Reasons for IT outsourcing Cost & quality Cheaper at same quality Faster at same cost Vendor can provide cheaper solution because: Vendors run leaner shops with fewer over heads May use off shore operations in India, Philippines, Ireland highly skilled and up to date staff Economies of scale Better utilization of hardware capacity Better negotiation of software licensing Tighter control over inventories Its their core business

Lagging IT performance Access to special technical skills Other financial factors can get quick cash against transfer of IT assets Fixed costs become variable costs Discipline amongst the user group as the $$s show up in the monthly bills and request for change costs Easier to sell off divisions HR concerns Inefficient staff Out dated staff Over staffed but don’t want to fire (not a company culture) Corporate culture Vendor may bring much needed change in the culture Large IT outsourcing arrangements are easy to enter but very hard to divorce Major outsourcing agreements are done more due to strategic reasons rather than operational reasons but the two approaches are complementary

Why are outsourcing arrangement so difficult Major outsourcing contracts cover 8-10 years Usually the customer gets lump sum cash in the first year. After 1st year customer gets a monthly bill In the 1st year the customer gets service very similar to what it was before the assets were transferred. As the requirements for 2nd year onwards change, negotiations are required to work it out---it can be stressful For the vendor, a big cash outflow takes place in 1st year Vendor expects profit from 2nd year onwards But customer may start complaining 2nd year onwards because of the monthly bill and need to rework the contract because of changing requirements This creates tension Novice customer may not do a good job of handling this Handful of vendors who can take large contracts Not much choice to switch

Some of these specialize in niche areas like Large vendors include EDS IBM COMPUTER SCIENCES CORPORATION COMPUTER ASSOCIATES PEROT SYSTEMS GENERAL DYNAMICS LOCKHEED MARTIN Some of these specialize in niche areas like Government Chemical industry Auto industry etc

When do benefits of outsourcing outweigh risks Position on the strategic grid (show figure 9.1) Development portfolio Outsource if high %age of IT staff working on maintenance or high-structured (end-products are clearly defined, static, and require no organizational change) projects High tech, highly structured is a good candidate because Requires specialized leading-edge technical skills Large low structured projects not good candidate because: These require high degree of coordination Design is iterative so require lots of coordination End outputs evolve as make progress on the project Organizational learning Some IT projects underway require BPE resulting in layoffs These are not good projects for outsourcing as it adds to tension

Firms position in the market Firms lagging their peers in IT architecture, IT leadership, staff skills can do a quick catch up by outsourcing Current IT organization Segregated or decentralized IT department is a good candidate for outsourcing It has fewer issues that need to be resolved with the vendor Has few integration problems Assuming in the above situations that the customer does not want to integrate the organization