General Dynamics and Computer Sciences Corporation

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2. Case Summary. Discipline: Management of information systemsDescription: Designed to generate discussion on the issues of outsourcing from the perspective of a firm thinking about turning over its IS activities to a third-party vendor. Subjects Covered: Computer systems, Information systems, Organizational change, Sourcing, Strategy implementation.Setting: United States; Defense industry; IT industry; Fortune 500; $8.7 billion revenues; 1991.

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General Dynamics and Computer Sciences Corporation

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1. 1 General Dynamics and Computer Sciences Corporation Outsourcing the IS Function Students should also study ITSA service agreement (a good guideline for your future) Q/A: ask students before presentation – is the case (GD/CSC) a good fit for both? (Joint venture and Outsourcing) the concept of outsourcing was proposed by Author Andersen in 1972, however, no one listened or even believe it. An example in Spokane – Washington Water Power (WWP) and Avista WWP sold its DP division to EDS in late 1990 – same personnel same office same job (almost) … different payroll and core business (utilities) is still retained on both sides. Students should also study ITSA service agreement (a good guideline for your future) Q/A: ask students before presentation – is the case (GD/CSC) a good fit for both? (Joint venture and Outsourcing) the concept of outsourcing was proposed by Author Andersen in 1972, however, no one listened or even believe it. An example in Spokane – Washington Water Power (WWP) and Avista WWP sold its DP division to EDS in late 1990 – same personnel same office same job (almost) … different payroll and core business (utilities) is still retained on both sides.

2. 2 Case Summary Discipline: Management of information systems Description: Designed to generate discussion on the issues of outsourcing from the perspective of a firm thinking about turning over its IS activities to a third-party vendor. Subjects Covered: Computer systems, Information systems, Organizational change, Sourcing, Strategy implementation. Setting: United States; Defense industry; IT industry; Fortune 500; $8.7 billion revenues; 1991

3. 3 Suggested Study Questions 1. As a member of the General Dynamics’ (GD) management, why would you want to outsource? 2. What perspective as a member of the Computer Sciences Corp. (CSC) management would you bring to the outsourcing negotiations? 3. What are the key issues that should be addressed in an outsourcing agreement?

4. 4 Why the GD and CSC Case? The case provides a setting to learn the critical issues which must be resolved if a successful outsourcing relationship is to be architected.

5. 5 Learning Objectives You will be able to learn the interplay between the firm hoping to outsource and the outsourcer.

6. 6 Summary of General Dynamics: IS Strategy Triangle Three criteria for maintaining strength of General Dynamics individual businesses: Each business must be within GD’s core defense competencies Must be #1 or #2 in its field Must have a “critical mass” to ensure efficiency, economies of scale, and financial strength Three criteria for maintaining strength of General Dynamics individual businesses: Each business must be within GD’s core defense competencies Must be #1 or #2 in its field Must have a “critical mass” to ensure efficiency, economies of scale, and financial strength

7. 7 From “Joint Venture” to ...

8. 8 Distribution of GD’s IT Resources in Outsourcing Arrangement

9. 9 The Expanding Scope of Vendor Options To buy professional services To buy a product To buy a transaction To use a systems integrator - project based Outsourcing - time based

10. 10 What was General Dynamics?

11. 11 A highly sophisticated aerospace and technical-oriented firm whose software penetrates its products. It operates in a dramatically shrinking defense market which has gone from $94 billion to $54 billion in five years. It had significant losses in 1990, and now has a new CEO, not identified in the case. No desire to expand in commercial business.

12. 12 General Dynamics is a leader in supplying sophisticated defense systems to the United States and its allies. The company is headquartered in Falls Church, Virginia, and employs nearly 30,000 people in the United States, Canada and the United Kingdom (1999).

