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The key factors that determine if and when outsourcing is right for you. Dr. Berg Comerit Inc. In This Session …. There are many issues that must be considered carefully before you decide if outsourcing is the right for you.
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.
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.
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’
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.
In February, 2011 SAP released of its SaaS (software as a service) suite Business ByDesign, in its 2.6 release.
The published base pricing was $149 per month per user, but this price varies based on volume discounts and the functionality included.
It is a significant step towards allowing companies that use SAP to “drink milk – without having to buy a cow”…
According to a report from IDC, IT cloud spending will expand from $21.5 billion in 2010 to $72.9 billion by 2015*
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*
(*Source: IDC, Worldwide and Regional Public IT Cloud Services 2011-2015 Forecast, Doc #228485, June 2011)
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.
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.
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
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
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.
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.
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
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”)
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
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.
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
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.
Fortune-500 companies considered the cost factor as most important, regardless of their strategy.
Fortune-1000 companies focus more on Internal factors
Smaller 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.
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.
Despite articles to the contrary, technology choice or the complexity of BI systems does not seem to be a factor when outsourcing these systems.
Companies should not consider outsourcing “SAP”, but instead treat ERP/OLTP and BI/DSS outsourcing as two separate decisions
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
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.
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.
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’.
In 2010, the number of jobs remained steady and salaries increased by $1,026 on average for all IT professionals
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.
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.
The fastest growth in BI outsourcing seems to also come from Fortune-500 companies.
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.
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.
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
Source: AMR Research, 2010
Join me for my session on how to write a good SLA later this conference..
Outsourcing is a part of most companies business strategy
You have to decide between complete outsourcing, SaaS, Cloud and partial outsourcing
ERP and BI outsourcing are different and should be treated so
Your organization size and strategy should determining what and how you outsource
Cost reduction should be just one of many measures
Writing a solid SLA is critical to outsourcing success
Trust in a supplier and supplier’s personal focus is very important in any outsourcing partnership
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