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Lecture 17. Chapter 9 Managing IT Outsourcing. Final Exam Outline. 12 – 3pm, Wednesday June 14 Half short and long answers on theory and principles from course Half case-study Open or closed book???. Managing IT Outsourcing. Focus on major projects rather than incremental

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lecture 17

Lecture 17

Chapter 9

Managing IT Outsourcing

final exam outline
Final Exam Outline
  • 12 – 3pm, Wednesday June 14
  • Half short and long answers on theory and principles from course
  • Half case-study
  • Open or closed book???
managing it outsourcing
Managing IT Outsourcing
  • Focus on major projects rather than incremental
    • Larger investments
    • Higher risk
    • Greater overall management complexity
    • 8 to 10 years
  • Environment of change makes long term difficult to project
  • Benefits to each party very different
  • Path uncertainty can lead to conflict
  • Different from offshoring
key challenges
Key challenges
  • First year large capital spending from customer
  • Later profit expected
  • Incentives to meet contract change with changing environment
  • Resolution of conflicts difficult and costly
  • Evolution of technology changes perspective
history of outsourcing
History of outsourcing

A few early examples

  • 1960’s computer services for financial operations
  • ADP started in 1949 as small punch card payroll company
    • Grew to $8.5b company in 2005
    • Large-volume standard transactions
  • Accenture software contractor
  • Purchasing equipment and software steps toward full outsourcing of IT
major early drivers toward outsourcing
Major early drivers toward outsourcing
  • Cost-effective access to specialized or occasionally needed computing power/systems development
  • Avoidance of building in-house skills
  • Access to special functional capabilities
  • 1990 Kodak decision to outsource IT legitimized idea
    • Mainframes
    • PC maintenance and service
    • Telecom
outsourcing today
Outsourcing Today
  • More and more functions outsourced
  • Acceptance of strategic alliances
    • Opportunity to complement strengths and weaknesses
    • Collaborative innovation
  • Changes in Technology
    • Most code development is outsourced
    • Most IT departments integrate (select vendors, code etc.) rather than develop
    • See table 9.1
drivers toward outsourcing today
Drivers toward outsourcing today
  • Costs and Quality
    • Tighter overhead cost control of fringe benefits
    • Aggressive use of low-cost labor
    • Tough standards
    • Effective builk purchasing and leasing arrangements
    • Better management of excess hardware capacity
    • Better control of software licenses
    • More aggressive management of service and response time
    • Tighter inventory control
    • Professional service at multiple levels
    • Leaner management structure
    • Higher level of IT staff skills
    • More realistic lease structures
drivers toward it outsourcing today ctd
Drivers toward IT Outsourcing today (ctd)
  • Breakdown in IT performance
    • Complexity led to problems led to new models
  • Intense Vendor Pressures
    • Good sales and marketing teams plus positive results have lead to confidence in outsourcing
  • Simplified General Management Agenda
    • IT is messy!
  • Financial Factors
    • Lower risk of cost fluctuations
    • Fixed (capital) cost business becomes variable cost business
    • Opportunity to move group into acquiring company
  • Corporate Culture
    • IT team given clout to make major decisions
  • Eliminating Internal Irritation
when to outsource
When to outsource

When do benefits outweigh risks?

  • Position on

strategic grid

when to outsource11
When to Outsource
  • Development Portfolio
    • More maintenance/highly structured projects means more outsourcing potential
    • High technology in specific field means more outsourcing potential
    • Large, low structured projects pose difficult coordination problems for outsourcing
  • Organizational Learning
    • Development work difficult to outsource
    • New areas mean company doesn’t understand what is required let alone how to manage outsourcing
  • Market Position
    • Large, well established firms are difficult to transition to new systems without outsourcing
  • Current IT organization
    • High structure easy to outsource
    • Contracts easy to write when know what is expected
structuring alliance
Structuring Alliance
  • Contract Flexibility
    • May change radically over time
    • 6 to 8 months to write contracts
    • Process of drafting more important than resulting document
  • Standards and Control
    • Should be explicitly written into contract
    • Vendors often able to provide better performance measures
  • Areas to Outsource
    • All or nothing?
    • Coordination costs
structuring alliance13
Structuring Alliance
  • Cost Savings
  • Supplier Stability and Quality
    • 10 year contract is long time in high-tech!
    • Keeping open to other outsourcing options
    • Managing conflicts of interest
  • Management Fit
    • People working with people
  • Conversion problems
    • IT staff move leads to uncertainty
managing alliance
Managing Alliance
  • Early results are key
  • CIO Function
    • Partnership/contract management
    • Architecture planning
    • Emerging Technologies
    • Continuous learning
  • Performance Measurement
    • Some areas easier than others
    • Cost savings vs. streamlining/simplification
  • Mix and Coordination of Tasks
    • Benefits can be overrun by management of complex project mix with multiple vendors
  • Customer-Vendor Interface
    • Final responsibility on both sides
    • Who communicates what and when?
    • Reporting expectations
    • Relationship managers and coordinating groups
what about the contractor
What about the contractor?
  • Business model for consulting/contracting companies
  • Risks