13. 13 General Dynamics has three main business segments (1999): General Dynamics is a leader in supplying sophisticated defense systems to the United States and its allies. The company is headquartered in Falls Church, Virginia, and employs nearly 30,000 people in the United States, Canada and the United Kingdom. General Dynamics has three main business segments. Marine Systems designs and builds submarines, surface combatants, auxiliary ships and large commercial vessels. Combat Systems supplies land and amphibious combat machines and systems, including armored vehicles, power trains, turrets and armament handling systems. Information Systems and Technology produces cutting edge signal and information processors and battlespace information management systems, while incorporating the use of commercial technologies for military applications. General Dynamics is a leader in supplying sophisticated defense systems to the United States and its allies. The company is headquartered in Falls Church, Virginia, and employs nearly 30,000 people in the United States, Canada and the United Kingdom. General Dynamics has three main business segments. Marine Systems designs and builds submarines, surface combatants, auxiliary ships and large commercial vessels. Combat Systems supplies land and amphibious combat machines and systems, including armored vehicles, power trains, turrets and armament handling systems. Information Systems and Technology produces cutting edge signal and information processors and battlespace information management systems, while incorporating the use of commercial technologies for military applications.

14. 14 The majority of the shares of the General Dynamics’ stock were owned by the Crown family in Canada who were concerned that the entire company’s investment might disappear under previous management policies, and thus triggered this management change. The key to their strategy was each division should become #1 or #2 in their industry or be sold; i.e., either acquire or divest.

15. 15 Key Items of GD’s MIS Activity IT is absolutely critical to the firm (strategic quadrant) Perceived as #1 IT shop in the defense industry. All IT activities are consolidated into a single IT corporate unit . Has faced significant downsizing in the past three years (from 4,500 down to 3,400 people) 800 people are devoted solely to developing software that goes inside products. IT expenses are significant with book value of assets being 140 million dollars and total annual operating budget of 375 million dollars.

16. 16 How to be survived in the sharp decline defense market? Two Strategies: diversify into commercial markets, or downsize to a level that could be supported by a smaller defense market

17. 17 Why GD Wants to Outsource?

18. 18 Why GD Wants to Outsource? desire to monetize fixed assets and get superior information service at even low cost transfer fixed overhead into variable costs downsize the organization and focus in its core business free organization from capital expenditures on IS in an environment of rapidly changing technology provide better opportunities for their employees by working in a professional IS company put variability in costs so that if their volumes continue to drop, without pain their IT numbers will also drop

19. 19 Potential problems that GD might face in the contract loss of control over a key resource problem of providing appropriate fringe benefits for their staff the need for dealing with potential divestiture of different business units vendor viability the need for flexibility to deal with new opportunity

20. 20 What is CSC ?

21. 21 Computer Sciences Corp. (CSC) provides information technology services through: outsourcing (operating a customer's technology infrastructure); systems integration (designing, developing and implementing information systems); and management consulting services. For the fiscal year ended 4/2/99, revenues rose 16% to $7.66 billion. Net income rose 31% to $341.2 million. Results reflect strong demand for information technology services and the absence of $229.1 million in special charges. Computer Sciences Corp. CSC's MISSION Solve clients' business problems using information technology. Offer a full spectrum of services from business re-engineering and IT strategy to systems integration, operations management outsourcing and professional services Build trust into client relationships Respond to each client with the best combination of services The corporate purpose of Computer Sciences Corporation is to be preeminent in the solution of client problems in information systems technology. This demands that we make an absolute commitment to excellence in our contract performance and products. We will achieve our purpose by observing these principles: We commit to client satisfaction as our most important business objective. We recognize that CSC's accomplishments are the work of the people who comprise CSC. We will encourage initiative, recognize individual contribution, treat each person with respect and fairness, and afford ample opportunity for individual growth in CSC. We in turn will require of our people the highest standards of professionalism and technical competence. We will maintain the highest standards of ethics and business conduct, and operate at all times within the laws of the United States and all other countries in which we do business. We will identify and respond aggressively to new opportunities, and commit to success in each undertaking. Finally, our success as a company requires that we achieve profits and growth commensurate with a leadership position in our industry. Van B. Honeycutt Chairman, President and Chief Executive Officer Computer Sciences Corporation Copyright © 1999. Computer Sciences Corporation. All rights reserved. about CSC home • overview • CSC's mission • letter from the president CSC home • news & events • industries • solutions • careers • investor relations contact us • about CSC • site map • search CSC's MISSION Solve clients' business problems using information technology. Offer a full spectrum of services from business re-engineering and IT strategy to systems integration, operations management outsourcing and professional services Build trust into client relationships Respond to each client with the best combination of services The corporate purpose of Computer Sciences Corporation is to be preeminent in the solution of client problems in information systems technology. This demands that we make an absolute commitment to excellence in our contract performance and products. We will achieve our purpose by observing these principles: We commit to client satisfaction as our most important business objective. We recognize that CSC's accomplishments are the work of the people who comprise CSC. We will encourage initiative, recognize individual contribution, treat each person with respect and fairness, and afford ample opportunity for individual growth in CSC. We in turn will require of our people the highest standards of professionalism and technical competence. We will maintain the highest standards of ethics and business conduct, and operate at all times within the laws of the United States and all other countries in which we do business. We will identify and respond aggressively to new opportunities, and commit to success in each undertaking. Finally, our success as a company requires that we achieve profits and growth commensurate with a leadership position in our industry. Van B. Honeycutt Chairman, President and Chief Executive Officer Computer Sciences Corporation Copyright © 1999. Computer Sciences Corporation. All rights reserved. about CSC home • overview • CSC's mission • letter from the president CSC home • news & events • industries • solutions • careers • investor relations contact us • about CSC • site map • search

