1. Managing IT Outsourcing
Chapter 9

2. Outsourcing in Retrospect
Major drivers for outsourcing in the 1990s
Cost effective access to specialized skills or occasionally needed computing power or skills
Avoidance of building in-house IT skills.
Access to special functional capabilities.

3. Outsourcing in the 21st Century
Acceptance of Strategic Alliances
IT’s Changing Environment

4. IT Markets Location Physical Aspects Information Internal External
Automating
: Computerizing physical and
clerical processes.
DP era (1960 -
1980)
• Dominant use of mainframe and
minicomputers.
• Operational level systems automated
primarily with COBOL.
• Process controls automate primarily with
machine language.
• Standard packages for payroll and general
ledger.
• Applications portfolio consists of millions of
lines of code with 50% typically
purchased from outside.
Informating
: Leveraging knowledge workers
with computers.
• User tasks leveraged through direct use of
micro
computers enabled by graphical
use interfaces (GU) and purchased
software such as word processing,
spreadsheet, graphics, and CAD/CAM.
• Local
area networks (LANs) --
user
oriented
software for e
mail, database sharing, file
transfer, and groupware for work teams.
• Microcomputer software consists of millions
of lines of code
almost 100% purchased
from other companies.
External
Embedding
: Integrating computers into
products and services.
Micro era (1980
1995)
• Specialized code embedded in products and
services to enhance function.
• Microcomputers in physical products such
as automobiles and “smart cards” in
services.
• Thousands of lines of code developed by
both specialized internal programmers
and outside contract programmers.
Networking
: “The Information Highway”
Network era (1990 ?)
• Wide area networks (WANs) networking
workers, suppliers, and customers.
• Internet for commercial use.
• Millions of lines of code, almost 100%
purchased and maintained from outside
software firms.
Source: Applegate, Lynda M., Robert D. Austin, and F. Warren
McFarlan ,
Corporate Information Strategy and Management
. Burr Ridge, IL: McGraw -
Hill/Irwin, 2002.

5. What Drives Outsourcing?
General Managers’ concerns about costs and quality.
Breakdown in IT performance.
Intense vendor pressures
Simplified general management agenda
Financial factors
Corporate culture
Eliminating an internal irritant
Other factors

6. Strategic Grid for Information Resource Management
High
Current Dependence
Factory -
uninterrupted service
oriented
information resource management
Outsourcing Presumption
: Yes, unless
company is huge and well managed
Reasons to consider outsourcing:
• Possibilities of economies of scale for
small and midsize firms.
• Higher quality service and backup.
• Management focus facilitated.
• Fiber op
tic and extended channel
technologies facilitate international IT
solutions.
Strategic information resource management
: Mixed
• Rescue an out of
control internal IT unit.
• Tap source of cash. •
Facilitate cost flexibility.
• Facilitate management of divestiture.
on Information
Support
oriented information resource
management
Outsourcing Presumption:
Yes
• Access to higher IT professionalism
• Possibility
of laying off is of low priority
and problematic.
• Access to current IT technologies.
• Risk of inappropriate IT architecture
reduced.
Turnaround information resource management
• Interna
l IT unit not capable in required
technologies.
• Internal IT unit not capable in required
project management skills.
Low
Importance of Sustained, Innovative High
Information Resource Development
Source: Applegate, Lynda M., Robert D. Austin, and F. Warren
McFarlan ,
Corporate Information Strategy and Management
. Burr Ridge, IL: McGraw -
Hill/Irwin, 2002. -

7. When to Outsource Position on the strategic grid Development portfolio
Organizational learning
A firm’s position in the market
Current IT organization

8. Structuring the Alliance
Contract flexibility
Standards and control
Areas to outsource
Cost savings
Supplier stability and quality
Management fit
Conversions problems

9. Managing the Alliance The CIO function Performance measurement
Partnership/contract management
Architecture planning
Emerging technologies
Continuous learning
Performance measurement
Mix and coordination of tasks
Customer-vendor interface