Chapter 8 Slide 1

Chapter 8

Managing IT Outsourcing

Chapter 8 Slide 2

Overview Companies outsource for a variety of reasons

Cost and qualityLagging IT performanceAccess to special technical application skills

Strategic alliances are common and acceptedLike marriages, outsourcing deals are easier to enter

into than to sustain or dissolveLong-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 jobsLow competitionThese firms have more experience setting up

deals than their customers (the car salesman problem)

Insourcing can be a NIGHTMARE scenarioShipping employees out of the areaLoyalty lost

The strategic relevance of IT to a firm can shift

Difficulties

Chapter 8 Slide 5

Popular since the 1960sComputer 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 1990Turning point in the industry

The CIO had been a general manager, not technical Outsourced Mainframes, Telecom, and PCs

Businessland went under, damaging the dealKodak 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 AlliancesFinding a strong partner to complement an area

of weaknessMust be a WIN-WIN situation

Changing IT EnvironmentPressure to keep legacy systems running while

optimizing new technology and techniquesComfort with packaged software (e.g. PCs)

Operating systems, email, 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 competencyIntense environmental pressureSee no future IT upside

Financial FactorsQuick cash infusionGet 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 frictionHigh cost of IT staffCareer path concerns of the IT staff

OtherAttracting and retaining staff

Chapter 8 Slide 10

Position on the Strategic GridOutsource

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 contractBPR

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 OrganizationIf IT development and IT operations are

separate, outsourcing is easyIt is also easy to negotiate and manage the

contractIntegrated IT makes outsourcing difficult

Chapter 8 Slide 12

Structuring the Alliance This is a contract

Established parameters at the beginningA proper structure is a necessary but not sufficient

requirement for success

Contract FlexibilityMust be able to deal with evolving technologyOutsourcer wants a contract as structured and close-

ended as possible

Standards and ControlSome areas are common: water, power, phoneIt is a loss of creative control and future thoughts

Chapter 8 Slide 13

CIO FunctionPartnership/contract managementArchitecture planningEmerging TechnologiesContinuous learning

Performance management Customer-Outsourcer Interface

Oversight can not be delegatedManagers for the relationship on both sides of

the deal

Managing the Alliance

Chapter 8 Slide 14

Questions on Chapter 8?