22. 22 Computer Sciences Corp. (CSC) provides information technology services through: outsourcing (operating a customer's technology infrastructure); systems integration (designing, developing and implementing information systems); and management consulting services. For the fiscal year ended 12/29/2000, revenues were $2.7 billion, a 12.9% increase over fiscal 2000, earnings increased 9.6% to $122.9 million, net income and earnings per share (diluted) were 65.6 million and 38 cents respectively, and announced major new business award were 1.8 billion Computer Sciences Corp. CSC's MISSION Solve clients' business problems using information technology. Offer a full spectrum of services from business re-engineering and IT strategy to systems integration, operations management outsourcing and professional services Build trust into client relationships Respond to each client with the best combination of services The corporate purpose of Computer Sciences Corporation is to be preeminent in the solution of client problems in information systems technology. This demands that we make an absolute commitment to excellence in our contract performance and products. We will achieve our purpose by observing these principles: We commit to client satisfaction as our most important business objective. We recognize that CSC's accomplishments are the work of the people who comprise CSC. We will encourage initiative, recognize individual contribution, treat each person with respect and fairness, and afford ample opportunity for individual growth in CSC. We in turn will require of our people the highest standards of professionalism and technical competence. We will maintain the highest standards of ethics and business conduct, and operate at all times within the laws of the United States and all other countries in which we do business. We will identify and respond aggressively to new opportunities, and commit to success in each undertaking. Finally, our success as a company requires that we achieve profits and growth commensurate with a leadership position in our industry. Van B. Honeycutt Chairman, President and Chief Executive Officer Computer Sciences Corporation Copyright © 1999. Computer Sciences Corporation. All rights reserved. about CSC home • overview • CSC's mission • letter from the president CSC home • news & events • industries • solutions • careers • investor relations contact us • about CSC • site map • search CSC's MISSION Solve clients' business problems using information technology. Offer a full spectrum of services from business re-engineering and IT strategy to systems integration, operations management outsourcing and professional services Build trust into client relationships Respond to each client with the best combination of services The corporate purpose of Computer Sciences Corporation is to be preeminent in the solution of client problems in information systems technology. This demands that we make an absolute commitment to excellence in our contract performance and products. We will achieve our purpose by observing these principles: We commit to client satisfaction as our most important business objective. We recognize that CSC's accomplishments are the work of the people who comprise CSC. We will encourage initiative, recognize individual contribution, treat each person with respect and fairness, and afford ample opportunity for individual growth in CSC. We in turn will require of our people the highest standards of professionalism and technical competence. We will maintain the highest standards of ethics and business conduct, and operate at all times within the laws of the United States and all other countries in which we do business. We will identify and respond aggressively to new opportunities, and commit to success in each undertaking. Finally, our success as a company requires that we achieve profits and growth commensurate with a leadership position in our industry. Van B. Honeycutt Chairman, President and Chief Executive Officer Computer Sciences Corporation Copyright © 1999. Computer Sciences Corporation. All rights reserved. about CSC home • overview • CSC's mission • letter from the president CSC home • news & events • industries • solutions • careers • investor relations contact us • about CSC • site map • search

