Sourcing Scenarios

7/28/2019 Sourcing Scenarios

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IT Staff Sourcing Scenarios

Case questions

Case 1: Outsourcing

1. Develop a table that captures the costs, benefits and risks of this sourcing

decision for Southwest. Remember to consider the pricing model.

Source: CIO Article (from BlackBoard)

Laudon & Laudon Textbook

Costs Cost of benchmarking/analysis to determine if

outsourcing is right choice

Cost of ongoing staffing/management of

outsourcing relationship

Cost of regularly reviewing metrics for the

vendor's performance relative to SLAs

Cost of reviewing customer complaints for

services or products handled by the vendor or

cost of conducting anonymous testing (if

necessary)

If need to fire vendor for underperformance,

results in additional fees/cost of transitioning to

new provider

Outsourcing transition period= productivity

slows down (transition costs)

Cost of terminating/relocating employees

(vendor hired most of Southwests IT staff butnot all, also Southwests IT staff may need to

be relocated to vendors location)

Benefits Ability to focus on core competencies (running

of successful IT services organization not core

competency)

Performance-based pricing and SLAs provide

incentive for vendor to perform optimally and

meet agreed-upon service levels

Use of vendor that specializes in providing

necessary range of IT services provides betterresults than if Southwest had used its internalresources

Ability to immediately access superior

expertise and industry best practices

Lower ongoing investment in internal

infrastructure

Tighter control of budget through predictable

prepared for MISM 2301 revd Nov 2012 Page 1


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costs

Risks

Source:

http://www.cio.com/article/

497323/IT_Outsourcing_W

hy_You_Need_to_Reengineer_Your_SLAs?

page=3&taxonomyId=3195

http://www.philadelphiafed.

org/bank-

resources/publications/cons

umer-compliance-

outlook/2011/first-

quarter/vendor-risk-

management.cfm

SLAs may be inadequate when looking for

innovation from outsourcer

SLA may fail to provide incentives for the

supplier to learn how to use IT to innovate or

create cost reduction/revenue enhancement

opportunities

Difficult to exit outsourcing relationship, may

not have skills to repatriate work

Outsourcing creates a potential dependency on

the third-party service provider

Individualized and timely attention from the

service provider may be uncertain and may

entail significant additional costs

Risk that a vendor's operational system does

not perform properly and negatively affectscustomers

Vendors noncompliance with consumer laws

and regulations creates reputational risk for a

financial institution

Legal risk that a vendor's operation does not

comply with consumer protection laws and

regulations

Potential for violations of confidentiality by

service provider employees (vendor has access

to access to confidential data, strategictechnology applications)

2. Assume there is minimum contract duration of three years (i.e., penalty to

Southwest for early termination). Given your cost-benefit analysis in question

one, would you recommend this deal to Southwest? Explain why or why not.

Source: http://www.cio.com/article/128900/SLA_Definitions_and_Solutions

http://www.ny.frb.org/banking/circulars/outsource.pdf

I would recommend this deal to Southwest based on the following analysis:

Performance-based pricing requires suppliers to pay a penalty for unsatisfactory

service levels

o Incentive for Southwests vendor to perform optimally

o Maximize costs through performance requirements

o Shifts the performance risk from the customer to suppliers since suppliers

assume greater responsibility for the quality of performance



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Result may include fewer delays and performance deficiencies

Service level agreement specifies the services the vendor will provide

o Customer can charge the vendor a penalty fee if certain SLAs are not met

o Should include performance metrics that prove the vendor is living up to

the terms of the agreement

o SLA clearly states metrics, responsibilities and expectations so in the

event of issues with the service, neither party can plead ignorance

o Ensures both sides have the same understanding of requirements

Southwest is seeking to outsource a significant amount of its IT operation

o Transformational outsourcing deal which will require more time to

achieve benefits (need to be structured in a longer-term contract)

Case 2: Partnering

Source: http://www.accenture.com/SiteCollectionDocuments/jp-

ja/PDF/technology/systems-integration/sap-solutions/Accenture_idc_report.pdf

1. Describe the critical success factors (CSFs) in making this partnership work.

Knowledge and information sharing should be required to create an environment

of innovativeness and problem solving

Need to establish a common language defining terminologies

o Removes possible wrong assumptions being made between IT staff of

Reliable Utilities, Inc. and personnel of vendor

Identify objective and quantifiable performance measures that are well specified,

relevant for the supported business units and agreed upon

o Must establish metrics (implementation of quality programs)

o

Reliable Utilities Inc. must clearly state that is expects vendor to respondto IT staffing needs on short notice

Determine value proposition for each member in the partnership

Define governance structure

Clearly define roles and responsibilities

Ensure cultural fit among employees of Reliable and those of vendor

Promote environment of information and knowledge sharing

Need to maintain level of commitment and mutual trust

Senior management involvement

o Having the senior on-site partner executive operate as a member of the

Reliable Utilities, Inc.o Senior management of Reliable must be involved (CIOs staff) in

approving vendors assignment ofexternal IT resources

Case 3: Unwinding an outsourcing relationship



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1. Describe the major risks associated with this in-sourcing solution and how SRS

mitigated each of these risks.

Risk Solution to Risk

Significant investment (large

costs, resources needed)

SRS required that possible

vendors define and configure

the hardware that would beneeded to operate their product

offering system (can anticipate

costs of the specific hardwareneeded, keep from

overspending)

Loss in productivity due to

down time of training/system

implementation

Although the firms records on

the old system were converted

to run on the new software, SRS

did not began operations with

the new system until parallelrun results were certified by

external auditors

SRS staff may be reluctant to

change from legacy system to

new system

SRS requires the vendor to train

its staff on system operations

User training

System acceptance testing

(ensures SRS staff are

comfortable with the new

system)

Additional costs of maintaining

new system (does SRS have thecapability internally to solvesystem problems)

RFP stated that vendor would

perform system maintenanceunder a separate agreement

Vendor's new operational

system may not perform

properly and negatively affects

customers (issues of system

compatibility)

SRS implemented a parallel run

between old and new system

Once results were certified by

the auditors, SRS began

operations with new system and

removed old system

SRS required vendor to covert

SRS data from the existing

vendor-based system to the in-house system (ensures system

compatibility)

Possible misunderstanding of

services required/requirements

necessary of new system

SRSs RFP defined

requirements of new system

SRS required vendors to define

and configure the hardware that



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would be needed to operate

their product offering system
