The key factors that determine if and when outsourcing is right for you

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© 2011 Wellesley Information Services. All rights reserved.

The key factors that determine if and when

outsourcing is right for you

Dr. BergComerit Inc.

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In This Session …

There are many issues that must be considered carefully before you decide if outsourcing is the right for you.

This session explores how technology, supplier, cost and internal factors impact the outsourcing decision making process.

Examine major factors that should affect your the outsourcing decision

Walk through a framework to help you make the correct outsourcing decision for an system. Learn how the outsourcing decision is different for every SAP environment and get a framework for deciding when to keep systems in-house, when to outsource, when to evolve systems, and when to retire them.

What We’ll Cover …

• Background• When to Outsource a BI system• Cost, Supplier, Internal and Technology Factors• BI Outsourcing Vs. ERP Outsourcing• Impact to Jobs and IT Growth• Trends and Success Rates • Wrap up

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Areas to Outsource

The focus of outsourcing has been on tasks that require high configuration, but causes few IT problems in the organization.

Most has been in the areas of System and Infrastructure software.

The next wave of outsourcing has been in the areas for business applications, which as substantially more complex.

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What is being outsourced today?

While a focus has been on application outsourcing, the IT infrastructure and Basis functions are close behind.

Today, over 50% of companies have either outsourced some of these functions, or are planning to do so over the next 12 months.

Outsourcing some core IT areas are becoming ‘mainstream’

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Software-as-a-Service (SaaS) Changes 2009 - 2010

The number of companies who said that they were using at least one SaaS application increased from 47% to 60% in one-year.

Initially, the focus was on applications such as email and CRM, but the trend for 2011 is towards looking at other applications such as Enterprise Resource Planning (ERP) and Business Intelligence (BI) as well.

In 2006 there were very few options for companies to do so, but now many of the major ERP Vendors, including SAP, has their own SaaS offerings.

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The Growing Trend of Software as a Service - SAP

The published base pricing was $149 per month per user, but this price varies based on volume discounts and the functionality included.

In February, 2011 SAP released of its SaaS (software as a service) suite Business ByDesign, in its 2.6 release.

It is a significant step towards allowing companies that use SAP to “drink milk – without having to buy a cow”…

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The Growing Trend of Cloud Computing

According to a report from IDC, IT cloud spending will expand from $21.5 billion in 2010 to $72.9 billion by 2015*

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Supply Chain Management

Content delivery (i.e. material for web site)

Other HR Functions

Financial Accounting & Payroll

Business Intelligence

Other Applications as a service

Collaboration services and software

Application Deployment software

CRM

System Infrastructure (basis)

(*Source: IDC, Worldwide and Regional Public IT Cloud Services 2011-2015 Forecast, Doc #228485, June 2011)

This means that IT cloud services is growing at more than four times the rate of the worldwide IT spending * (others have the overall worldwide IT spending is increasing by 5.7% in 2010).

Research forecasts that one of every $7 spent on packaged software, service and storage offerings in 2015 will be related to the public cloud model*



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When to Outsource a BI system – BI Vs. ERP

As part of the outsourcing, many companies are debating when to outsource their BI tools as well.

This is a complex question that must consider the competitive advantage which a tool may provide.

The company must also account for how ready the market is to support BI in an outsourcing model.

The final direction should not solely be question of cost savings, but must consider the benefits and the business strategy of the company.

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A Framework for Deciding when to Outsource a BI system

• When making strategic decisions one should always have a framework for examining alternatives.

• There are 4 possible decisions to an outsourcing evaluation. We will look at each in detail.

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The Four Decisions – 1) Eliminate the BI system

As the information volume is increased, the quality of the decisions improve.

However, once information overload kicks-in, the quality of the decision starts to decline

The challenge of a BI organization is not to create more information, but the correct amount to the right audience.

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The Four Decisions – 1) Eliminate the BI system

Unfortunately, some custom BI tools are built on a "nice-to-know" basis. These are systems that do not measure what drives the business but are satisfying some department's wants instead of needs.