23. 23 It is largely unknown in the private sector. It is an extremely large service organization with 23,000 employees and almost two billion dollars worth of sales. A long-term player in the IS industry. Consistently profitable and financially strong. A company historically serving in the federal sector which is now transitioning to the private sector.

24. 24 Has GD heard of CSC? YES

25. 25 What key issues are that contract will revolve around? The amount of down payment The annual charges Length of contract Maximum and minimum swings in volume that will be tolerated on a year-to-year basis. Type of linkages between CSC and GD to provide a framework for conflict resolution. Steering committees formal procedures for resolving disputes regular meetings between senior people, and perhaps even a GD board member joining the CSC board of directors

26. 26 Highly specific articulation of service levels along multiple dimensions response time cost trends Ownership issues of software and confidentiality What happens if GD spins off a division heavy penalty clauses if the outsourcing contract is ended from CSC viewpoint, a protected contract makes divestiture very attractive as it introduces them to a new company.

27. 27 From “Joint Venture” to ...

28. 28 Distribution of GD’s IT Resources in Outsourcing Arrangement

29. 29 “From the perspective of the chairman of the board, don’t lose the deal but don’t do anything stupid either!”

30. 30 What is Outsourcing? The phenomenon that appeared in the information systems field in the late 1980s was outsourcing, which means turning over a firm's computer operations, network operations, or perhaps other information systems functions to a vendor for a specified time - generally, at least for three years.

31. 31 Outsourcing has become an option that most CIOs need to consider to satisfy their management that their operation is being run efficiently and effectively.

32. 32 The Driving Forces Behind Outsourcing Two drivers focus on core business value shareholder led companies to restructure and asking themselves, "Where do we really add value?" So outsourcing is part of the drive for focus and value, and it is not solely an information systems issue; it is a business issue. Since top management must stress value, they must consider outsourcing in all their nonstrategic functions.led companies to restructure and asking themselves, "Where do we really add value?" So outsourcing is part of the drive for focus and value, and it is not solely an information systems issue; it is a business issue. Since top management must stress value, they must consider outsourcing in all their nonstrategic functions.

33. 33 What Activities that Management should not Outsource? strategy policy role the decisions about when to introduce information systems into the organization the management of the vendor when the system (IS) department is well managed, and where IT is a core competency when the system (IS) department is well managed, and where IT is a core competency, outsourcing should not be an option.when the system (IS) department is well managed, and where IT is a core competency, outsourcing should not be an option.

34. 34 OUTSOURCING BENEFITS Economy Service quality Predictability Flexibility Making fixed cost variable Freeing up human resources for other projects Freeing up financial capital

35. 35 CONS OF OUTSOURCING Loss of control Vulnerability of strategic information Dependency

36. 36 Desirable Outcomes and Implementation Issues On-time On-budget Full functionality user acceptance Favorable cost-to-benefits ratio Low maintenance Scalability Integration with other systems Reusability

37. 37 See Appendix A of Information Technology Services Agreement on the web (under SSQ).

38. 38 Three Main Business Segments General Dynamics has three main business segments (1999): Marine Systems designs and builds submarines, surface combatants, auxiliary ships and large commercial vessels. Combat Systems supplies land and amphibious combat machines and systems, including armored vehicles, power trains, turrets and armament handling systems. Information Systems and Technology produces cutting edge signal and information processors and battlespace information management systems, while incorporating the use of commercial technologies for military applications.

39. 39

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