Outsourcing (OS)

1. Outsourcing (OS) Part 1 - Introducing Outsourcing Part 2 - Evaluation & Management Section 1 – A Framework for Evaluation & Management Section 2 – Analysis of the Strategic Sourcing Options Section 3 – Developing the Relationship Strategy Section 4 – Establish, Manage & Evaluate Appropriate Relationships

2. Outsourcing Part 1 - Introducing Outsourcing (OS) • Provisioning of IS/IT Resources. • The Growth of Outsourcing. • Driving Outsourcing. • Outsourcing Rationales. • Thinking about Outsourcing. • Strategic & Tactical Reasons for Outsourcing. • Potential Benefits of Outsourcing. • Risks Associated with Outsourcing.

3. Provisioning of IS/IT Resources • Deciding from where IS/IT resources should be sourced has become a critical issue for organisations. • Most IS/IT resources have traditionally been provided in-house by a central IS function (insourcing). • However, many organisations have looked to the external market to provide them with the IS/IT resources that the business requires, a practice generally referred to as outsourcing. Cont’d Source: Ward & Peppard (2002)

4. Provisioning of IS/IT Resources (Cont’d) Outsourcing : the delegation, through a contractual arrangement, of all or part of the technical resources, the human resources and the management responsibilities associated with providing IT services, to an external vendor. Clark et al (1998), in Ward & Peppard (2002) Outsourcing : involves the sourcing of goods and services previously produced internally within the sourcing organisation from external suppliers. McIvor (2005) Cont’d

5. Provisioning of IS/IT Resources (Cont’d) • Key point - there are ‘degrees’ of outsourcing: • May involve transfer of an entire business function to a supplier • Transfer of some activities associated with a function (others kept in-house) • Transfer of people and physical assets. • Outsourcing is often used as an ‘umbrella’ term for a variety of different arrangements (not all of which involve adding value). Cont’d Source: McIvor (2005)

6. The Growth of Outsourcing (OS) • The drive for greater efficiencies and cost reductions has forced many organisations to increasingly specialise in a limited number of key areas: • outsourcing activities traditionally carried out in-house. • OS involves re-drawing the boundaries between the organisation and its supply base. • OS provokes a range of contrasting reactions from a range of organisational stakeholders. Cont’d Source: McIvor (2005)

7. The Growth of Outsourcing (Cont’d) Business Leaders • Regard OS as a powerful vehicle to achieve performance improvements. Unions • Regard OS as another weapon in the armoury of powerful businesses, further eroding the terms and conditions of an already embattled employee. Governments & Politicians • Involved with both the debate ands practice of OS. Source: McIvor (2005)

8. Driving Outsourcing - Changes in the Business Environment The trend towards the increased use of OS has been driven by a number of inter-related factors (external business environment). • Globalisation. • Developments in ICT. • Public Sector reforms. • More demanding consumers. Source: McIvor (2005)

9. Driving Outsourcing - Evolving Organisational Structures • To compete effectively in these environments organisations must not only reduce costs, but: • focus on innovative activities that can deliver value to customers. • create competitive advantage. Organisations have had to become more proactive in achieving innovations that directly benefit the consumer rather than the organisation McIvor (2005) Source: McIvor (2005)

10. Outsourcing Rationales • The decision to outsource IT is not an easy one to make: • demands considerable managerial attention. • requires rigorous analysis and discussion. • Two main factors determine the suitability of any outsourcing arrangement: • nature of the organisation. • the business importance of the IS element. • Organisations should choose to outsource carefully selected, non-core activities that can be accomplished quicker, cheaper and better by vendors.*** Note: *** Part 2 will consider scenarios where core activities may be considered. Cont’d Source: Ward & Peppard (2002)

11. Outsourcing Rationales (Cont’d) If you have a business that churns out products, then outsourcing makes sense. But … IT is our central nervous system … if I outsourced tomorrow I might save a dollar or two on each account, but I would lose flexibility, and value and service levels. Nigel Morris, President of US credit-card group Capital One

