Lecture 17 Chapter 9 Managing IT Outsourcing

2 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???

3 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

4 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

5 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

6 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

7 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

8 Drivers toward outsourcing today Costs and Quality –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

9 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

10 When to outsource When do benefits outweigh risks? 1.Position on strategic grid

11 When to Outsource 2.Development Portfolio 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 3.Organizational Learning Development work difficult to outsource New areas mean company doesn’t understand what is required let alone how to manage outsourcing 4.Market Position Large, well established firms are difficult to transition to new systems without outsourcing 5.Current IT organization High structure easy to outsource Contracts easy to write when know what is expected

12 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

13 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

14 Managing Alliance Early results are key CIO Function –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 –Final responsibility on both sides –Who communicates what and when? –Reporting expectations –Relationship managers and coordinating groups

15 What about the contractor? Business model for consulting/contracting companies Risks