1. Outsourcing

2. Some Key Outsourcing Firms
EDS CSC
IBM Systematics
Perot Systems Telesystems
Andersen Consulting ISM
Cap Gemini GSI
AT&T Systemhouse
PRC
GIS

3. Strategic Planning Assumptions
The most successful vendors will opportunistically form quasi-permanent or situational alliances with various partners (other outsourcers, hardware or software suppliers or users) to provide best-of-breed solutions (0.9 probability).
In many cases, users will choose a prime contractor, then stipulate which best-of-breed vendors should be the preferred business partners (0.65 probability).
Defining the Outsourcing Relationship

6. The Advantages of Outsourcing
The deal may include cash payments for assets; this can be helpful for financially hurting companies or for ones that need cash to finance fast growth
Cash
Price
Flexibility
Personnel conservation
Documentation and methodology
People
Technology
Hassle
As a result of economies of scale, many outsourcing firms can perform outsourced tasks at a cost lower than if the task were performed by internal operations.
Use of an outsource firm gives companies the flexibility to deal with such major events as acquisitions or mergers.
Use of an outsourcing firm for routine tasks frees internal employees for more strategic work.
Outsourcing firms often use more structured methodologies to perform tasks and produce documentation more rigorously
Outsourcing puts the burden of finding and managing skilled workers on the vendor.
Outsourcing firms may have specific technology, tools, or expertise
Outsourcing firms typically deal with vendor liaison, procurement, problem-solving, and so forth.

7. The Disadvantages of Outsourcing
There is risk in giving control of lifeblood network and data processing operations to a third party.
Control
Returns
Conversion
Technology transfer
Alliance management
Supply restrictions
Cost savings
Change
The returns on outsourcing, for both vendor and user, are based on the assumptions that may quickly become invalid.
The cost of converting to outsourcing, including top management time and attention, is nontrivial.
Once companies transfer application and operational knowledge to the outsourcing firm, getting it back might be difficult.
Outsourcing shifts a company’s internal burden from providing infrastructure services to a managing a mission-critical alliance, which takes work.
Relying on an outsourcing vendor will, as a practical matter, restrict availability of products and services from competitors.
Contract pricing for out-years of the deal may not pass on costs savings available from technology.
Changing business conditions for either user or vendor or changing strategic focus could leave either party stuck with an outmoded relationship.

8. Executive Survey: Top 10 Reasons Companies Outsource
1. Reduce and control operating costs
2. Improve company focus
3. Gain access to world-class capabilities
4. Free internal resources for other purposes
5. Resources are not available internally
6. Accelerate reengineering benefits
7. Function difficult to manage/out of control
8. Make capital funds available
9. Share risks
10. Cash infusion
Source: Survey of Current and Potential Outsourcing End-Users, The Outsourcing Institute Membership

9. Executive Survey: Top 10 Factors in Vendor Selection
1. Commitment to quality
2. Price
3. References/reputation
4. Flexible contract terms
5. Scope of resources
6. Additional value-added capability
7. Cultural match
8. Existing relationship
9. Location
10. Other
Source: Survey of current and Potential Outsourcing End-Users, The Outsourcing Institute Membership

10. Executive Survey: Top 10 Factors for Successful Outsourcing
1. Understanding company goals and objectives
2. A strategic vision and plan
3. Selecting the right vendor
4. Ongoing management of the relationships
5. A properly structured contract
6. Open communication with affected individual/group
7. Senior executive support and involvement
8. Careful attention to personal issues
9. Near term financial justification
10. Use of outside expertise
Source: Survey of current and Potential Outsourcing End-Users, The Outsourcing Institute Membership

11. Outsourcing and Strategy

12. Outsourcing - Paul Strassmann’s Argument
Reasons for outsourcing - according to firms that do it:
IT is no longer (never was) a core competency
Lower IT costs by eliminating operational IT which enables the firm to focus on strategic IT
Outsourcing firm has specialized IT expertise
“If those reasons are correct, then IT outsourcing ought to be randomly distributed among firms.”
A study of Fortune 1000 firms frequently mentioned in the press for outsourcing their IT found that …
The distribution of firms is not random.
Firms doing the outsourcing were “economic losers” in terms of an EVA (Economic Value Analysis) analysis starting from three years prior to the awarding of an outsourcing contract.
No firm with a large EVA engaged in IT outsourcing.
Conclusion: IT outsourcing is just another label and justification for cutbacks.

13. Stated Reasons for Outsourcing
Financial
reduce operational (maintenance, legacy) costs
directly eliminating them from the firm’s budget
gain from economies of scale in outsourcing vendor
reduce financial uncertainty (turning variable costs of running IS internally into a known cost based on the contract with the outsourcer)
Strategic
enable IS staff to focus on strategic systems
build a strategic partnership with a firm that has complementary skills
Other
gain access to state-of-the-art IT expertise
manage the IS function more professionally
eliminate a non-respected or difficult department
provide a professional career path for IS staff

14. Internal vs External Service Delivery
Does service offer competitive advantage?
If “yes,” keep internal.
Is external delivery reliable and lower cost?
If “yes,” outsource.

15. Managing Risk Through Incremental Outsourcing
The logic of incremental outsourcing parallels the logic of outsourcing large segments of the IT function.
However, the economic stakes are not as high and the potential consequences of mismanagement are not as far-reaching.
Mistakes are more reversible and less painful.
Since costs are less, experimentation is feasible.

16. Issues to Consider Incremental outsourcing vs large-scale outsourcing
When to outsource
Position on strategic grid
Development portfolio
Organizational learning
Firm’s position in market
Impact of organizational culture on outsourcing
Designing the alliance for success
Managing the alliance