter 8 Slide 8  General Manager concerns about Cost and Quality  IT performance breakdown  (Intense) Supplier pressure (i.e., lobbying)  Simplified General Management Agenda  Firm does not see IT as a core competency  Intense environmental pressure  See no future IT upside  Financial Factors  Quick cash infusion  Get a large cost off the books Factors Driving IT Outsourcing

9. Chapter 8 Slide 9 Factors Driving IT Outsourcing  Financial Factors (contd.)  Lowers personnel costs (IT people are very expensive vis-à-vis the rest of the firm)  Costs are left for a successor in some firms  Corporate Culture  Eliminating an Internal irritant  Solve (?) end-user friction  High cost of IT staff  Career path concerns of the IT staff  Other  Attracting and retaining staff

10. Chapter 8 Slide 10  Position on the Strategic Grid  Outsource  The contract is critical to the outsourcer  Maintenance is a large part of the portfolio  Keep  IT is critical to the firm  New systems are critical to success  Development Portfolio  Organizational Learning  You must adapt to the contract  BPR 5 Factors: When Not to Outsourcing

11. Chapter 8 Slide 11 5 Factors: When Not to Outsourcing  Firm’s Position in the Market  If your technology is very old, outsourcing is a good way to catch-up  If you are fairly current, outsourcing gains you little  Current IT Organization  If IT development and IT operations are separate, outsourcing is easy  It is also easy to negotiate and manage the contract  Integrated IT makes outsourcing difficult

12. Chapter 8 Slide 12 Structuring the Alliance  This is a contract  Established parameters at the beginning  A proper structure is a necessary but not sufficient requirement for success  Contract Flexibility  Must be able to deal with evolving technology  Outsourcer wants a contract as structured and close-ended as possible  Standards and Control  Some areas are common: water, power, phone  It is a loss of creative control and future thoughts

13. Chapter 8 Slide 13  CIO Function  Partnership/contract management  Architecture planning  Emerging Technologies  Continuous learning  Performance management  Customer-Outsourcer Interface  Oversight can not be delegated  Managers for the relationship on both sides of the deal Managing the Alliance

14. Chapter 8 Slide 14 Questions on Chapter 8?