Chapter 8 Slide 1 Chapter 8 Managing IT Outsourcing
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
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
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
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
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
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, , browsers, office automation, compilers Y2K 2 Factors Affecting Outsourcing Growth
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
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
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
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
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
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
Chapter 8 Slide 14 Questions on Chapter 8?