Gerald DeHondt II Dr. Marvin Troutt Department of Management and Information Systems Kent State University

Purpose of Outsourcing Lowered Development Costs Primary business of the customer is an area other than systems development. Utilize Knowledge Capital of the Vendor Best Practices Software and Systems Expertise Economies of Scale

Challenges Transition Costs Time and Effort Managing the Vendor Legal and Liability Issues Organizational Culture

Purpose of this Research Investigate impact of unanticipated costs. Propose potential methods of mitigating these cost challenges.

Anticipated Cost Savings One in three outsourcing projects targeting cost reductions fail to meet expectations (Caldwell, 2002). Most companies believed they understood all major costs (Scheier, 1996).

Unanticipated Costs Transition and Management Costs Legal and Liability Issues Vendor Contract Client Lock-In Institutional System Knowledge and Employee Loss of Confidence

Transition and Management Costs Can amount to as much as 5 – 7% of the total value of the contract (Scheier, 1996). Examples Costs to maintain the current staff while the vendor learns the system. Assistance provided to the vendor. Disruption to the business due to mentoring vendor. Slower response of vendor during ramp-up. The more specific or complex the activity, the more expensive will be transition costs (Barthelemy, 2001).

Legal and Liability Issues In the absence of an employment agreement (as with direct employees), companies need to ensure trade secrets and confidential data are protected. Non Disclosure Agreements (NDAs)

Vendor Contract The Customer and Vendor seek to shift risk to the other party Fixed Price Time and Materials Determine consistency of client needs with ability of the vendor. Appropriate Vendor Selection Relative bargaining power of each party may determine which arrangement is chosen. Carefully negotiate Service Level, then give Vendor control over how contract is fulfilled (Bendor-Samuel, 2002).

Client Lock-In The client cannot get out of the relationship except by incurring a loss (Aubert et al., 1998). Vendor may renege on service levels because the client cannot easily engage another vendor (Bahli and Rivard, 2003). Service Debasement Cost Escalation Companies utilize a multi-vendor strategy to allow options (Porter, 1985). Switching vendors is easier. Vendors maintain quality because of threat of losing business (Ngwenyama and Bryson, 1999).

Institutional System Knowledge and Employee Loss of Confidence Redisposition of displaced staff or losing those with significant system knowledge (Domberger, 1998). Knowledge gained over many years is difficult to transition in a short time. Loss of confidence by staff may increase turnover. Compounds transition challenges.

Potential Benefits Access to Additional Skill Sets Organizational Flexibility

Access to Additional Skill Sets Maintaining expertise in-house is expensive (Martin, 1991; Yourdon, 1992) Skill deterioration of workers. Shortage of required skills. Contracting these services allows access to professionals who have mastered required skill sets. Vendors can implement best practices or solutions utilized on previous engagements.

Organizational Flexibility The degree to which a business unit is adaptable in administrative relations or the authority vested in situational expertise (Barrett et al., 2005). Companies skilled in outsourcing systems development have an additional tool set. Flexibility to adapt to changing markets and environments.

Factors Impacting Success Information Incentives Institutional Factors

Information Due Diligence of Vendor Capabilities Strengths Weaknesses Self Reflection of Client Regarding Outsourcing Capabilities Strengths Weaknesses Full Information on Vendor Team

Incentives Contract Clauses defining Service Level Agreements (SLAs) and Quality Standards. Incentives Penalties May be viewed negatively by Purchasing Department as this places additional liability on the client.

Institutional Factors Cultural Fit Vendor Experience Knowledge of Best Practices

Conclusion Outsourcing Systems Development Activities may be beneficial if handled appropriately. Lowering Cost of the Function Opportunities for Client Staff Bringing Additional Knowledge into the Organization Can Introduce Additional Risks to the Organization. Careful Balancing of Benefits and Risks Required to Make Optimal Decision.