These are often found at regional levels or in subsidiaries that are allowed to evolve their legacy reporting tools over time.

Since these are not providing a competitive advantage and are often not required from a regulatory standpoint, they should be eliminated from the organization.

These BI systems impact the focus of the organization, and benefits can be realized from removing these distractions

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The Four Decisions – 2) Keep SAP BI In House

Most companies aspire to build BI systems that are so good that they become a source for competitive insights that lead to an advantage in the marketplace.

These tools can not be bought out of the box.

One can find them in critical areas of the organizations, such as lending policy groups in banks, underwriters in insurance companies and production planning groups in manufacturing companies.

For these systems it is important to maintain user flexibility and responsiveness.

Outsourcing these BI tools may lead to sharing "know-how" that can be made available to competitors. These tools are best developed and maintained in house

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The Four Decisions – 3) Evolve the BI System

Early adaptors of BI systems may experience a period of competitive advantages.

However, as the rest of the industry adapts these tools, the systems are no longer a source of competitive advantage. They have become a part of the "must-have" infrastructure.

To maintain a form of competitive advantage, these systems must continue to evolve or risk becoming an industry commodity.

If the BI tool is allowed to become a commodity, and the competitive advantage is surrendered, it will become a candidate for outsourcing.

We often find this type of analytical support tool in standardized process areas such as shipping, receiving, call centers, customer interaction tracking,

etc.

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The Four Decisions – 4) Outsource BI and BW

Some BI tools that can be outsourced.

These are systems that serve the function of monitoring the business, rather than supporting complex business decisions.

These BI systems do not provide a competitive advantage, but are essential for good "business practices." They are often reactive in nature

As a result, they are required in the organization but not a source for future growth or a focus of new business development. In addition, the technology knowledge is available in the marketplace.

A company can realize substantial financial benefits of removing these BI tools from their internal infrastructure.



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What to Consider - Cost Factors

Research has suggested that the overall costs of outsourcing have been consistently underestimated by organizations.

However, a driving factor of outsourcing has been to reduce costs while being able to provide the same level of service. Justifications include beliefs that the outsourcer has better economies of scale, tighter control over fringe benefits, better access to lower cost labor pools and a more focused expertise in managing systems.

As labor costs are a function of an organization’s overall cost structure, outsourcing is sometimes used to change the overall labor cost structure for the whole organization.

In these cases, outsourcing may be used as a tool for an overall reduction in compensation even for those jobs that remain

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Supplier Factors

Supplier factors include the availability of possible outsourcing partners, their expertise, reliability and willingness to provide IT services at a reasonable service level and at a low cost.

The trick to select an outsourcing partner is first of all based on a level of trust and a making sure that the partner will provide adequate focus to your needs and issues.

Physical location, language, training and an formal escalation process is also important.

There are over 872 IT outsourcing vendors of which 115 companies are providing some form of SAP outsourcing services

(Brown & Wilson, “The Black Book of Outsourcing”)

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Internal Factors

Organizations are also looking at internal factors when considering outsourcing

This include the need to sustain 24/7 operations, and perceived improvements in flexibility and agility.

Processes that are outside the normal operations of a company, or that are not deemed a good fit with the core operations of a business model, are more likely to be outsourced.

Other internal factors may include an organization’s expertise with outsourcing in general, or in a specific related area, as well as the organization’s expertise in IS operations. It is more likely that organizations that have little familiarity

with ERP or BI operations will outsource those functions

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Technology Factors

Some organizations choose to outsource ERP and BI systems due to uncertainty around technology choice, and perceived task complexity.

Large-scale ERP systems have a high degree of complexity and a number of organizations have, therefore, decided not to acquire these systems.

Instead some are relying on outsourcing as a means to get access to the ERP technology without making software or hardware purchases.

The lack of commitment to a specific system is often motivated by perceptions regarding the frequency of technology changes

and uncertainty regarding the long-term strategic direction of the organizations due to events such as mergers and divestitures.