12. Thinking about Outsourcing Starting point: analyse whether OS an activity is appropriate for the organisation, consider: • The capability of the organisation in the activity relative to competitors. • The importance of the activity to competitive advantage. • The capability of suppliers to provide the activity. • Level of risk in the supply market. • Potential workforce resistance and the impact upon employee morale. Cont’d Source: McIvor (2005)

13. Thinking about Outsourcing (Cont’d) Asking the Right Questions • What are our core competencies? • Which IT services or other corporate support functions are integral to or close to our core competencies? • What are our overall goals? • What are the barriers raised by the corporate culture to the use of IT and the offerings of the IS department? Cont’d Source: Jones (1997)

14. Thinking about Outsourcing (Cont’d) Asking the Right Questions • What is the cross-functional impact of IT and the IS department? • What can we fix ourselves internally before we consider outsourcing? • What might be better accomplished by an outside vendor? Source: Jones (1997)

15. Thinking about Outsourcing (Cont’d) When the decision to OS has been made: • Supplier selection. • Contract negotiation. • Transitioning of assets to the supplier. Significant attention must also be given to managing the relationship with the supplier to ensure that outsourcing meets its intended objectives. McIvor (2005) Source: McIvor (2005)

16. Strategic Reasons for Outsourcing • Improved business focus. • Access to world-class capabilities. • Shared risks. • Redirection of resources. Source: Jones (1997)

17. Tactical Reasons for Outsourcing • Reduction or control of operating costs. • Increased availability of capital funds. • Cash infusion. • Lack of internal resources. • Problematic functions. Source: Jones (1997)

18. Potential Benefits of Outsourcing • Cost reduction. • Performance improvement. • Flexibility. • Specialisation. • Access to innovation. Note the similarities between the above benefits and the strategic / tactical reasons for OS. Source: McIvor (2005)

19. Risks Associated with Outsourcing • Many companies are disappointed with their results from having outsourced IT activity. • A recent survey (Computing, 20th September, 2001) revealed that just one-quarter of IT directors would use their main outsourcing vendor again. • American Management Association survey – three-quarters of respondents reported that the anticipated outcomes of OS had failed to meet their expectations. More than half reported bringing at least one activity back in-house (Greenberg & Canzoneri, 1997). Cont’d

20. Risks Associated with Outsourcing (Cont’d) • Treating IT as an undifferentiated commodity to be outsourced. • Incomplete contracting. • Lack of active management of the supplier on: • contract • relationship dimensions • Power asymmetries developing in favour of the vendor. • Supply market risk (McIvor, 2005). • Inexperienced staff. Cont’d Source: Ward & Peppard (2002)

21. Risks Associated with Outsourcing (Cont’d) • Outsourcing for short-term financial restructuring / cash injection. • Hidden Costs (see directed reading). • Managing multiple vendors. • Loss of innovative capacity. • Loss of skills (McIvor, 2005). • Culture incompatibility. • Organisational change implications (McIvor, 2005). Source: Ward & Peppard (2002)

22. Required Reading • Barthelemy, J. (2001) The Hidden Costs of IT Outsourcing, Sloan Management Review, vol. 42, no. 3, pp.60-69. *** • *** Illustration 4.1 pp66-67 in • McIvor, R. (2005) The Outsourcing Process, Cambridge University Press.

23. References The following texts were used in the preparation of this material. Barthelemy, J. & Geyer, D. (2000) IT outsourcing: findings from an empirical survey in France and Germany, European Management Journal, vol. 19, no. 2, pp.195-202. Jones, W. (1997) Outsourcing Basics, Information Systems Management, vol. 14, pt. 1, pp.66-69. Lee, M. (1996) IT Outsourcing Contracts, Industrial Management and Data Systems, vol. 96, pt. 1, pp. 15-20. McIvor, R. (2005) The Outsourcing Process, Cambridge University Press. Cont’d

24. References (Cont’d) The following texts were used in the preparation of this material. Robson, W. (1997) Strategic Management & Information Systems, 2nd ed., Pitman Publishing. Ward, J. & Peppard, J. (2002) Strategic Planning for Information Systems, 3rd ed., Wiley.