Why is Outsourcing a Problem? Customer view –length of contract –benefit tends to diminish over time –IT may be outsourced as a commodity, but later may be viewed as strategic

Why is Outsourcing a Problem? Outsourcer view –large initial investment required –size of firm Limited number of outsourcing firms for large projects

History of Outsourcing Computer service bureaus –financial and operations support –turnkey applications –ADP, Anderson Consulting, EDS

History of Outsourcing Shift in 1990s to outsourcing –mainframes, PCs, telecommunications –used by large companies (e.g., Kodak) Factors causing the shift –strategic alliances –changing environment

Management Concerns Customer as CIO –importance of planning and education Measuring performance –differences in what outsourcer views as success versus the company employing them

Management Concerns Mix and Coordination of Tasks Customer/Outsourcer Interface

Reasons for Outsourcing Difficulty of managing complex functions such as communications Concern about buying costly technology that could rapidly become obsolete Difficulty of obtaining and retaining high- caliber IT specialists

Reasons for Outsourcing Temporary outsourcing of old systems to permit concentration on migrating to new- generation systems Internal staff without capacity or skills to undertake a project

Risks of Outsourcing Escalating costs –contractors protect profits with clauses that permit additional charges beyond baseline established in the contract

Risks of Outsourcing Escalating costs (cont’d) –may pass along charges for upgrading equipment or adding computer capacity –additional charges if new or expanded services are required

Risks of Outsourcing Inadequate emergency support –contractor makes profit from economies of scale –in emergency situations, contractor has to balance needs of all its customers, leaving some below minimally acceptable levels

Risks of Outsourcing Disaster recovery Information security –responsibility for integrity and confidentiality of information rests with firm, not contractor

Risks of Outsourcing Financial reliability –examine financial condition and require disclosure of any pending lawsuits –store backups at company site, not just contractor’s site

Risks of Outsourcing Financial reliability (cont’d) –contract should state who owns data programs procedures

Risks of Outsourcing Technology change –contractors may be reluctant to adopt new technologies if perceived to threaten profits or revenue stream

Risks of Outsourcing Systems architecture change –increased service demands by business units results in increased distribution of capacity, not new business for the contractor

Risks of Outsourcing Software license fees –software package suppliers require increased fees to move their software to the contractor’s equipment Performance measurement –how will performance be measured and reported –external consultant often used

Risks of Outsourcing Contract termination penalties –reducing level of service or terminating service –ownership of information and materials –rights to continue using information and information processing during a dispute

Bidding Practices Criteria contractors may use to increase prices when bidding –reputation and credit history of client –quality of request for proposal –length of contract –stringency of performance criteria and guarantees for compliance

Setting up the Contract Need for flexible contract terms Control and responsibility What will be outsourced?

Setting up the Contract Outside consultants to review cost savings from outsourcing Investigating the outsourcer Management fit

Steps in Outsourcing Define requirements –functions and features of system –expected performance characteristics

Steps in Outsourcing Define requirements (cont’d) –description of business and technical environment in which system will operate –acceptance test methods and procedures Independent validation and verification

Steps in Outsourcing Specifying operations needs –transaction volumes –critical needs for timeliness –critical needs for security

Steps in Outsourcing Specifying operations needs (cont’d) –critical needs for resuming business in event of disaster –needs for local processing –anticipated new applications development

Steps in Outsourcing Specifying operations needs (cont’d) –anticipated adoption of new technology –measures of performance and frequency of performance audits

Some Additional Caveats Danger of sole-source procurement Set forth terms you expect to see in contract Lawsuits from staff reductions Contractor is NOT your business partner