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Top 20 Reasons Given for Outsourcing

Research has found that companies give a variety of reasons for why they are outsourcing.

The top 20 reasons can be grouped into the four factors:

Cost factors Internal factor Supplier factors Technology factors



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Finding Real Answers

In order to explore what companies are really doing, we surveyed participants at four national SAP conferences.

We distributed almost 2,400 surveys and got 1,889 responses.

We classified each company based on size

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Competitive Strategies and Outsourcing

Companies operate under different competitive strategies.

Some are low-cost providers, others compete as a niche player or differentiators.

The competitive strategy impacts why you may consider outsourcing. For example, low costs providers are

looking at costs, while differentiators, may choose not to

outsource at all.

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Findings – Company Size matters in Outsourcing

Fortune-500 companies considered the cost factor as most important, regardless of their strategy.

Fortune-1000 companies focus more on Internal factorsSmaller organization emphasize the supplier factors highest

Smaller companies seems to be more willing to following a pitch from a supplier, while very large companies have the capabilities to do this work themselves, but wants to reduce costs above all

else.

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The Most Important Factors to consider when outsourcing ERP

The most important factors when outsourcing ERP systems seems to be focusing on the service providers. While technology uncertainly seems to be the least motivator for outsourcing.

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The Most Important Factors to consider when outsourcing BI

Despite articles to the contrary, technology choice or the complexity of BI systems does not seem to be a factor when outsourcing these systems.

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There is a difference between outsourcing BI and ERP

Companies should not consider outsourcing “SAP”, but instead treat ERP/OLTP and BI/DSS outsourcing as two separate decisions

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Findings – Strategy and Outsourcing

There is a difference how each company looks at cost savings, internal, supplier and technology factors.

This depends on the competitive strategy of an organization

Low Cost Niche DifferentiatorLow Cost - Different DifferentNiche Different - Not DifferentDifferentiator Different Not Different -

Low Cost Niche DifferentiatorLow Cost - Different DifferentNiche Different - DifferentDifferentiator Different Different -



Technology Factors

Cost FactorsStrategy

Supplier Factors

Internal Factors

When deciding if outsourcing is right for you, you have to look at your competitive strategy

and company size, before you decide what to focus on.



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The IT Jobs are Still growing in the USA

Despite an increase in outsoaring overseas, the number of IT jobs in the USA is still growing and will continue to do so for the next 7 years according to the US department of Labor statistics.

Occupation 2008 2018Annual Growth Total Growth

Average Salary (2010)

Computer and Information Systems Managers 293,000 342,500 1.57% 16.9% $ 123,280.00 Software Developers, Applications 514,800 689,900 2.97% 34.0% $ 90,410.00 Computer Occupations, All Other 209,300 236,800 1.24% 13.1% $ 79,790.00 Computer software engineers, systems software 394,800 515,000 2.69% 30.4% $ 75,730.00 Computer Programmers 426,700 414,700 -0.28% -2.8% $ 74,900.00 Computer Support Specialists 565,700 643,700 1.30% 13.8% $ 49,930.00

2,406,308 2,844,618 1.69% 18.22% $ 82,340.00 * Projections by US Department of Labor, Sept, 2011

The overall growth in IT jobs is forecasted to be over 18% between 2008 and 2010, despite a recession. The only area decreasing is ‘programmers’.

Outsourcing and Recession had little impact on IT Workers

• The IT outsourcing has also had limited impact on the salaries overall.• The national US average salary is $44,410 and IT professionals are

compensated between 20% and 300% higher.

In 2010, the number of jobs remained steady and salaries increased by $1,026 on average for all IT professionals

Employee Type

2009 2010

# of employees

Mean Salaries

# of employees

Mean Salaries

Computer and Information Research Scientists 26,130 $105,370 24,900 $103,150 Computer Systems Analysts 512,720 $80,430 495,800 $81,250 Computer Programmers 367,880 $74,690 333,620 $74,900 Software Developers, Applications 495,500 $90,170 499,280 $90,410 Software Developers, Systems Software 385,200 $96,620 378,920 $97,960 Database Administrators 108,080 $74,290 104,080 $75,730 Network and Computer Systems Administrators 338,890 $70,930 333,210 $72,200 Computer Support Specialists 540,560 $47,360 579,270 $49,930 Information Security Analysts, Web Developers, & Network 226,080 $76,560 243,330 $79,370 Computer Occupations, All Other 195,890 $78,010 183,110 $79,790

3,196,930 $79,443 3,175,520 $80,469 * US Dept. of Labor Statistics 2011


• Background• When to Outsource a BI system• Cost, Supplier, Internal and Technology Factors• BI Outsourcing Vs. ERP Outsourcing• Impact to Jobs and IT Growth• Technology Factors• Trends and Success Rates• Wrap up

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How Much are Companies really Outsourcing ERP?

We found that companies spent between 12 and 14% of their IT budgets on ERP outsourcing today.

However, they planned on increasing this to between 10% and 30% in the next 3 years.

The fastest growth in ERP outsourcing seems to be from Fortune-500 companies.

We found that companies spent only between 3% and 6% of their IT budgets on BI outsourcing today. This is less than half of what they spend on ERP outsourcing.

However, they planned on increasing this to between 9% and 20% in the next 3 years.

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How Much are Companies really Outsourcing BI?

The fastest growth in BI outsourcing seems to also come from Fortune-500 companies.

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The Direction and Risk of BI Outsourcing

As the outsourcing wave of the transaction processing continues, there are mounting pressures to seriously examine which BI tools can be bundled into the outsourcing packages.

In this environment, it is important that companies do not blindly look at cost savings, but also considers which BI tools are critical to their competitive advantage.

A company that signs any deal based solely on cost savings can risk becoming a commodity business with no real ability to take advantage

of future opportunities to distinguish themselves from the competition.

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The Direction of BI Outsourcing

However, to blindly state that there are no BW/BI tools that can be outsourced is shortsighted.

A balanced view must be taken when deciding where to draw the line between in-house and outsourcing.

This decision should be based on the level of maturity of the industry (as demonstrated by standardization) as well as the competitive standpoint of the company.

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The Success Rate of IT Outsourcing

About 50% of all outsourcing efforts are considered a success, while many efforts does not yield few improvements.

To improve on these statistics, it is important to write a comprehensive Service Level Agreement (SLA) with objective performance targets Join me for my session on how to write a

good SLA later this conference..

Source: AMR Research, 2010


• Background• When to Outsource a BI system• Cost, Supplier, Internal and Technology Factors• BI Outsourcing Vs. ERP Outsourcing• Impact to Jobs and IT Growth• Technology Factors• Trends and Success Rates • Wrap up

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Resources

• European Journal of Information Systems. “Factors considered when outsourcing an IS system: an empirical examination of the impacts of organizational size, strategy and the object of a decision” By Drs. Berg and Stylianou http://www.palgrave-journals.com/ejis/journal/v18/n3/abs/ejis200918a.html

• Outsourcing SAP Operations, SAP PRESS by Yosh Eisbart ISBN:978-1-59229-284-4. http://www.sap-press.com/products/Outsourcing-SAP-Operations.html

• The Black Book of Outsourcing http://www.theblackbookofoutsourcing.com

CIO Magazine – Outsourcing Success Measureshttp://www.cio.com/topic/3195/Outsourcing

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7 points to take home

1. Outsourcing is a part of most companies business strategy

2. You have to decide between complete outsourcing, SaaS, Cloud and partial outsourcing

3. ERP and BI outsourcing are different and should be treated so

4. Your organization size and strategy should determining what and how you outsource

5. Cost reduction should be just one of many measures

6. Writing a solid SLA is critical to outsourcing success

7. Trust in a supplier and supplier’s personal focus is very important in any outsourcing partnership

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Your Turn!

How to contact me:Dr. Berg

[email protected]

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The key factors that determine if and when outsourcing is right for you